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Forty-seven Republican Senators signed a letter to the Iranian leadership claiming that any nuclear non-proliferation treaty signed by President Obama could be vacated at the stroke of a pen by the next President. What is the impact of their tactic on the probability of the deal being signed?

There are many effects but here are four key ones:

1. The Iranians now get further confirmation that President Bush III will be tougher than President Obama. The deal on the table is the best they are going to get. This makes them more likely to sign.

2. Democrats who are skeptical of the deal with now rally round the President, as they did after the surprise Netanyahu speech. This makes a deal more likely.

3. The Iranians now get further confirmation that the deal may fall apart under next administration. This makes it easier for them to renege in the future if circumstances dictate – they can more credibly blame the U.S. for being untrustworthy. Their citizens will not blame them if they exit the agreement as the Iranian leadership can more credibly blame the U.S.

Russia and China can trade with Iran with less international condemnation as the U.S. can be more credibly faulted for the deal falling apart. This makes a deal more likely.

4. The “no deal” option just got better too for reasons outlined in 3. Iran can blame the U.S. for not agreeing to the treaty and try to persuade Russia etc to break sanctions. This makes “no deal” more attractive relative to “deal” and makes the deal less likely. It could also mean that the deal the Iranians now get is improved to reflect their better outside option. If the deal is already better than even the improved outside option, the improvement will have little effect on the chance of a deal.

So, unfortunately, the net effect of the letter on the probability of an agreement is ambiguous. But even if the letter makes a deal less likely, it makes it less likely by making Iran stronger.

He is as smart as people say:

Sen. Ted Cruz (R-TX) announced Monday his intention to donate his congressional salary to charity for each day government remains closed, pinning blame for any potential shutdown in operations past Sept. 30 on Senate Majority Leader Harry Reid (D-NV).

“Harry Reid should not force a government shutdown,” the conservative firebrand said in a statement. “I hope that Reid stops refusing to negotiate and works with the House to avoid a government shutdown, and, at the same time, prevent the enormous harms that Obamacare is inflicting on the American people.

“If, however, Harry Reid forces a government shutdown, I intend to donate my salary to charity for each day the government is shut down,” he added.

But it turns out his offer came after Democratic Rep Gary Peters:

@SenTedCruz joining me to donate pay to charity, but not to stop shutdown. I urge you to drop politics. Irresponsible to do anything less.

As budget negotiations get underway with the threat of sequestration looming, it’s worth recalling a basic lesson from game theory.

Consider two parties in the same vehicle speeding towards a cliff. The one who concedes, i.e. chickens out and steers the car out of danger, is the loser. Winning is better than losing but either is better than driving off the cliff. Finally, time is valuable: if you are going to concede, you prefer to do it earlier rather than later. Still you are prepared to wait if you expect your rival will concede first.

In equilibrium of this game, unless someone concedes right away there is necessarily a positive probability that they will go over the cliff.  

The proof is simple.  Consider player 1 and suppose his strategy is not to concede immediately. Then we will show 1’s strategy is such that if 2 never concedes there is a positive probability that 1 will also never concede and they will drive off the cliff together. To prove it, suppose the contrary: that 1’s strategy will eventually concede with probability 1 (if 2 doesn’t concede first).  If that is 1’s strategy then 2’s best reply is to wait for 1 to concede. In equilibrium 2 will play such a strategy and the outcome will therefore be that 1 is the loser with probability 1. But if 1 is going to be the loser for sure anyway he should have conceded immediately. That’s a contradiction. We have shown that if 1 does not concede immediately then his strategy will allow the car to drive off the cliff with positive probability. The exact same argument applies to 2. Thus in equilibrium, if the game begins without an immediate concession there is a positive probability they will plunge from the cliff.

Eli Dourado wrote this on Twitter:

Despair. RT @GovChristie: The State Division of Consumer Affairs will look closely at any and all complaints about alleged price gouging.

When there’s a natural disaster some people, like Gov. Christie, start complaining in knee-jerk fashion about price gouging. And then some other people, with their knees jerking in exactly the same fashion, start complaining about people who complain about price gouging. The latter sets of knees usually belong to economists.

