But ... so what? The Economics of Ambiguity and Threat

Threats -- the subject I addressed in a previous blog -- are interesting, I tried to argue, from an economic perspective. They are used when one lacks other resources and are, as it were, a currency through which a leader (on behalf of his or her country or party or ruling group, etc.) tries to buy (as it were) things. The currency of threat is both internal and external. Internally, a threat may be good for the leader. It may buy him or her support or praise, particularly if their support is shaky. Thus, and just as an example, the North Korean leadership continually threatens other countries (using its control of the media) both to try to win it international respect (that it has no other means of attaining) and to ensure its support at home. This, too, it has little other means of attaining other than through censorship (which, sooner or later, will fail).

Recently, as I read over the news, I noticed a Washington Post story that Donald Trump planned to declare the Iran nuclear deal bad for the American "national interest." You can find the story here. He also, apparently, however, would not say whether or not he would, on behalf of the US, abandon the deal. That story is here. What does this mean? There are a range of different ways of assessing these statements but if we look at them from an economic perspective and think about their relationship to the economics of threat, we can use such statements as examples that serve to illustrate broader patterns (as opposed to something that is valuable in itself). What is that broader pattern?

One of the problems with threats, I suggested, is that they have a shelf life. This does not mean that you cannot take them out, dust them off, and use them again down the road, after memory has faded a bit. In fact, if you look at North Korea, this is what its government has tended to do. What of Trump? How do his threats work? These threats noted above are interesting from this economic perspective because they show us two things.

First, Trumpian threats are backed up by something vaguely ominous but unclear. This is different the Trump administration's approach to environmental protection legislation. They simply try to get rid of it. They don't threaten anyone. They just move ahead and do it. (I'm not saying that is good. I'm saying it is action that is characterized by a lack of public threatening.) In the case of the Iran nuclear deal, a very different tact has been taken. What happens to the deal if Trump "declares" that it is not in the American "national interest?" It sounds bad, but is it? Does this declaration have any criteria that go with it? Who gets to decide what is and is not in the national interest? Are any laws passed because of this declaration? Does it have any effect on Iran?

Said differently, we have what looks like a definitive statement cum threat that, when looked at closely, is more akin to a house of cards.  Having Trump declare that a nuclear deal with Iran not in the national interest is not like establishing a no fly zone in Iraq or Kosovo. It is not like a certification has been revoked, nor a trade agreement scuttled, nor even a soccer tournament canceled. Trump makes a statement -- some people like it, others criticize it, talking heads chatter over it -- but ... and this is the point, nothing really happens afterward ...  except ...

And, it is that "except" that is vital to the Trump administration's economics of threat. The except is that we don't know.  Will this mean that the US will abandon its deal with Iran? And, what are the implications of abandoning it? Again, it does not sound good but we don't know. This is important because knowing removes the threat. If, for instance, the US stated clearly that it was pulling out of the deal, the Iranian government would say "that is a drag" and go back to their old program. The US might want a new deal but negotiations would have to begin anew. And, as we saw from the first deal, the US does not have a lot of leverage. It could make a stronger threat, say military action, but does anyone seriously believe that they would follow through with that?

Thus, ambiguity is needed for the threat -- or, in this case implied threat -- to actually work. The ambiguity creates pressure and sounds like it creates negative consequences that the other party seeks to avoid. And, from Iran's perspective, seeking to avoid a broken deal might be a good thing and so the treat gains some leverage. But, at the exact minute it stops being ambiguous, the threat loses its leverage, forces Iran to make decisions (whatever these might be) and, because of that, because it convinces Iran that decisions must be made, the US government loses its traction (regardless of what the decision actually is). It can threaten but what if those threats are taken seriously? It now must "fish or cut bait." The beauty of the ambiguity Trump creates is that right now, at least, it need do neither. In other words, to maximize its leverage, the US government needs ambiguity and it needs irresolution.

