Decision Theory and the War in Iraq--Posner

What can economics contribute to decisions on the further conduct of the war in Iraq? I set to one side all issues concerning the initiation of the war, the adequacy of intelligence and planning, the mistakes made in the conduct of the war since the invasion of Iraq in March 2003, and the costs that have already been incurred. (See Becker's and my postings of March 19, 2006, concerning the costs and benefits of the war up to that date.) All those are bygones and should not be allowed to influence current decision making. The correct perspective is an ex ante one. Rational decision making has the general form of cost-benefit analysis. That is, one compares alternatives and picks the one that offers the greatest surplus of anticipated benefits over anticipated costs. This requires monetizing benefits and costs and discounting (multiplying) them by the probability that they would actually be realized if the particular alternative were chosen. The challenge to the application of cost-benefit analysis to the question of what the United States should do in Iraq lies in the difficulty of monetizing many of the relevant costs and benefits and of estimating the probabilities that they will be realized by particular courses of action that should be considered and thus compared. An initial distinction should be drawn between monetized and monetizable costs. Our expenditures on military and civilian operations in Iraq are of course monetized, but not the deaths and injuries that our troops sustain. They are, however, monetizable. The greater the risk of death or injury, the higher the wage that is demanded to enlist or re-enlist. That wage premium (as discussed in my post of June 4 of this year), to the extent that it has risen as a result of the Iraq war, provides a basis for estimating the cost of anticipated deaths and injuries to our troops from continued involvement in Iraq. In effect, those costs are impounded in the wage premium. The very slow pace at which the army is being expanded is widely considered a sign of inefficiency, but an alternative possibility is that the expansion is being deliberately slowed out of concern that the wage premium necessary for a rapid expansion would be staggering. Another important monetizable cost of the war is, if experience with the war in Vietnam is a reliable guide, the tendency to conceal the full costs of an unpopular war by deferring maintenance and replacement of equipment, drawing down reserve stocks of equipment and supplies, and cannibalizing spare parts from equipment not in use. There is also the present cost of long-run medical and disability benefits for the thousands of permanently injured veterans of the war. When the readily monetizable costs of the war are added to the monetized costs now running at some $140 billion a year, the total monetized and monetizable costs could be twice that amount. There are also nonmonetizable costs, of course, such as the contribution that continuing the war makes to recruitment and training of Muslim extremists who may want to attack the United States either directly, or indirectly by destroying regimes friendly to the United States or by disrupting the production or transportation of Middle Eastern oil. The presence of U.S. troops anywhere in the Middle East apparently acts as a provocation to many Muslims. Against this it is argued by the Bush Administration that if we withdraw from Iraq, the terrorists who are attacking our troops there will as it were follow us to the United States. That is possible, but there are two contrary arguments. The first is that al Qaeda is Sunni, and if we leave Iraq the Sunnis there will find themselves hard pressed by the Shiites, who control the government; so al Qaeda may continue to be preoccupied with Iraq for years. Second, if our presence in Iraq endangers us by fostering recruitment and training of Islamic terrorists, it seems contradictory to claim that our absence would act as a similar provocation. Another possible nonmonetizable cost is the boost to the terrorists that would be given by our acknowledging defeat in Iraq. Terrorist recruiters would argue that Islamic extremism was winning its global struggle with the West and that this was proof that God is on the side of the extremists. There is also a natural attraction to being on the winning team--the winning side in history. Again, though, there is an element of paradox in arguing that our invading Iraq was a provocation and that our withdrawing from Iraq would be an equal or (the position of the Administration) a greater provocation. The cost most emphasized by the Administration is the possibility of chaos in Iraq if we leave--an intensified civil war with interventions by Iraq, Saudi Arabia, Turkey, and possibly other countries as well. Interventions by foreign countries in civil wars are common. Another possibility would be a partition of Iraq into Shiite, Sunni, and Kurdish states, on the model of the Yugoslav brakeup, which was accompanied by great violence. The United States would be blamed, and this might well increase Muslim hostility to the United States. Against this it can be argued, first, that withdrawal of U.S. troops might induce the contending factions in Iraq to settle their differences rather than inviting intervention by the neighboring countries, and, second, that whenever we leave, there will be anarchy in our wake because we are unprepared to commit the forces that would be required to pacify such a populous, violent, and fissiparous nation as Iraq. If the nonmonetizable costs of continuing the war are ignored, either on the ground that the best guess is that they are likely to be a wash or that they are unquantifiable because no one can predict the consequences of our withdrawal, then the case for withdrawal becomes compelling: on one side would be costs probably in excess of $200 billion a year and on the other side no calculable or even probable benefits. Moreover, there are nonmonetizable costs to our continued involvement in Iraq, in particular the distraction of our government from other foreign policy problems and perhaps domestic problems as well. The benefits of our staying in Iraq seem in current thinking to be limited to averting the costs I have mentioned. There is little expectation of a victory that would transform Iraq and the Middle East and weaken the terrorist threat to the United States. An intermediate approach to valuing our continued involvement in Iraq would exploit the notion of option value, an important concept of decision theory. An option is a device for deferring a transaction until more is known about its value. We can think of the many billions of dollars that the United States is currently spending on the war in Iraq as the purchase of an option to delay a decision on whether to leave until we have more information about the likely consequences of leaving. That is a prudent course when potentially very large consequences cannot be evaluated at present but may be evaluatable in six months or a year. That seems to be the thinking of the Administration. The objection is that there is no indication that waiting is producing any information. The optimal strategy for the strongest Iraqi factions, which is to say the Shiites and the Kurds, is simply to lie low until the United States withdraws. The Sunnis have less grounds for optimism concerning their position when the U.S. withdraws, and so they are showing signs of willingness to cooperate with us. But it is unclear how that willingness translates into a forecast of what the future holds for Iraq whether we withdraw in the near term or persist indefinitely. The Yugoslav precedent suggests that when the lid on a cauldron of smoldering ethnic hatred is lifted, civil war ensues. That process is already well under way in Iraq. A critical variable that receives insufficient attention by the media is the condition of the Iraq armed forces and police. Is it improving? At what rate? What is the desertion rate from the armed forces (a very good measure of effectiveness)? The great failure in Vietnam was the failure to create a South Vietnamese security structure that could stand up against the North Vietnamese without U.S. aid. No matter how successful the United States is in suppressing violence in Iraq, our departure will be followed by collapse if we leave a security vacuum. Since the current emphasis appears to be on quelling violence rather than on creating a viable Iraqi security structure (which may be impossible), the option value of our continued involvement seems slight.

