Shadow Government

Debating next steps on Iran

The failure of the latest round of negotiations over Iran's nuclear program will likely bring calls for changes in the American approach -- for bilateral engagement, for an "endgame proposal," or even for reconsideration of the merits of "containment" of a nuclear-weapons-capable Iran. One such proposal -- focusing on strengthening the US "diplomatic track" with Iran -- was put forward recently by The Iran Project, a group of distinguished former U.S. officials.

There is much in the report with which I agree. In particular, the report is correct to observe that neither sanctions nor engagement alone will accomplish U.S. aims and that a combination of policy tools will be required. It is also right to begin with an assessment of U.S. and Iranian interests and objectives, which should be the starting point for any successful policy.    

However, I would differ with the report on four vital issues and thus reach different conclusions regarding the way forward on Iran policy.

First, the report conflates the objectives and interests of Iran writ large with those of the Iranian regime. The principal-agent problem that bedevils even democratic governments is particularly pronounced in authoritarian regimes, such as Iran's, which are not accountable to an electorate. Care must therefore be taken to distinguish between Iranian national interests and regime interests.

When it comes to sanctions, the Iran Project report's own conclusions illustrate this distinction -- the economic costs imposed upon Iran have certainly set back Iran's national interests but have had little apparent impact on the regime's own calculus, likely in part because Iran's leaders are relatively sheltered from the impact of sanctions compared to ordinary Iranians.

This distinction must also, however, be applied when designing incentives. What the report lists as Iranian aims -- respect, acknowledgement of nuclear "rights," etc. -- appears based on the rhetoric of regime officials. That rhetoric has multiple audiences in mind -- especially public opinion in Iran and the Middle East -- and therefore deliberately obscures the gap between the interests of the regime and those audiences. An examination of Iran's policies and actions, on the other hand, suggests that the regime is primarily interested in the enrichment of regime elites, the projection of power throughout the region to ward off potential foes, and especially in the survival of its "velayat e-faqih" system of rule.

Second, the report draws a false distinction between "diplomacy" and "pressure." There is a widespread misconception that diplomacy means "being nice," which leads to engagement being seen as a reward. In fact, diplomacy is just the conduct of relations between states -- a means of communication. A skilled diplomat will use these communications both to pressure and to entice, as well as to learn about his counterpart. Whether any particular action constitutes a disincentive or incentive depends on whether it damages or advances the Iranian regime's interests, which is why understanding how the regime truly views its interests is critical to diplomatic success.

Third, the report treats Iran's nuclear ambitions as the result of U.S.-Iran hostility. In reality, both likely arise from the regime's desire to preserve itself. Anti-Americanism was a founding pillar of the current Iranian government, and abandoning it would undermine the regime's raison d'etre. As for nuclear weapons, they would under the right conditions provide Iran with a powerful deterrent to external attack. Furthermore, the regime may calculate -- based on U.S. policy toward North Korea during its recent leadership transition, as well as U.S. policy toward Pakistan -- that fears of "loose nukes" would cause outside powers not simply to be deterred, but give them a vested interest in the regime's stability. Because the threats to that stability emanate from within as well as without, Western security guarantees are unlikely to be regarded as an acceptable substitute for a nuclear arsenal.

Fourth, and most problematically, the report assumes that a nuclear agreement could result in a broader strategic shift by Iran. In fact, a nuclear agreement -- and any improvement in U.S.-Iran relations -- is more likely to be a consequence of such a shift than a cause of one. As noted above, both Iran's nuclear ambitions and its hostility toward the West are elements of a strategy to advance the regime's interests, as it conceives them. For a strategic shift to occur, the regime must be convinced that this strategy is no longer tenable.

Far from compelling the regime to rethink its strategy, however, the current Western approach is likely seen in Tehran as vindicating it. U.S. policies at the negotiating table and across the region -- a reduction in our military posture, our inaction in Syria, and our continually improving nuclear offers -- are interpreted as successes by the regime and perceived by it as indications not of good will but of desperation or decline. 

Seen in this light, rather than forcing the regime to face a stark choice, the U.S. and our allies have given Iran's leaders the impression that they can have their cake and eat it too: retain an implicitly acknowledged nuclear weapons capability and not only maintain but expand its regional influence without having to adopt a posture of international cooperation.   

The U.S. objective, therefore, should be to reverse this dynamic. Such an approach would require a firmer posture in the nuclear arena -- refraining from further improvements to our offer, setting red lines for Iran's nuclear program, taking  steps to enhance the credibility of the U.S. military threat, and leaving open for now the question of whether we will hold further talks. 

