Cheap Talk

I went to a totally fascinating talk at MIT given by Kevin Woods from the Institute for Defense Analyses.  Woods interviewed  Saddam’s key henchmen, like Chemical Ali and Tariq Aziz, who were captured after the invasion.  He also has access to documents in Saddam’s palaces and intelligence offices.  Saddam also has the “Nixon disease” and taped everything.  Woods and his team are busy listening to all of the tapes.  There were many fascinating anecdotes and I list all of them I can remember:

1. Delusions At a meeting in the mid-ninetees with leading generals and strategic thinkers, one officer offered a subtle and nuanced theory of how an invading army might be forestalled and defeated by an attrition strategy using small, fast-moving decentralized groups (a little like the fedayeen that plagued US troops in Gulf War II).  The officer compared this to the strategy used by the Russians against Napoleon.  ( I assume extreme heat replaces extreme cold as the weather component of the strategy.)  Saddam dismissed the strategy.  His argument was that the fact that he, Saddam, was still standing and alive meant that he had defeated the U.S. coalition in Gulf War I.  A coalition of thirty odd nations had been brought to its knees by him.  Therefore, since he had a winning strategy in 1991, there is was no reason to replace it for the next invasion.  Notice that Saddam also wants to learn from his mistakes – that is why he had the after-event analysis done, just like the analysis done for the US by Woods.  But Saddam is subject to so much overconfidence that he cannot use any useful information that might come out of the analysis.

From the U.S. perspective, Saddam was deliberately left in power to prevent a collapse of the country and the growth in the influence of Iran.  Saddam’s perspective was obviously different.

Saddam became more and more delusional over time.  Initially, he used to defer to his generals but by the end he started writing memos on how to organize even small groups soldiers.  Woods said that such memos are written by sergeants in the US Army so Saddam had reached this level of micromanagement.

2. Information

2.1 Every Thursday, all the cars used by the key players in the army and government had to be taken in for “maintenance”.  It was common knowledge that the batteries were being replaced in the “secret” recorders in the cars.

2.2 Saddam’s key fear was a coup.  He was suspicious if officers talked too much in case they were plotting something.  Officers at the same lateral level did not talk, fearing repercussions.  Vertical communication was OK, especially as the top brass were insiders who were most likely to have Saddam’s support.

2.3 A key player, the head of research into WMDs, was asked: Is it possible that there was a WMD program and you did not know about it?  He said it was quite possible.  First, information was compartmentalized and no-one knew anything.  After Gulf War I, many documents, resources etc were destroyed so inspectors would not find them and hold Saddam in contempt of various UN resolutions.  But this process was haphazard and no-one really knew what was and was not destroyed and whether some WMDs had been hoarded secretly.

Why did he believe that Saddam had WMDs?  Because “little Bush”, as Saddam called him, had said there were WMDs.  And if he invaded and there were no WMDs, Little Bush would be very embarrassed so he would make sure there were WMDs before saying it!

3. Nepotism, Cowardice and Stupidity

Saddam lived in fear of a coup mounted by the Republican Guard. His solution was to create the Special Republican Guard, whose main remit was to protect him against coups particularly from the Republican Guard.    You would think that the head of this outfit would be a fearsome figure who would terrify any budding coup plotters.  Woods asked other leading figures if this was indeed the case and the answer was a resounding NO!  Why?  Saddam was well aware of the “who monitors the monitor problem” – what is the head of the Special Guard mounted a coup himself?  Saddam’s solution was not original: appoint a relative.  Make sure the appointee is a coward so he would not dream of mounting a coup.  Just in case he is tougher than you might think, choose someone stupid so he cannot mount a successful coup and is too stupid  to recognize someone else’s good ideas for a coup.

4. WMDs

Saddam did not have them in 2003 and hid that fact and in 1991 he had them but did not use them.  Why did he not use them in 1991?  He thought the U.S.has lots of chemical weapons and would not hesitate to use them.  Ditto Israel.  Why did he not reveal that he had no weapons in 2003? That would embolden aggressors and leave him naked in the face of an internal coup or an external threat like Iran.  This is the part of Woods’ work I was familiar with and is cited in my paper Strategic Ambiguity and Arms Proliferation with Tomas Sjostrom.

