0:36 Intro. Post-war reconstruction: democracy not successful in Iraq but were successful in Japan and Germany after WWII. But those are only a two data points. Cuba 1898-early 1920s (not talking about the Bay of Pigs), U.S. intervened three times. McKinley, 1898-1902 for civil unrest, then 1906-1909, 1917-1922. Political instability; result was Batista 1940-1959, Castro, 1959-recently. U.S. made significant investment, with very little return. Could argue that they made things worse. U.S. puts regimes in place that are friendly to its interests but that do not necessarily benefit the citizens themselves. Two themes: law of unintended consequences; other is law of intended consequences--maybe our goal really was to put regimes in place that were friendly to our interests even if it didn't benefit the citizens. Assume goal of intervention might lead to liberty and democracy.

6:27 Why has intervention been so unsuccessful in Iraq? What incentives face Iraqi people that are causing it to go so badly? Incentive: factor that provides motivation for particular course of action. Reconstruction process is all about incentives. Do citizens have incentives that align with liberal democracy? In the case of Iraq: historical experience of the various groups, Kurds, Sunni, Shia; actually more complex, subgroups. When you don't get along with various parties it's hard to establish liberal democracies. Transaction costs, bargaining costs, are higher than they might be because the groups don't trust each other. Ideally if Iraq could move toward a decentralized democracy with a market economy, the pie would get dramatically larger. But if you don't know if that will happen and what your share of that pie will be, people may fight so much over that that they forego the gains. When you get the parties around the table they don't want to negotiate because they don't trust each other, in part because of history of the groups coercing each other in the past. Issue of credible commitment: why would they think the commitment, whatever they agree on, is binding, if the enforcers--the U.S.--will leave shortly? Even if they do trust each other you have additional problems because people fight over who gets the bigger share and are willing to use violence to keep people from cooperating. McCain, stay 100 years, but part of the conflict involved U.S. statement that we are not occupiers. Get involved with politics the longer you stay. Citizens don't view us as benevolent liberator. The longer you stay you can enforce contracts, but at the same time you can't say we are here to liberate you to engage in self-determination, but if we don't like the outcome we can change it, at the point of a gun if necessary.

14:18 The word "occupier" can mean something neutral, coercive, or exploitive. Car bombs in the news make it look like occupation must be oppressive. But it doesn't have to be oppressive. It could mean that the car bombers think they'll do better in a world where there is chaos and where the U.S. is not controlling things. Iraqis want to have a more dominant role than they have with the U.S. there. If you don't feel like you are part of the game and won't have a role in the new Iraq, one response is to fight the occupation; and one form of that is terrorism. Other factors also influence terrorism. How the U.S. perceives the occupation is very different from how the Iraqi citizens view it, as well as other countries. We view ourselves as being benevolent. Who doesn't like private property, wealth, representative government? But Iraqis don't necessarily view it that way. Role of fear: incentives change dramatically; cooperating can be seen as a badge of honor or as a badge of shame.

19:17 Is anything going well in Iraq? Hussein is gone. Is there any source of optimism for the creation of liberal democracy in Iraq? Different factions, small incentives to cooperate, impose social costs on each other. Are there any positive signs? Best we can hope for is some kind of stability, cooperative equilibrium, but not one that we like or that is what our initial goals were when we went in. Likely we will have troops there for a long time, maybe not continuous but may have to re-enter. Not too long ago the U.S. was supportive of Hussein; funding and arms to Bin Laden when he was fighting the U.S.S.R. Incentives for politicians--hard to exit and hard to stay for political reasons. Cuba analogy--we've been involved a long time.

23:05 Japan and Germany. Why did they turn out differently? Initially looked like no cause for optimism. Japan had no democratic leanings; Germany was only a democracy briefly under Weimar Republic. Both were relatively developed countries; had national identities, no internal conflict within groups or subgroups. Both were nation-states involved in a conflict and had clearly lost, official surrenders; clear that the Allies were in charge when they entered, clear that they were being occupied. Psychological as well as physical devastation. Many Japanese were initially scared of us. Tried to provide food, services; respected their rights and property. U.S. troops didn't have to worry about getting shot at; makes it easier to carry out reconstruction. Infrastructure can only be used successfully if it can be used in cooperation and peace. A school is not useful if it can be blown up. Microsoft culture is what makes it the company it is. If its building burned down, rebuilding it would just be a matter of resources. The MS building in the middle of Iraq wouldn't be useful; culture isn't there to use it. Underlying culture and institutions existed to use the infrastructure in both Germany and Japan. Is that hindsight? Japan had a culture of militarism; people were certainly unsure of what their role would be in the post-war world and new hierarchy. Why didn't they try to disrupt the reconstruction as we see in Iraq? Protests, problems with food delivery. But there were already national institutions in place that had carried over. MacArthur realized that to overcome the trust issues he had to overcome the trust issues. First thing he did was have his picture taken with the Emperor--viewed as being a leader. Used the Emperor to help sell reforms, facilitated cooperation among the citizens. Played a key role in writing the Constitution; passed it through the Diet, got their approval. Improved the credibility of the efforts, lowered the transaction costs. Meeting the Emperor could have gone the other way. Communist element as well that wanted a say in the new Japan.