But it would also require putting the nuclear negotiations in their appropriate regional and strategic context. The regime should come to believe that a confrontational, rather than cooperative, approach to its own security will come at a price, exacted by the U.S. and our allies. There are a number of ways to send this message -- pushing back against Iranian support for terrorism, greater support for the Iranian opposition -- but the most important way to do so is through greater involvement in Syria, where Iran has much at stake.

None of these steps exclude continued or even intensified diplomacy. Successful policies should combine a range of tools employed in coordination. But the goal of all of these actions should be the same. A strategic shift by Iran -- from a zero-sum policy of confrontation to one of cooperation -- would benefit the U.S. and the region whether or not a formal nuclear agreement is reached. A nuclear agreement without such a shift, however, will prove a hollow achievement.


Shadow Government

A curiously selective economics rethink

The policy world has turned on Ken Rogoff and Carmen Reinhart with a vengeance. The two are the celebrated authors of multiple studies showing that very high levels of government debt have historically been associated with slower growth. After a review of one of their articles revealed a spreadsheet mistake, the ever-temperate Paul Krugman was driven to ask: "Did an Excel coding error destroy the economies of the Western world?"

John Maynard Keynes once said that "even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist."Apparently, this bondage is felt even more acutely when those practical men are in the thrall of a living, breathing pair of economists. Now that Rogoff and Reinhart have been discredited, the thinking seems to go, the masses who had been suffering under the yoke of austerity are now free to spend as they had always wished.

There are a number of reasons to see this as an overreaction. The episode is a bit analogous to a researcher finding that a daily Twinkie adds 10 pounds over a year. A subsequent study finds that, with different methodology, a daily Twinkie might add only 5 pounds over a year. Then the baying pack howls that they knew Twinkies were good for you all along, they abjure dieting, and stuff themselves with cake and cream filling. [Reinhart and Rogoff respond to the criticisms and put the dispute in the context of a broader literature without resorting to any talk of dessert cakes.]

An odd strain of the discussion has been the implication that the only restraint on unbounded budget deficits has been the Reinhart-Rogoff admonition that it could slow economic growth. In fact, there are other constraints. How much can Portugal or Greece or Cyprus spend beyond current tax revenue? They can spend the money they have in savings (negligible) plus the amount they can borrow in the open market (negligible) plus the amount that other countries or international financial institutions (IMF, ECB) are willing to lend them. The limitation, then, is not Harvard researchers' findings but rather the willingness of other leaders to risk their funds, as their thoughts teem with admonitions about "sending good money after bad."

Of course, countries such as the United States, France, or the UK can borrow on open markets. That does not free them from all non-academic constraints, however. If borrowing is excessive, a country begins to look riskier. The United States was downgraded in 2011, France in 2012, and the UK last week. Even the IMF, cheering now for a spending boost, has argued for offsetting medium-run budget cuts.

The Reinhart-Rogoff episode has prompted deeper ruminations about how grounded our economic beliefs really are. In the Wall Street Journal, Carl Bialik elicits a confession from the editor of the American Economic Review that peer review rarely involves line-by-line checks of authors' calculations. Bialik lays bare some of the inherent vagaries of working with historical macroeconomic data -- there are no controlled experiments and the numbers can be unreliable.

It is thoroughly healthy to review the limitations of empirical macroeconomics. It is the part of economics that deals with the most moving parts and has the least opportunity to isolate treatment effects from confounding variables. Economics does far better as a field when conditions are more favorable -- predicting how an auction will work, for example. Yet citizens and policymakers want to know what will happen with inflation, unemployment, and growth, and how these will be affected by government spending, taxes, and the money supply. These are all macroeconomic questions.

Let's stipulate, then, that macroeconomic point estimates should be treated as somewhat fuzzy. That was always acknowledged in the formal economics (standard errors), but it does not usually make for good newspaper copy. If multiple studies, using different data sources and different techniques, find similar results, then we will have steadily more confidence in those findings. This has always been true too, though in public debate participants tend to prefer a single bold study to a lengthy lit review.

The newfound caution about macroeconomic findings has, so far, been curiously selective. Foes of austerity argue that, after slaying the dreaded Reinhart-Rogoff result, they are not even bound by warnings of credit downgrades. After all, if only we adopt new fiscal stimulus, it will promote growth and pay for itself (debt/GDP will fall as GDP rises faster than debt).

How do we know this? Why should we believe that the stimulative effects of new spending will overcome people's worries about the new taxes that will inevitably follow? How can we calculate how much stimulus is appropriate? Are tax cuts or spending increases more appropriate? If we do not see booming economic growth after stimulus has been tried, how will we know that the stimulus was worthwhile, that it saved us from an even worse fate?

We have macroeconomic findings. Precisely calculated macroeconomic findings. Based on historical data. Published in peer-reviewed journals. Worked out on spreadsheets. Let the spending commence.