Suppose that an unexpected shock has occurred which has two effects. First, it increases demand for, say bottled water. Second, it cuts off supply lines so that in the short-run the quantity of bottled water in the relevant location is fixed at Q. A basic principle of economics is that if you wish to maximize total surplus then you should allow the price to adjust to its market-clearing level. This ensures that those Q consumers with the highest value for water get it. The total surplus will then be the sum of all their values.

The price plays two roles in this process, one crucial to the result, one just incidental and not necessarily intended. First, it separates out the high-value consumers from the low-value consumers. That’s the crucial role. Unavoidably it also plays a second role of taking some of that total surplus away from the consumers and giving it to producers. If you are maximizing total surplus you are completely indifferent to that second effect.

But what if you don’t want to maximize total surplus but just want to maximize consumers’ surplus? Your goal is that the Q bottles of water you’ve got should generate the greatest possible benefit for those who will consume them. I would bet that most people who understand the previous paragraph also assume that it applies equally well to the problem of maximizing consumer’s surplus. How else would you maximize it but to ensure that those with the highest value get the water?

But in fact it is quite typical for the consumer surplus maximizing solution to be a rationing system with a price below market clearing. I devoted a series of posts to this point last year. The basic idea is that the efficiency gains you get from separating the high-values from the low-values can be more than offset by the high prices necessary to achieve that and the corresponding loss of consumer surplus.

Why would we only care about consumers’ surplus and not also the surplus that goes to producers? We normally we care about producer’s surplus because that’s what gives producers an incentive to produce in the first place.  But remember that a natural disaster has occurred. It wasn’t expected. Production already happened. Whatever we decide to do when that unexpected event occurs will have no effect on production decisions. We get a freebie chance to maximize consumer’s surplus without negative incentive effects on producers. And just at the time when we really care about the surplus of bottled water consumers!

Of course there are other good reasons to be skeptical of rationing in practice. It might not be enforceable, it might lead to inefficient rent-seeking, etc. But these objections mean that the debate should be about rationing in practice. The theoretical argument against it is weaker than many people think.

Ezra Klein has a great post about the “cheap talk” used by candidates to try to manipulate beliefs about their candidates chances of winning.  He concludes:

The bottom line is that Boston fears scared Republicans won’t vote and Chicago fears confident Democrats won’t vote. And so, in this final stretch, Boston wants Republicans confident and Chicago wants Democrats scared. Keep that in mind as you read the spin.

In an patent race, the firm that is just about to pass the point where it wins the race and gets a patent has an incentive to slack off  a bit and coast to victory.  The competitor who is almost toast has an incentive to slack off as he has little chance of winning.  But if the race is close, all firms work hard.

Elections are similar except the campaigns have the information about whether the campaign is close or not and the voters exert the costly effort of voting.  Campaigns have an incentive to lie to maximize turnout so the team that’s ahead pretends not to be far ahead and the team that’s behind pretends the race is very close.  As Klein says, no-one can believe their spin and no information can be credibly transmitted.

If they really want to influence the election, the campaigns have to take a costly action to attain credibility.  For example, they can release internal polling. This gives their statements credibility at the cost of giving their opponent their internal polling data.

Some time ago I had half-written a post calling for a Nobel prize for Al Roth.  It was after he gave his Nancy Schwartz lecture at Kellogg and I decided not to publish it because I thought maybe it was just a little too soon.  Not too soon to get the prize but too soon to expect the Nobel folks to give it to him.  I am glad I was wrong.

Don’t forget his very important co-authors Tayfun Sonmez, Attila Abdulkadiroglu, and Utku Unver.  These guys, Tayfun especially, were still working on matching theory when nobody else was interested and before all the practical applications (mainly coming out of their collaboration with Al) started to attract attention.

This is a time for microeconomics to celebrate.  When you are on a plane and you tell the person next to you that you’re an economist, they ask you about interest rates.  Everyone instinctively equates economics with macroeconomics.  And that’s probably because most people have the impression that macroeconomics is where economists have the biggest impact.