Comments

[B]

“The enemy is extremism, we think.” –General Petraeus

Back in the 600s, Mohammed and his tribe attacked a large caravan coming from Syria towards Mecca. The people of the caravan, the Quraysh, were either killed in battle or taken prisoner and thrown into a pit to die. Mohammed then continued his exploits and became one of history’s most influential men. He divided the earth up into ‘Dar-al-Islam’ (land of Islam) and ‘Dar-al-Harb’ (land of war, where we live). His followers were instructed that Islam was to dominate and not be dominated. Since then, Dar-al-Islam has gotten much bigger and Dar-al-Harb has shrunk.

The Sunni-Shia split is deep in Islam. The Iran-Iraq war from 1980-1988 was fueled in large part by this split, as is the civil war in Iraq today. The Reagan Administration was content to allow the Sunnis and Shia to burn up their energies fighting each other and the 1980s were a pretty quiet decade on the Islamic extremist front. The Bush Administration seems committed to healing the Sunni-Shia rift. Condoleezza Rice has stated that the two sides will ‘just have to get over their differences’. That was a foolish statement.

One of Dar-al-Islam’s best weapons against Dar-al-Harb is the petrodollar. Saudi Arabia uses it to build schools teaching the words of the Qu’ran around the world. Saudi Arabia has stated that it will back the Iraqi Sunni if Iraq descends into a larger conflict. Their Ambassador also let slip that, in the case of a regional war, Saudi Arabia will increase oil production to drop prices below $50 per barrel (Iran’s profit point) to starve the Shia war effort.

The best strategy is to maintain a strategic presence at large airbases and get off of the Iraqi streets. The West’s costs will drop. The Islamic powers’ costs will jump. As water finds its own level in Iraq, the petrodollars currently spreading Qu’ranic teachings will instead be spent in Iraq. OPEC will likely disintegrate and the Saudi’s plan to lower oil prices might just happen.

The strategy of spreading democracy to Middle Eastern moms and dads sounds nice, but recess is almost over. It is time to shift to a defensive posture again the Jihad. Our enemies will turn on each other just like they did in the 1980s. We’ve got better things to do with our military and tax receipts.

[Michael Brophy]

How much did 9/11 cost us? Direct costs were somewhat above $100 billion is the estimate I am familiar with. Were these costs recurrent the overall impact is, I believe, in the range you estimate for Iraq war. And you haven't yet begun to deal with the problem.

So what about recurrence? Sadaam, somewhat like Germany as it left the Weimar era and transitioned to Hitler, was restrained by measures it was significantly noncompliant with. With again a demonstrated murderer in charge 'a stitch in time saves 9' appeared an appropriate proverb. More generally, what was the problem in the Arab world?
The Palestinians had been left by the Arab nations to nurse a grievance. There was no 'Life is about getting and giving up.' They were not to turn to 'get' anything unless it involved direct retribution for their loss. It was thought that this abnormal psychology was more general in the Arab world and promoted scapegoating and was bound up with a lack of liberty. Thus the idea was that liberty would promote 'getting' for the Arab people. This seen would reduce the impetus to scapegoat the US. If you look at the blog Iraq the Model or those citizen journalists in Iraq Michael Yon and Totten linked through Instapundit, you see that the Iraqis are now richer in liberty.

[Thomas B.]

Compelling pieces this week.