For an economist, some of Saddam’s strategies are reminiscent of themes in the economics of organizations…promotion of dumb managers, though for quite different reasons, the difficulties of coordinating across divisions…

Another theme is also familiar to game theorists though we have no clear answer: it is very hard for one player to understand the strategic intent of another.  It is very hard for one player to communicate his strategic intent to the other indirectly: presumably Big Bush thought it was obvious which side had defeated the other and could not imagine that Saddam would even consider Gulf War I a win for the Iraqi regime!  This leads the players to have two quite different interpretations of the same event and creates room for future errors.

How should one player credibly communicate his strategic intent and beliefs to another?  This is the fundamental question for the US from this excellent and interesting study by Woods and his team.

Obama is close to a decision on the U.S. strategy is Afghanistan.  What is the rational way to approach this decision assuming the U.S. is maximizing its own payoff?  This is the “realist” assumption rather than one incorporating a moral component, though it is not too hard to jazz up some of the analysis to deal with this objective function too.

First, think through whether we should be there in the first place.  What is the threat to the U.S. if Afghanistan falls to the Taliban?  Will Al Qaeda move back in or not?  If the belief is that the Taliban is not a threat to the U.S. and Al Qaeda will not move in, the realist conclusion is to withdraw and focus on counterterrorism.  This is the debate taking place within the Obama adminstration

Second, what if the Taliban is a threat and/or Al Qaeda will flourish in a Taliban-led Afghanistan?  This is the more interesting case from the strategic perspective and an analysis has been provided by Nolan Miller.  He applies it to Iraq as his paper was written during the election but it could equally be applied to Afghanistan.

The U.S. strategy affects two other players, Karzai and the Taliban.  If the U.S. adopts an aggressive approach and commits to a large military presence, this reduces the incentive of the Taliban to be aggressive and their effort is more likely to be futile.  But equally there is a free rider problem for Karzai: if the U.S. is exerting effort anyway, this reduces the incentive of Karzai to do so.

These two effects go in opposite directions.  If Karzai is weaker than the Taliban in the absence of intervention, the reduction in his effort after U.S. intervention is outweighed by the reduction in the effort of the Taliban.  In that case, it is better to adopt an “output-based” strategy where the U.S. commits to a security level that it tries to achieve regardless of the Karzai government’s and insurgent’s effort.

This appears to be the pertinent case if  the belief is that we should pursue counterinsurgency rather than counterterrorism.  Miller also explores more complex solutions.

I haven’t pre-ordered the Saran Palin “Going Rogue”.  Many of the juicy details have already leaked out.  She did the disastrous Katie Couric interview because she “felt sorry” for her.  The McCain campaign manager Steve Schmidt gets slammed for shouting at her over the phone after Palin gets tricked into taking a fake call from Nicolas Sarkozy etc. etc.

In fact, according to the Times:

The most sustained and vehement barbs in this book are directed not at Democrats or liberals or the news media, but at the McCain campaign. The very campaign that plucked her out of Alaska, anointed her the Republican vice-presidential nominee and made her one of the most talked about women on the planet — someone who could command a reported $5 million advance for writing this book.

It all smacks of paranoid high school behavior.  Tina Fey not only did a great Palin on SNL but also the sense of Palin we see in the book reviews was captured in Fey’s movie “Mean Girls”.  This Venn Diagram captures it all:

1. Dan Ariely’s latest gig.
2. Cats with fake MBAs.

The sandwiches at the Kellogg cafe come with a choice of homemade chips or an apple. Perhaps reflecting an overdose during my summers picking fruit in the Okanagon valley, the apple typically ends up sitting un-eaten. 

There are better and worse home-made potato chips, but even the worst of them push many of my buttons. It thus marks a true culinary achievement that when I choose the chips, I typically eat a couple of them, and then throw the rest away. And, it turns out, I derive a lot of pleasure from this! It makes me feel all self-controlly and healthy.

Given a choice between not eating something you will feel guilty about, and not eating something that suffuses you with a feeling of virtue, I strongly recommend the second.

I am atingle to think what I shall non-consume next.

Independent Joe Lieberman is driving Gail Collins and the progressive left crazy.  He caucuses with the Democrats and holds a plum committee chairmanship on the strength of largely voting with the Democrats.  But he is threatening to filibuster the healthcare reform vote in the Senate.  The only way to give him the incentive to drop this threat is to threaten him in turn – strip him of his chairmanship if he filibusters the vote.

The problem is that Lieberman knows that if he filibusters, the Democrats do not have the incentive to carry out their threat because they need his vote in the future.  Their threat to strip him of his chairmanship is not credible. This is a classic issue in deterrence theory: how can we make our threat to bomb the Soviets if they bomb us credible?  Many of the strategies do not transfer (e.g. the automated response à la Doomsday machine in Dr. Strangelove), but one does: the Democratic leadership has to rely on reputational devices to incentivize Lieberman.