But actually microeconomic theory has already had a bigger impact on your life that macroeconomic theory ever will.  And there’s no politics tangled up in microeconomics.  When you meet a microeconomic theorist it never once occurs to you to check the saline content of their nearest body of water.

There are no fundamental disagreements about basic principles of microeconomics. And I would say that Al Roth epitomizes what’s great about microeconomics.  He has no “field:” he does classical game theory/bargaining theory and he does behavioral economics.  He does theory and experiments.  He theorizes about market design and he actually designs markets.

Al is the second blogger to win a Nobel prize.  Compare their fields and their blogs.

I never met Shapley and I only saw him give a couple talks when he was already way past his prime.  But gappy3000 reminds me that he and John Nash invented a game called Fuck Your Buddy.  So that’s something.  And now he has a Nobel Prize. And of course without his work there would be no prize for Roth either.  David Gale should have shared the prize but he died a few years ago.

Temporary parking sign spotted near the Stanford GSB/Economics department by Michael Ostrovsky (via Google+)

I wrote about it here.  I had a look at the video and it was the right call given the rule, but as I argued in the original post the rule is an unnecessary kludge.  At best, it does nothing (in equilibrium.)

The difference between cycling and badminton:

“I just crashed, I did it on purpose to get a restart, just to have the fastest ride. I did it. So it was all planned, really,” Hindes reportedly said immediately after the race. He modified his comments at the official news conference to say he lost control of his bike.”

The opposition took it in stride:

French officials did not formally complain about the British tactic.

“You have to make the most of the rules. You have to play with them in a competition and no one should complain about that,” the France team’s technical director, Isabelle Gautheron, told The Associated Press.


“He (Hindes) should not have told the truth,” Daniel Morelon, a Frenchman who coaches the China team, told the AP. “It’s part of the game, but you should not tell others.”

CJ Roberts rescues the mandate by noticing that it’s a tax.  Here’s the key line in the dissent of the minority, Kennedy, Scalia, Alito, and Thomas:

The issue is not whether Congress had the power to frame the minimum-coverage provision as a tax, but whether it did so.

The full decision is here.

Josh Gans gives a handy benchmark model where the answer is no.

MODEL 1: Wholesale Pricing

Suppose that a book publisher charges a price of p to a retailer. Then, based on this, the retailer sets a price to consumers of P and earns (P – p)(a – P).

In this case, the retailer’s optimal price is:

P* = (a + p)/2

Given this, the publisher’s demand is Q = a – P* or Q = (a-p)/2. The publisher chooses p to maximize its profits of pQ which results in a price of p* = a/2. This implies that the final equilibrium price under the wholesale pricing model is:

P* = 3a/4

MODEL 2: Agency

Under an agency model, the publisher sets P directly while the retailer receives a share, s, of revenues generated. The publisher, thus, chooses P to maximize its profits of (1-s)PQ. This generates an optimal price of:

P* = a/2


Regardless of s, the price under the agency model is lower than the price under a wholesale pricing model. The reason is that the agency model avoids double marginalization. The comment here does not reflect other effects arising from ‘most favored customer’ clauses that can apply in both wholesale pricing and agency models and are discussed further in Gans (2012).

Instead of a mandate to buy insurance and a penalty of $X if you do not comply, what if everyone’s taxes are raised by $X and anyone who complies with the mandate receives a refund of $X? Does that make it constitutional?

Professional line standers.

The word “Intrepid” is on Hans Scheltema’s business card, and it’s more than just the name of his business. The professional line-stander prides himself on sticking it out, in all kinds of weather, on behalf of the lawyers, lobbyists and others willing to pay for a place in line at big events, such as arguments before the Supreme Court this week on thefederal health-care overhaul.

But even a guy with supreme stick-to-itiveness has his limits.

On Sunday afternoon, after holding down spot No. 3 outside the Supreme Court for the better part of the day, he hired a homeless man to fill in for a few hours. Scheltema, 44, who had taken over Sunday morning for a guy who had held the spot since Friday, wanted to go home to recharge — both himself and his BlackBerry.