Here I was, anticipating the September report, hoping it would tell us our difficulties in Iraq were simply the result of some simple strategic error. These articles are right, mine's a false species of hope.

Only thing that remains for me is the nonmonetizable benefit of fulfilling our moral obligation to mitigate the unholy mess we've made in someone else's home. Mitigate, or at least try until asked to leave.

Given your surgical disposal of my other concerns, all that seems left is an Iraqi referendum on American withdrawl. It feels long overdue.

[Mark Shapiro]

The only missing part of your option value analysis is the possibility that the option value is negative.

General William Odom (head of NSA in the Reagan administration) has been arguing for several years that we are paying to make our strategic position worse, not better.

An economist can be excused for believing that option value cannot be negative. But the option value of another round of drinks while deciding whether to drive home is severely negative.

[ChinaCoalWatcher]

Short-term game theory may be a necessary substitute for decision theory when it is simply too difficult to measure and predict long-term outcomes but it is believed that "quitting" the game is unacceptable.

Economic decision theory makes more sense at the higher levels of political choices but less sense at the medium and lower levels of military strategy and tactics. The question of whether to be involved in Iraq at all must of course require an analysis of the costs and benefits of all relevant factors.

But in a system like the military, mission accomplishment is simplified, broken up, and distributed through a hierarchy of units with separate zones of responsibility. This is typically only practical where there is a narrow focus on particular objectives given in a context of the broader goals of higher command to avoid counterproductive efforts. The necessity of acting in an environment of significant uncertainty and the needs of speed, simplicity, secrecy, and compartmentalization also make any more thorough analysis pointless.

So while elements of decision theory are used at a strategic level, the military uses MDMP - The Military Decision Making Process - at the tactical level. MDMP works like chess - one tries to predict the many permutations of action and enemy reaction for as many "moves" ahead in the game as one can realistically anticipate with any degree of confidence, and cycles through the various assets the sides have for each move. One is able to choose readily between the various outcomes by comparison to the fundamental objective instead of all the effects in the universe.

Also like chess, one chooses the course of action that yields the optimal positioning to both accomplish the mission and provide flexibility to respond to changed circumstances, new information, and future orders.

In the Iraq situation, it's a chess game where all sides get to replace some of their lost pieces, and so an MDMP analysis would probably suggest establishing a broad and deep security presence, and a vigorously offensive posture which could either keep enemy units pinned down or be able to dominate them quickly when they emerge from hiding. The goal of current US-Iraq policy is to provide cover for Iraqi forces until they can (if ever) obtain that capability domestically.

[Richard Rogers]

Since all data from the executive branch is unreliable, it would be impossible to come up with any realistic assessment of the price of this war as long as the current executives are in charge. Successful democratic decisionmaking, like good economic analysis, requires reliable data. Without reliable data, a decisionmaker (the voter) has to rely upon emotion and gut instinct - things like - do we trust the persons responsible for implementing a strategy? The strategy may be the best strategy from an economic analysis, but how do we know that, and are we willing to trust individuals to implement it who have shown by their actions to be incompetent and unreliable?

[jimbino]

As a citizen of the world, I'm dismayed that the lives of Iraqi citizens don't figure into your cost-benefit analysis anywhere.

[Tom Rekdal]

If it is really true that "There is little expectation of a victory that would transform Iraq and the Middle East and weaken the terrorist threat to the United States," it is difficult to see what an economic cost-benefit analysis adds to the Iraq debate.

No one is going to convince the American voter to stay in Iraq if our only strategic goal in remaining is "limited to averting the costs" of leaving. Such a premise makes it inevitable that in 2009, or sooner, we will be out.

Surely, both our friends and enemies have figured that out by now.

[Scot]

Although Posner is correct that a look at the war must be "ex ante", I believe that both he and Becker overlook something fundamental. Namely, what's the probability that the Administration which has executed the war thus far, will perform competently in the future? If the Administration can't get the strategy/operations/tactics right, then the projected cost/benefit ratios are pretty unreliable. Based on my observation of past events, I'd say there's only about a 10-20% probability that this Administration will perform competently going forward.

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[Rebunga]

What about the benefit of showing the world that Americans will still act, unilaterally and violently if necessary, to further our interests in the world.

Does our cost of the Iraqi war keep us out of other conflicts (Libya, N.Korea, Iran). Would retreat from Iraq send the message that Americans are unwilling to engage hostile regimes and embolden out enemies (e.g. Vietnam, Mogadishu).

[peter jackson]

Rebunga's point is really far more powerful than it's been given credit for thus far in the war debate. Beligerent despots make cost benefit analyses as well, even the crazy ones, and can be generally counted on to act on their aggressive impulses only when they perceive a net gain.

If it was generally understood around the world that the United States

1. while reluctant to resort to arms, would, once moved to war, remain offensively engaged until the enemy regime was militarily defeated and institutionally dismantled, and

2. maintain a military and political presence in the vanquished nation forever, a l√° Japan, Germany, and Korea,

we would see the greatest probability we could probably ever have that we had fought our last war.

yours/
peter

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