Forgiving Lieberman may create future defections as the Democratic leadership shows they are wimps.  Carrying out the threat shows that Reid and Obama are tough and signals they will be tough in the future.   This is the slippery slope argument and the classic “act crazy to get a reputation for toughness” strategy.  Dick Cheney gets this strategy (though it seems to be the only strategy in his arsenal).

If Lieberman finds the threat credible,  the Democrats do not even have to carry it out because he will not filibuster.  But if he does not find it credible, he will filibuster.  Then you face the problem of losing his vote in the future if you accept the slippery slope argument and feel you must punish Lieberman for his treachery.

To evaluate this possibility, we have to consider the credibility of Lieberman’s threat to vote Republican in the future if he stripped of his chairmanship.  The Republicans are too extreme for the Connecticut voter.  If Lieberman votes with them or switches parties, he is in trouble at home.  So you can rely on his reelection motive to discipline him and get his vote on some mainstream Democratic issues.

There is also a subtle way to give Lieberman the incentive to go along with his punishment without ganging up with the Republicans.  It is a “penal code” to design dynamic incentives and it was discovered by Dilip Abreu.  The penal code boils down to forgiving Lieberman gradually over time to get his cooperation in the future.  In this scenario, this requires some deviation from standard seniority principles for allocation of committee chairs.  Put a stopgap person, Al Franken, in charge of Lieberman’s committee. Tell Lieberman that Franken will step down if Lieberman is on board in future.  Otherwise, goodbye chairmanship forever.  If this subgame is triggered as Lieberman is bloody minded, Franken should step down in favor of whoever is in line for the chairmanship now if  Lieberman is ejected.  This might be necessary to get this person on board with the plan to deviate from the status quo procedure for allocation of committee chairs.

And if all this Machiavellian structure falls apart, Al Franken is Chair of an important committee.  He is a professional comedian while the rest of the Senate are amateurs.  That seems like an improvement to me.

Let me begin by saying that I’m with the new Keynesians on the central issue here. I believe real world markets break down. A stunning point for me is the juxtaposition between the fact that much of modern macro began by trying to incorporate micro foundations into their models, but in the end, many of the proponents of the extreme version of fresh-water economics have ignored 30 years of micro that is pretty specific on all sorts of ways that markets can fail to clear.

That said, one can argue about the role of government on many levels. I take a variety of positions on these issues. I’m a deficit hawk, but a big believer in well-timed intervention. I’m in sympathy with the comment from our treasury secretary that we need to pay serious attention to the deficit, just not this year. I sure as heck hope he means the second part, though. The long chain of budget deficits forecast by the CBO scares the heck out of me.

Today, however, I want to make two reflections on the right form of stimulus.

The first is an easy one. In talking about the purported wastefulness of direct stimulus spending, I think it is well worth noting that very few people would argue that this country has been spending too much on infrastructure. Clearing up a lot of deferred maintenance seems like a fine idea to me, and getting our transportation system back up to something approaching the quality viewed as normal in much of the developed (and developing) world a pretty good idea too. For much the same reason, I get less worked up than many about “pork-barrel” spending; sure, it would be nice to have a more transparent process, and maybe doing a little better on allocating scarce resources on the margin, but we seem so far from a sensible amount of public goods in this country that I’m doubtful that much of the spending is truly a waste.

Now to my second, and maybe less trivial point about stimulus spending. One theme that has recurred in left-of-center blog land of late is that if only we could have another round of “real” stimulus, we wouldn’t need to be doing back door stuff like cash for clunkers and the tax subsidy for home purchasers. I disagree! If one wants to stimulate economic activity at reasonable cost, this seems like a good way to go. Why? Because it is pulling exactly the right lever if you think hard about why spending has fallen in the first place.

One reason, of course, is because some people have less money. Extending unemployment insurance benefits seems a good idea in this context. State governments, many of which have mandatory budget balance mechanisms, are also in the class of entities to which  a direct cash transfer is likely to stimulate spending.