The big event of this week in the U.S. will be the Supreme Court discussion of the Affordable Care Act aka “ObamaCare”, a supposedly derogatory nickname now embraced by the Obama campaign. At the heart of the fight is the so-called individual mandate which requires everyone to purchase health insurance. A related and important argument is that additional provisions, such as requiring coverage for individuals with preexisting conditions, become prohibitively expensive without the individual mandate. This is because, without the mandate, healthy individuals will not buy insurance till they become sick and this drives up costs of insurance companies. So, if the individual mandate is struck down, the argument goes, the court should also strike down the requirement that insurance companies cover individuals with pre-existing conditions.

I am not a lawyer but the main argument for canceling the individual mandate turns on whether the federal government has the right to penalize an individual if they do NOT take a certain action. There is plenty of precedent for taxing “action” but can the federal government tax “inaction”? Many amicus briefs have been filed but there are two key ones by economists.

David Cutler, who worked in the Obama administration, has filed one with many co-signatories (including Akerlof, Arrow, Maskin, Diamond, Gruber, Athey, Goldin, Katz, Rabin, Skinner etc.). They say there is no such thing as inaction. A conscious decision to forego healthcare is an action and hence under the purview of existing law. Foregoing insurance also affects outcomes largely by shifting costs to others and hence is not a neutral decision.

The other side of the argument is filed by Doug Holtz-Eakin with co-signatories inclusing Prescott, Smith, Cochrane, Jensen, Anne Krueger, Meltzer etc.) First, they argue that if an individual does not want to buy converage it must be because the costs outweigh the benefits. Second, they argue about the numbers, claming the costs imposed by the uninsured on the insured (“cost-shifting”) are far below the $43 billion estimated by the Government Economists and are more like $13 billion.

The first part of the Holtz-Eakin argument is, to me at least, odd. Uninsured individuals can get healthcare for free in the emergency room. Hence, they can get the benefits of healthcare  -or at least healthcare in extreme circumstances – without the costs. So, of course for them the benefits are outweighed by the costs because they get the benefits anyway. The argument by Holtz-Eakin presumes that the individuals are not free-riding and so their private decisions fully reflect the costs and benefits but they do not. Then, the second part of the argument which admits there is cost-shifting going on basically makes the point I am making – if there is cost-shifting, there is free-riding and then individual’s decisions do not fully internalize costs and benefits.

There has to be a better argument against the individual mandate than this. I looked at Senator Rand Paul’s brief. The precedent for this case is a 1942 case involving an Ohio farmer who was exceeding his quota of wheat production. Footnote 6 caught my eye:

So infamous is the case, it has been set to music, to the
1970s tune of “Convoy”:
“His name was farmer Filburn, we looked in
on his wheat sales. We caught him exceeding
his quota. A criminal hard as nails. He said,
“I don’t sell none interstate.” I said, “That
don’t mean cow flop.” We think you’re
affecting commerce. And I set fire to his crop,
HOT DAMN! Cause we got interstate
commerce. Ain’t no where to run! We gone
regulate you. That’s how we have fun.”

Will this convince Justice Kennedy or is it cow flop?

Find all briefs here.

Observers cite the possibility of a brokered convention as the only reason for Newt Gingrich to remain in the race for the Republican nomination. If Mitt Romney cannot accumulate a majority of committed delegates prior to the convention, then Newt’s delegates give him bargaining power, with the possibility of throwing them behind Rick Santorum or even forging a Santorum/Gingrich ticket.

But why wait for the convention? If Gingrich and Santorum can strike a deal why not do it right now? There are tradeoffs.

1. If all primaries awarded delegates in proportion to vote shares there would be no gain to joining forces early. Sending Newt’s share of the primary voters over to Rick gives him the same number of delegates as he would get if Newt collected those delegates himself and then bartered them at the convention. But winner-take-all primaries change the calculation. If Santorum and Gingrich split the conservative vote in a winner-take-all primary, all of those delegates go to Romney. Joining forces now gives the pair a chance of bagging those big delegate payoffs.

2. Teaming up now solves a commitment problem.  If both stay in the race and succeed in bringing about a contested convention, the bargaining will be a three-sided affair with Romney potentially co-opting one of them and leaving the other in the cold.

