The market says the surge is not working

Steven Levitt of Freakonomics points to a paper by an MIT economist that concludes that the surge is not working.

Michael Greenstone, an M.I.T. professor, good friend, and one of the best young economists in the world, has just released an incredibly thorough and thoughtful analysis of the impact of the surge. …

The most interesting part of Greenstone’s paper is his analysis of the pricing of Iraqi government debt. The Iraq government has issued bonds in the past. These entitle the owner of the bond to a stream of payments over a set period of time, but only if the government does not default on the loan. If Iraq completely implodes, it is highly unlikely that these bonds will be paid off. How much someone would pay for the rights to that stream of payments depends on their estimate of the probability that Iraq will implode.

The bond data, unlike the other sources he examines, tell a clear story: the financial markets say the surge is not working. Since the surge started, the market’s estimate of the likelihood of default by the Iraqi government has increased by 40 percent.