No Panaceas

Thursday, July 31, 2003
Revisiting the Iraqi Freedom rally: I've looked at rally events within the context of the Iraq war several times. Most recently here. Bush's approval ratings have become a big topic in the press lately, so I thought I'd take a look at the most recent polls. As Gallup reports, Bush is now at 58 points. Adding this new data point to the chart I've shown before produces this:

As before I'm comparing Iraqi Freedom with a few other more or less comparably important episodes in recent U.S. history. As the figure indicates, Bush's approval is now back to about the level it was just before the war commenced. Thus it turns out to be a very typical rally event. There is a spike -- fourteen points in this case -- and then a fast decay.

A couple of points. First, I think this indicates that current press reports that Bush's polls are dropping due to the Niger uranium scandal and the continued chaos in Iraq are overblown. Of course it's impossible to completely disentangle what is going on with these numbers. But this rally event is so typical of past events that I'm inclined to say that the recent drop is almost completely the normal wearing off of war passion.

Second, from a historical perspective Bush is in pretty good shape. Looking at other presidents at similar points in their first terms, he is doing well. Yet, as everyone knows from Bush I, things can change very very fast. The first President Bush was in the low seventies at this time in 1991.

Excellent use of vertical space: Here's a rental listing in Alexandria:

2 Bed, 1 Bath
3 Sq. Ft

Tuesday, July 29, 2003
This calls for a remake of Trading Places: The Defense Advanced Research Projects Agency (DARPA) at the Pentagon is setting up a futures market on the Middle East. Rather than trading in oil, pork bellies, or elections, this futures market will be, "trading futures contracts that deal with underlying fundamentals of relevance to the Middle East. Initially, PAM will focus on the economic, civil, and military futures of Egypt, Jordan, Iran, Iraq, Israel, Saudi Arabia, Syria, and Turkey and the impact of U.S. involvement with each."

I think you can look at this from two angles: an intelligence gathering perspective and a public relations/politics perspective. Frankly, in principle I don't think this is such a bad idea from the perspective of gathering information. Futures markets can be pretty good predictors of what will happen because investors have a strong incentive -- making money -- to glean good information from bad. In a sense, such a market is an efficient way of making intelligence analysts out of thousands of citizens (assuming the market became popular.)

Furthermore -- and I wonder whether or not the people at DARPA realize this -- such a market might become the ultimate 'no spin zone' for Middle East politics. As I said, in a futures market investors have the incentive to separate good information from bad information, this means that wise investors try to filter out propaganda. Thus, the market might say something very different than the government. What if prior to the Iraqi war there was a market on whether Iraq had a viable nuclear arms program? (The trick is to appropriately define issues such as what constitutes a viable program and what constitutes proof; otherwise a market won't function properly.) What would such a market have said about the credibility of the Bush administration's claims? I suspect such a market would have indicated far more skepticism than what we saw in the public opinion polls. (Voicing an opinion in a poll is virtually costless, so respondents feel no obligation to actually know something about the topic.)

Before speaking to politics, there is another factor here to consider. Let's say one of the markets is predicting some seriously traumatic event in the Middle East, like the overthrow of a key U.S. ally. Let's make this more concrete by setting a share's value in cents equal to the believed probability that some event will happen. So, if you believe that an overthrow will happen with .75 probability, you as an investor will want to buy shares being sold for less than $.75, and you will want to sell shares for more than $.75. Let's say that the market reaches $.75 -- so the market is saying that there is a .75 probability that an overthrow will occur within X period of time. The U.S. then combines this information with other forms of intelligence in a way that convinces U.S. foreign policy leaders that we have to intervene. So we intervene and prevent the overthrow. How does this interfere with the market? Well, in theory investors will take the possibility of U.S. interference into account, and adjust their investment decisions accordingly. This might drop the market share to, say, $.50 because enough investors believe the U.S. will prevent an overthrow.

This is a problem because DARPA wants to use the market to learn about the Middle East and then adjust U.S. policy accordingly. Yet, this ability to adjust U.S. policy potentially distorts the market and thus renders the market less useful to U.S. policy makers in the first place. Perhaps a well-designed market would overcome these problems -- I think it is largely an empirical question. But the designers of this market will not get the chance to find out. It might be a good idea from an intelligence standpoint. From a public relations and political standpoint it is a terrible idea, and congressional pressure will nix this in less time than it takes William Bennett to drop a grand on video poker. There is no way to insulate this plan from the charge that it is nothing more than crass gambling on death and destruction. Here is one choice selection from today's NYT:

One of the two senators, Byron L. Dorgan of North Dakota, said the idea seemed so preposterous that he had trouble persuading people it was not a hoax. "Can you imagine," Mr. Dorgan asked, "if another country set up a betting parlor so that people could go in — and is sponsored by the government itself — people could go in and bet on the assassination of an American political figure?"

UPDATE: Who knows, Bennett might have been able to blow $2k in the amount of time this took. I suspect someone's career just hit a nasty roadbump.