Those are the incentives in favor of a merger now.  Working against is

3. A candidate has less control over his voters than he would have over his delegates. Newt endorsing Santorum does not guarantee that all of Newt’s supporters will vote for Rick, many will prefer Romney and others would just stay at home on primary day.

Gingrich and Santorum are savvy enough, and there is enough at stake, for us to assume they have done the calculations. Given the widespread belief that any vote for Rick or Newt is a really an anti-Romney vote, they surely have discussed joining forces. But they haven’t done it yet and probably will not, and this tells us something.

The huge gain coming from points 1 and 2 can only be offset by losses coming from point 3. Their inability to strike a deal reveals that the Gingrich and Santorum staffs must have calculated that the anti-Romney theory is an illusion. They must have figured out that if Gingrich drops out of the race what will actually happen is that Romney will attract enough of Gingrich’s supporters (or enough of them will disengage altogether) to earn a majority and head into the convention the presumptive nominee.

Newt and Rick need each other. But what they particularly need is for each to stay in the race until the end, collecting not just the conservative votes but also the anti-other-conservative-candidate vote in hopes that their combined delegate total is large enough come convention-time to finally make a deal.

Here’s a pretty simple point but one that seems to be getting lost in the “discussion.”

Insurance is plagued by an incentive problem. In an ideal insurance contract the insuree receives, in the event of a loss or unanticipated expense, a payment that equals the full value of that loss. This smooths out risk and improves welfare. The problem is that by eliminating risk the contract also removes the incentive to take actions that would reduce that risk. This lowers welfare.

In order to combat this problem the contracts that are actually offered are second-best: they eliminate some risk but not all. The insured is left exposed to just enough risk so that he has a private incentive to take actions that reduce it. The incentive problem is solved but at the cost of less-than-full insurance.

But building on this idea, there are often other instruments available that can do even better. For example suppose that you can take prophylactic measures (swish!) that are verifiable to the insurance provider. Then at the margin welfare is improved by a contract which increases insurance coverage and subsidizes the prophylaxis.

That is, you give them condoms. For free. As much as they want.

How did British PM David Cameron steel himself for the historic all-nighter last week in Brussels?

Cameron, it is said, used his tried-and-tested “full-bladder technique” to achieve maximum focus and clarity of thought throughout the gruelling nine-hour session in Brussels. During the formal dinner and subsequent horse-trading into the early hours, the prime minister remained intentionally “desperate for a pee”.

Showing a healthy disdain for ivory-tower types who claim the opposite:

Australian and American researchers examined the “effect of acute increase in urge to void on cognitive function in healthy adults”. After making eight “healthy young adults” drink two litres of water over two hours, the researchers asked them to complete a series of tasks to test their cognitive performance. They concluded from the results that an “extreme urge to void [urinate] is associated with impaired cognition”.


The Palestinians cannot get membership in the UN because the United States would use its veto.  But they have other options.  A month ago they were voted in by a wide margin to the United Nations Educational, Scientific and Cultural Organization, UNESCO.  This compelled the United States to cease funding to UNESCO because of an American law that prohibits contributing to any organization that recognizes the Palestinian Liberation Organization which the US considers to be a terrorist arm.

The US has no veto power to prevent entry to UNESCO or 14 other special UN agencies.  Quoting Gwynne Dyer:

If the Palestinians apply for membership in each of these organisations over the next year or so, they will probably get the same 88 percent majority when it comes to a vote on membership. None of the countries that defied the United States and voted Palestine into UNESCO is going to humiliate itself by changing its vote at other UN agencies. And each time, Washington will be forced by law to cease its contributions to that agency.

The United States would not actually lose its membership by stopping its financial support – at least not for a good long while – but it would lose all practical influence on these agencies, which do a great deal of the work of running the world. It would be a diplomatic disaster for Washington…

I thank Sean Brockelbank for the pointer.

Honestly though, I like Rick Perry now more than ever.  How he handled that moment is incredibly endearing and anti-political.  And I understand a lot about the GOP by noticing that every time one of their candidates does something likable his popularity among the base is eroded.

