What can economic science say about the Iraqi surge?

A lot according to this very interesting paper by Michael Greenstone, an MIT professor who is also an incoming editor at REStat. 

This paper shows how data from world financial markets can be used to shed light on the central question of whether the Surge has increased or diminished the prospect of today's Iraq surviving into the future. In particular, I examine the price of Iraqi state bonds, which the Iraqi government is currently servicing, on world financial markets. After the Surge, there was a sharp decline in the price of those bonds, relative to alternative bonds. This decline signals a 40% increase in the market's expectation that Iraq will default. This finding suggests that, to date, the Surge is failing to pave the way toward a stable Iraq and may in fact be undermining it.

This despite the fact that civilian casualties have apparently come down, again according to Michael's empirical analysis.

Comments

[CalDem]

Go see Daniel Davies comments on this. While he like the paper, he destroys the bond price argument by noting that the fall occurred during the whole credit crisis thing, and therefore is not evidence of anything related to Iraq.

[DRDR]

Levitt had interesting comments on this paper a month ago: http://freakonomics.blogs.nytimes.com/2007/09/15/is-the-surge-working-ask-the-data-not-the-politicians/

[s]

After a quick glance at the article, I'm not convinced by the identification strategy vis-a-vis the finding that the surge *caused* the reduction in casualties. Another explanation for this finding could be one that is clearly much less discussed in the media or by politicians. To my mind, there is a key omitted variable that may be driving the apparent success of the surge in reducing casualties. I'm talking about the possibility that military intel have begun to reach out to (read negotiate with) the prominent resistance groups, aside from Sadr's Mahdi army, which has recently officially declared a halt to operations. It is quite possible that the US has begun the process of negotiation/bargaining with the various insurgent groups, a logical consequence of which has been a reduction in attacks on US troops and attacks more generally. This hypothesis seems plausible for two reasons. One, the possibility for an attack on Iran seems to be increasing by the day, and should push come to shove, the US will certainly need some Sunni allies in Iraq to combat the almost certain intensification of the Shia insurgent group attacks on US troops that will follow from any attack on Iran. Two, US forces are beginning to prepare for the eventual withdrawal of troops from Iraq. If the US has any hope of Iraq remaining outside the Iranian sphere of influence, if not de jure state, then the US will surely have to build up some partnerships with Sunni groups. To do so will clearly require reaching out to the most powerful and well-organized insurgent networks. This is all a long-winded way of saying that the key omitted variable "behind-the-scenes-negotiation with insurgents" could clearly be driving the drop in casualties entirely orthogonal to the "surge" as defined in the paper. I guess his fixed effects take care of this omitted variable to some extent, but there could be a) a clear structural break that these month FEs still miss and b) more complicated dynamics at work than than his trend specification allows for. Nevertheless, this is a fascinating and much-needed economists' take on the surge.

[DHsu]

....all of which shows that this particular paper turns out to say not very much about the surge, but does a good job at pretending.

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