But, the bulk of the reduction in spending, by both firms and consumers, is not “we have no money to spend, or nothing worth spending it on”. Rather, they are properly exercising option value in a setting of wildly increased uncertainty. In the months after the financial meltdown, a new TV suddenly needs to meet a much higher hurdle: the question is not “do I think the flow of services from the TV over the next 8 years is more than worth the cost”, but “do I expect to derive enough value from owning this TV now instead of 3 months from now that I wouldn’t rather wait a bit, and see how the situation develops.” If things look less apocalyptic in three months, one can always buy the TV then, having foregone only a few months of HDTV heaven. On the flip side, if in three months the situation has shifted for the worse, then one has avoided being saddled with a TV/car/house/factory that does not make sense in the new environment.

If I’m waiting to buy a new house because I’m waiting to see if I get tenure, this delay is economically efficient. But, if the uncertainty is aggregate and extreme, so the we all want to exercise the option value of delay, and if one believes that markets don’t always clear, then if we all start delaying economic activity because we want to see if the future is bad, the future has a decent chance of being just that.

In such a context, a tax cut, or a check from the government, is likely to have very little effect. I’m a little more flush than I was (although I’m also guessing that my future tax liability is going to be higher), but heck, I had money to spend before anyway. If the issue is uncertainty, then the right thing to do with extra money that appears is to simply stick it in the bank.

On the other hand, if the choice is “new car today at huge discount” vs. car in 3 months at normal prices, then I may well pull the trigger even if I face a moderate degree of uncertainty. Note then, though, that cash for clunkers and the housing subsidy are particularly effective precisely to the extent that people think they will end. If I am pretty sure the program will be renewed, then the original calculation is back in effect, and waiting is probably the right thing to do.

This brings us to one of the most important points made by Lucas, Phelps, and company: economic policy based on consistently fooling people is unlikely to be a great idea. Here, the problem is to avoid the temptation to go back and re-new each program as it nears expiration. If people grow to expect this, they lose their oomph.

This has been illustrated in a paper by Megan Busse, Duncan Simester, and Florian Zettelmeyer. In the wake of 9/11, GM ran “The best deal you’ll ever get.” Precisely because it had a well-defined end date, and one that seemed credible given the extraordinary circumstances, the program was extremely effective in raising sales for GM despite the uncertainty rampant that fall. But, when GM renewed it, the effect was much smaller, probably because people no longer saw the cost of delay as being large.

Not exactly. But the story is about the same guy who I blogged about before (United Breaks Guitars):

After baggage handlers at United broke his guitar last summer and the airline refused to pay for the $1,200 repair, Mr. Carroll, a Canadian singer, created a music video titled “United Breaks Guitars” that has been viewed more than 5.8 million times. United executives met with him and promised to do better.

So how was Mr. Carroll’s most recent flight on United?

Same as usual:

This Everyman symbol of the aggrieved traveler was treated, well, like just another customer. United lost his bag.

In an interview, Mr. Carroll said that for more than an hour on Sunday, he was told he could not leave the international baggage claim area at Denver International Airport, where he had flown from Saskatchewan. He said he had been told to stay because his bag was delayed, not lost, and he had to be there to claim it when it came down the conveyor belt.

“I’m the only person pacing around this room,” Mr. Carroll said, recalling how he was caught between an order from United staff members to stay and collect his bag, and a federal customs official telling him he had to leave the baggage claim area. The bag never showed.

As we say in MBA world, Carroll has “turned a crisis into an opportunity” – he has a business speaking to customer service reps:

This latest episode provided him with fresh material for his most recent performance, which was why he was flying on United — to speak to a group of customer service executives on Tuesday (though without his best shoes and “United Breaks Guitars” CDs that were in his still missing suitcase).

Three very nice Pinot Noirs, all under $25.

First, Martinborough Vineyards Russian Jack, NZ 2008: $19 from Wine Bottega in the North End of Boston.  Best wine for everyone but me.  Cherries, floral nose and very smooth.  Coconut taste at end suggests oak.  My second best.

Second, A to Z Pinot Noir, Oregon 2007:  Widely available.  But rough to begin with.  Still classic cherry.  Consensus worst of three.  But I would buy it and drink it again as it was quite good nevertheless.

Third, Soris Pere and Fils, Santenay, 2006:  $25 at Formaggio Kitchen.  Multi-layered.  Stinky barnyard and hay as well as cherry.  But tannic. My favorite, everyone else’s number two.

Overall, very good wines at this price.  Had some Vin Santo (Allegrini 1999) as well that our guests brought.  Four bottles of wine between four people at one sitting!  Didn’t feel worse for wear the next day.  Either liver is in trouble or the wines were good.  Hope it is the latter.