When he made his red-meat candidacy announcement this summer, I was frightened, and the GOP insiders already had him in the White House. Then when he appealed to his party’s heart to defend financial aid for the undocumented in Texas, me and the GOP switched places.  When he gave that speech in New Hampshire that went viral, I thought he came across as a guy you could hang with.  Everybody else said he must be on drugs.  Bill Clinton talks like that and he’s our buddy Bubba.

The standoff between Herman Cain and his accusers offers us some interesting strategy to contemplate.  The accusers are muzzled by a non-disclosure agreement they signed as a part of their settlement with the National Restaurant Association, where they worked alongside Mr. Cain.  But lets walk down the tree to the node where the NDA has to be enforced.

One of the accusers has gone public with the allegation.  To enforce the NDA is to admit that the NDA exists, which in turn is an admission that there was a settlement, which for all practical purposes is an admission that the allegations are true. Now, back here at the beginning of the game tree, should the accusers consider this a credible threat?

Perhaps.  Because the allegations will be devastating whether or not Mr. Cain confirms the settlement.  By then he would have little to lose, and at that stage the presumed penalties mandated by the NDA plus plain old retribution would be motivation enough.

(Let’s admire but ultimately ignore as unrealistic the gambit of not enforcing the NDA as a way of “proving” that there is no NDA because there was never any settlement with these accusers.)

However, it appears that the settlement is actually a contract between the NRA and the accusers.  If that is the case then the decision to enforce it may not be Mr. Cain’s.  Does the NRA have any credible motivation to do so?

Maybe not, but in some ways this arrangement may strengthen Mr. Cain’s position.  Imagine that the accuser’s lawyer holds a press conference and publicly asks “Mr. Cain, my client is subject to a Non-Disclosure agreement arising from a sexual harrassment settlement in which you were the harasser. You deny this.  Since the accusations are false you should be perfectly willing to release them from the NDA.  Please prove to the American people that you are telling the truth by waiving it.”

Mr. Cain wiggles out of this one by publicly saying “Yes, I have nothing to hide. The NDA should be waived” and then by privately urging the NRA to do no such thing.  The NRA can of course deny that there was any agreement and indeed the agreement probably requires them that because it presumably prohibits all parties from talking about it.

Spake Kim:

“I got caught up with the hoopla and the filming of the TV show that when I probably should have ended my relationship, I didn’t know how to and didn’t want to disappoint a lot of people,” the post said.

That explains it.

On Monday, me and some dudes are gonna tailgate outside the Kellogg School of Management before the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is announced. You should totally come. It’s gonna be ill. My pick to click this year is N. Gregory Mankiw. They’re gonna say it’s for his work on menu costs and price stickiness, but that’s bunk. It’s really so they can hand it over to someone who isn’t Paul Krugman.

Who’s on your Nobel fantasy team?

In related news, Harvard has shut down its Nobel pool (and Al Roth plans on a late breakfast.)

I am attending a workshop organized by Eli Berman at UCSD.  Eli and his co-authors have been studying the military surge in Afghanistan.  Colonel Joe Felter, a key member of the research team, presented an overview of the theory of counterinsurgency (COIN) – How can the Afghan government and the US forces “win hearts and minds”?

Think of Apple and Samsung competing for consumers.  In the end, a consumer hands over some cash and gets an iPad or a Galaxy.  Both sides of the exchange have sealed the deal, an exchange of a product for money.  The theory of COIN works the same way.  Two potential governments compete for allegiance from an undecided population.  They offer them security and public goods in exchange for allegiance.  They may also use coercion and violence to compel compliance.  There is a key difference – an Afghan citizen can take the goodies offered by the U.S., claim he will offer his allegiance and then withhold it.  The exchange takes place over time and there is no “contract” that guarantees payment of allegiance for US bounty.

The Afghans will offer their allegiance to the government that will be around in the long run.  And the Taliban tell them, “The Americans have watches but we have the time.”  And this strategic issue undercuts the theory of COIN.  How can the surge work if one of the firms that is trying to sell you a product won’t be around to honor the warranty?