This is, btw, exactly the same approach the US government has followed with regard to NAFTA. What is the US position on NAFTA? It wants to renegotiate it, but this desire for renegotiation is periodically interrupted by musings out loud about ditching the deal. We can ask in another post, what happens if that were actually the case, but you see the point with regard to the economics of threat. The ambiguity is better than a defined position. Looking at just at Canada, if the US ditches NAFTA (which, it might, of course), that removes the ambiguity and Canada needs to make decisions about what it does with its US trade. Canada makes those decisions on the basis of what is good for Canada. Ditching NAFTA outright, in other words, does not win the US any concessions from Canada. But, ambiguity might. In order to maintain the deal, Canada might be willing to make concessions (say, limiting the export of softwood lumber, or buying even more dairy, or purchasing some military equipment from Boeing). Canada might do this because it is worth something, to the Canadian government and Canadian business, to avoid disruption. But, once that disruption has occurred, the Canada government enters into a different series of calculations. One looks for different markets, rethink energy proportionality, expands supply management programs, etc. Ambiguity, in other words, serves people well in negotiations.

Now, I am not trying to say that the Trump administration is filled with geniuses.  What I am trying to say is that there is an economics to threat and it is different in this case than in the case of North Korea (where a different but similar economics is at play). In both cases irresolution works to advance the state objectives except that North Korea is really looking for either (a) permanent irresolution or (b) the attainment of their aims (which seems unlikely). The US government, one assumes, is looking to attain certain aims and long-term irresolution will not work to meet its aims. This ambiguity with regard to NAFTA has, in this sense, a time limit because sooner or later the US government will want to show results, if for no other reason than to get re-elected.

Same thing with the Iran deal. The deal with Iran might be bad. It might be good. That point is irrelevant. The US wants a deal because it does not want to deal with nuclear proliferation. That was, after all, why it signed the deal in the first place. The current administration is gambling that ambiguity can help it meet its goals in that renegotiation as well. Ambiguity, in this sense, becomes a currency that it is using to try to buy its objectives.

North Korea and the Economics of Threat

North Korea is in the news so much ... that no one pays attention to it. And, in my view, rightly so. Yes, some people have to pay attention. The US government has to say something about threats, if for no other reason than they don't want them to escalate, the UN has to say something, South Korea, Japan, China, but one has the sense that one is trapped in a deja vu all over again. I guess Trump provided a moment of entertainment by sounding a bit like a Kim Jung-un (which earned Trump moderate but near universal condemnation) but other than that ... really? The latest, I gather, is that North Korea will attack Guam sometime in the next X months.

There is not much to say about this that has not been said. North Korea is clearly an odd place run by odd people. So, we might be better off trying to riff on this latest flare up to ask a question that emerges out of it: what are the economics of threat? Since I've been burbling on about the economics of health care, this seems like a natural connection. Is there an economics of threat that we can use to assess not simply this situation but others?

The short answer is that I don't know. I'm not well versed in this subject, in North Korea politics, in the risk/trust literature and the like. But, it seems to me that there might be an unusual rationality to what North Korea is doing. Let us assume that the North Korean government is looking to get something out of its threats. What might this be? Well, it could be all manner of things. It could be favourable trade agreements, international respect, increased longevity for itself, since as a non-democratic regime it must face some international opposition (no matter how well it is repressed).

Can threats advance objectives? There is an interesting connection to Trump here, as well. The Trump government has initially attempted to get what it wants (whatever that might be) by threat. If you don't build a factory in the US, we will impose a tax on your product.

Moreover, threats are not confined to governments. I've been involved in organizations that worked with threats and implied threats. For instance, I was on strike. The threat is there: "if we do not get what we want, we will withhold services." In part, we reacted to an implied threat: "do X or something worse will happen," as a negotiating position from my employer. There were threats all around, even if no one actually used the precise word "threat."  Parents threaten children ... clean your room or you are grounded.