The daring raid on Osama Bin Laden’s Pakistani hideout has deeply embarrassed the Pakistani military and secret service ISI.  American helicopters were able to fly in undetected, kill the world’s most wanted man and leave with his body.  We might speculate about the consequences for Al Qaeda and the possible acceleration of withdrawal of American troops from Afghanistan.  Instead, I thought I would talk about the implication of the American attack on Pakistan.

First, if Navy Seals were able to fly in and steal Osama Bin Laden, might they be able to steal Pakistan’s nuclear materials?   A much more difficult and perhaps impossible enterprise with weapons at different locations, some of them mobile. But the Abottabad adventure was highly improbable too. Therefore, one result of the death of OBL is that the Pakistanis will guard their nuclear weapons with more diligence. This is good for the rest of the world as it reduces the chances of a WMD falling into the hands of extremists.  It is bad to the extent that the rest of the world (i.e. the US!) has plans to capture Pakistani WMDs in some emergency scenario.

Second, the Pakistani military does not come out of this incident looking good. Either they are incompetent, unknowingly allowing OBL to live in an army town, or they are complicit, deliberately harboring a terrorist where he might be least likely to be found.  In either scenario, Pakistan might think that the American action emboldens India.  India now has cover to adopt a more aggressive stance against Pakistan.  This in turn implies that Pakistan might adopt a more aggressive stance itself to counteract any reputational fallout from its perceived ineptitude.  Some kind of cross-border incident in Kashmir is an obvious move for Pakistan to engineer.  There is some distance between Pakistani politicians and the military and some kind of “confidence-building” move by India might help to forestall any increase in tension.  Such a move unfortunately is politically difficult given the huge suspicion of the Pakistani military and ISI following on the heels of the discovery of OBL living safely in Abottabad.

From MR, I read this story about how the San Francisco smart parking meters will be designed to adjust meter rates in real time according to demand.  There wasn’t much detail there but this bit gave me pause.

Rates at curbside meters in the project area will be adjusted block by block in an attempt to have at least one parking space available at any time on a given block.

Republicans and Democrats are negotiating a budget deal in an effort to avert a government shutdown. The last time the government was forced to furlough workers, Congressional Republicans and their leader Newt Gingrich took much of the blame in the eyes of the public.  It is generally believed that Republicans, the anti-goverment party, would again be blamed for a government shutdown should an agreement not be reached this time around.

The first-order analysis bears this out.  While a government shutdown would be a bad outcome for all parties, it is relatively less bad for the anti-big-government Republicans.  Other things equal you would infer that if a shutdown were not averted it would have been because the Republicans were willing to let that happen.

Of course other things are not equal.   The second-order analysis is that Democrats, understanding that Republicans would take the blame now become relatively more willing to allow a shutdown.  This affects the bargaining. Democrats are now emboldened to make more aggressive demands for two reasons.  First, the cost of having their demands rejected is lower because they score political points in the event of a shutdown. Second, for that same reason Republicans are now more likely to accept an aggressive offer.

Will the blame equilibrate?  Does the public internalize the second-order analysis and adjust its blame attribution accordingly?  And what does equilibrium blame look like?  Must it be applied equally to both parties?

In politics only the most transparent arguments hold sway with the public.  The second-order analysis is too subtle to be used as a talking point even though probably everybody understands it perfectly well.  A talking point is effective as long as it’s believed that many people believe it, even if in fact most people see right through it. So the first-order analysis will rule and the blame will not equilibrate.

In the current environment that could raise the chances of a government shutdown.  Ideally Democrats would maximize their advantage by increasing their demands and stopping just short of the point where Republicans would rather trigger a shutdown.  But the Tea Party complicates things. They might be so steadfast in their principles that they are not deterred by the blame. That could mean that the best deal Democrats can expect to reach agreement on is dominated by making a demand that the Tea Party rejects and forcing a shutdown.

The now metered and paywall protected NYT reports:

The Obama administration is engaged in a fierce debate over whether to supply weapons to the rebels in Libya, senior officials said on Tuesday, with some fearful that providing arms would deepen American involvement in a civil war and that some fighters may have links to Al Qaeda.


Even if fighters do not have links to Al Qaeda or Hezbollah, what is there to guarantee that they are or will remain friendly to the Western allies?  Gaddafi while historically unfriendly had finally been seduced with Mariah Carey concerts and Coca Cola. Arming the rebels might fulfill a short term objective of regime change but at the cost of creating an armed future enemy.  What’s the debate?

This is an easy one: North Korea thinks (1) the US is out to exploit and steal resources from other countries and hence (2)  Libya was foolish to giving away its main weapon, its nascent nuclear arsenal, which acted as a deterrent to American ambition. Accordingly,

“The truth that one should have power to defend peace has been confirmed once again,” the [North Korean] spokesperson was quoted as saying, as he accused the U.S. of having removed nuclear arms capabilities from Libya through negotiations as a precursor to invasion.

“The Libyan crisis is teaching the international community a grave lesson,” the spokesperson was quoted as saying, heaping praise on North Korea’s songun, or military-first, policy.

In a perceptive analysis, Professor Ruediger Franks adds two more examples that inform North Korean doctrine.  Gorbachev’s attempts to modernize the Soviet Union led to its collapse and the emancipation of its satellite states.  Saddam’s agreement to allow a no-fly zone after Gulf War I led inexorably to Gulf War II and his demise.  The lesson: Get more nuclear arms and do not accede to any US demands.

Is there a solution that eliminates nuclear proliferation?  Such a solution would have to convince North Korea that their real and perceived enemies are no more likely to attack even if they know North Korea does not have a nuclear deterrent.  Most importantly, the US would have to eliminate North Korean fear of American aggression.  In a hypothetical future where the North Korean regime has given up its nuclear arsenal, suppose the poor, half-starved citizens of North Korea stage a strike and mini-revolt for food and shelter and the regime strikes back with violence.  Can it be guaranteed that South Korea does not get involved?  Can it be guaranteed that Samantha Power does not urge intervention to President Obama in his second term or Bill Kristol to President Romney in his first? No.  So, we are stuck with nuclear proliferation by North Korea.  The only question is whether North Korea can feel secure with a small arsenal.

Tomas Sjostrom and I offer one option for reducing proliferation in our JPE paper Strategic Ambiguity and Arms Proliferation.  If North Korea can keep the size and maturity of its nuclear arsenal hidden, we can but guess at its size and power.  It might be large or quite small – who knows.  This means even if the arsenal is actually small, North Korea can still pretend it is big and get some of the deterrent power of a large arsenal without actually having it.  The potential to bluff afforded by ambiguity of the size of weapons stockpiles affords strategic power to North Korea.  It reduces North Korea’s incentive to proliferate.  And this in turn can help the U.S. particularly if they do not really want to attack North Korea but fear nuclear proliferation.  Unlike poker and workplace posturing à la Dilbert, nuclear proliferation is not a zero-sum game.  Giving an opponent the room to bluff can actually create a feedback loop that helps other players.


An insightful analysis from John Quiggin at Crooked Timber of the organizational economics of Arab dictatorships.

The element of truth is that the Arab monarchies have good prospects of survival if they can manage the transition to constitutional monarchy. And it makes sense for them to do so. After all, a constitutional monarch gets to live, literally, like a king, without having to worry about boring stuff like budgets and foreign affairs. And, in the modern context, the risk that such a setup will be overthrown by a military coup, as happened to quite a few of the postcolonial constitutional monarchs, is much diminished. By contrast, there’s no such thing as a constitutional dictatorship or tyranny and no way to make the transition from President-for-Life to constitutional monarch. That’s not to say all the monarchs in the region will survive, or for that matter, that all the remaining dictatorships will fall. But the general point is valid enough.

With this corollary for Saudi Arabia

The other big problem is that this can’t easily be done in Saudi Arabia. There are not even the forms of a constitutional government to begin with. Worse, the state is not so much a monarchy as an aristocracy/oligarchy saddled with 7000 members of the House of Saud, and many more of the hangers-on that typify such states. These people have a lot to lose, and nothing to gain, from any move in the direction of democracy.

If you were the President of the United States and, on camera, you were asked

If there is an uprising in Saudi Arabia the likes of which we have seen in Tunisia, Egypt, and Libya, will the United States stand by the protestors and ask the regime to leave?

how would you answer?

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