Threats then are not confined to North Korea (even if theirs are a lot more grave by an order of magnitude). We use threats because they work. In economic terms, the threat is a currency that allows us to buy something: better labour relations (ideally), chores done, higher domestic employment. Most of the time, threats lurk in the background. Indeed, polite people are not supposed to really threaten someone else. Its not really considered ... well ... appropriate. So, we leave the implication of the threat floating there, in the air, so that people are aware of it, but no one is really saying it. The difference (or, one difference) with North Korea, and to a lesser extent Trump, is that threats are part of the regular political arsenal. (By contrast to Trump, the Bush, Jr., regime thought up a whole new language to disguise threats ["regime change," "pre-emptive defense," "coalition of the willing"]).

The problem with threats -- and I suppose implied threats -- from what I can see is that they have a short shelf life. They might produce immediate results but ultimately, they tend to produce only limited results. Why? Well, because they are not economically efficient.

For instance, imagine that I am running a government and I decide that I will cave in to North Korea's demands (whatever they happen to be) and agree to, say, ease trade sanctions. I have not done this not because I *wanted* to. I've done it because of the threat.  What happens when you do something you don't want to? Well, you do it as little as possible. In other words, I might cave, but I don't want to cave in a big way. I might be willing to ease sanctions but I am not going to offer any development aid or IMF loans or a lessening of troops along the border. I'll do precisely -- and only -- what I have to do to respond to that threat.

And, I bet you folks knew that already. After all ... if you threaten to ground your child, how much effort do they spend on cleaning up their room? They meet the basic demand and that is all.  (I strongly suspect Trumpian economics will be like this because they are founded on the same false idea that threats work well to accomplish objectives, but that is an issue for another day). Thus, for instance, if we assume North Korea has objectives, its threats help it meet those objectives *but just barely.* Its government might get a bit of international respect (it is involved in international negotiations -- other governments have to talk to it -- at least with regard to scaling back its threats, but that is all. It is not welcomed into the UN Security Council, no one rushes to side a free trade agreement with it, it garners no international free passes to cultural or athletic events, etc.).

What this means is that the threat is actually less economically efficient than other methods of attaining aims. For instance, there are other ways of winning international respect or attracting investment that produce more long-lasting effects. For instance, capacity is important. The US is invited to a host of international fora not because it threatens to get in the door but because it has the capacity to actually effect changes (be these medical care in Africa, famine or natural disaster relief, international athletics, the arts, scientific developments, post-secondary education, etc.). This runs against the grain of much neo-realist thinking with regard to power and the military but the US is not invited to international hockey tournaments because of its army. It is invited because it has a good team (aka, capacity). Its scientists are invited to international conferences because they are good (aka, capacity) not because its leadership had a fit on TV and makes demands. Threats become, in other words, a substitute for other capacity which is, actually, what North Korea lacks (capacity). Hence, it reverts to threats and these then compound the problems.

The other economic issue with a threat is that it is does not circulate endlessly. Sooner or later, other countries get tired of threats and say, in effect, "shit or get off the pot." Said differently, if you don't act on a threat, people start to think you are bluffing. Then ... what do you do? This means that if you rely on threats you either (a) have to act on it or (b) look like a dufus and back off. In the case of  North Korea, neither option is particularly good. Imagine if the goal of North Korea's threats is to help the regime stay in power by creating an evil other against which the population will rally. Well, this works ... until they actually launch a missile. After that, the regime's time in office is numbered in the days. Hence, acting on the threat is economically irrational because it will produce the opposite of the desired effect. But B is equally unpalatable because the threats are intended to win respect, the opposite of being seen as a dufus. Either way, threats make bad sense.

So, what does one do? Well, in the case of North Korea, I don't know. In the case of the US, I have some ideas but in the case of North Korea, the absence of capacity in other areas and the fact that its government has transformed itself into a pariah state creates serious problems. There is no easy out, but I don't want you to miss my point. There is no easy out because of the economics of threats. In the longer run, they have a shelf life and if I were running a government, I'd recognize that and try to make sure I had some other -- more efficient -- way of meeting my goals.