35:05 On the surface the Iraqi story looks somewhat similar. What's the difference? Japanese citizens vs. Iraqi citizens; in Iraq people have primary identifications within their group or subgroups. We all want different stuff; is my group or subgroup being represented? Constitution was approved by a representative body but the U.S. played a key role in selecting the people in the representative body. Baathist party members couldn't be trusted; but then people disenfranchised. Japan much more inclusive because existing political institutions existed. Diet before the war had limited power but was well-established institution, well-known by Japanese citizens. Instead of wholesale change it was tinkering on the margins. Lower-cost effort (not monetary cost). Not suggesting that sparing Hussein would have been a good idea. Emperor didn't need to coerce citizens to get their cooperation. Iraq was relatively peaceful inside the country under Hussein; but how did you get that peace? If you were a threat to it, throw you in jail or kill you. Large segments of the population didn't trust Hussein, whereas the Emperor had the affection and respect of the Japanese citizens.

39:56 Germany. International war, national government that we were fighting and that we defeated; clear government that we were taking over. Lucius Clay. MacArthur had a lot more unilateral power in Japan than Clay had. Clay received a lot of influence from D.C. Reconstruction of Germany was successful not because of occupation but despite it. Kept many economic controls, rationing schemes, that were in place under the Nazis; didn't allow market forces to operate. Doing same thing in Iraq. Central planning, attempting to rationally construct a set of institutions that can't ever be constructed by a foreign government. Ludwig Erhard went on the radio and lifted the price controls. Knew economy was suffering under the controls and rations. Clay scolded him; Erhard responded that if he'd told them they wouldn't let him do it. Occupation had brought him in as an advisor. Key driver behind the opening of the economy. Wasn't the central planning. Historical accounts, all this infighting between government agencies and bureaus. Seen in Iraq now. Public choice problem. People blame Bush for having no plan, not trying hard enough. But another way to view it is that the bureaucrats measure success by the number of their employees and size of their budgets, so you get infighting between agencies and bureaus. Not limited to Iraq or Republican administration. Issue of government and ability of government to centrally plan the complex array of institutions necessary for liberal democracy. Failures are bipartisan if you look at it historically.

47:08 Somalia and Haiti: U.S. tried to do something from the top down and failed. More relevant for Iraq and Afghanistan. Also more relevant because the threat to the U.S. in the future is not likely to be from a superpower but from weak and failed states and rogue groups. Noble motivations, U.S. and U.N. went into Somalia just to keep the peace. Mission creep; one way to get power is to expand the mission. Humanitarian aid brought to one side is viewed by the other side as helping the enemy and shoot. U.S. had to decide whether to shoot back or to exit. Black Hawk Down. Trying to impose solutions top-down where it doesn't fit. Haiti: Aristede overthrown, U.S. restored him to power; elected originally, sham, but friend of the U.S., illiberal. Liberal in the classical sense, devoted to liberty. Care about liberal democracy, protection of property, civil freedoms, don't want elected person able to exploit the minority. Majority rule. Hamas is a democracy. Organizing elections is the easy part. Establishing binding constraints on the people who win the election is the hard part. Collective decision making but winner can't abuse minorities or its political rivals. Aristede's rivals didn't view him as legitimate and used violence to overthrow him. U.S. went in 1994, there until 1996. Failed in our goals, Aristede forced into exile. Looked to U.S. to intervene to help him retain his power. No investment in infrastructure, subsistence level because government takes your stuff. Policy makers have a fetish with nation states; but consider alternatives. Trying to prop up states might get democracy but not liberal democracy. Good argument for allowing weak and failed states to collapse. Pure cost on their citizens, provide benefits to their cronies at the expense of their citizens. Empowering the worst governments in the world. When a state is collapsing it indicates something. Like most interventions it's motivated by the view that we can do better; but when we recognize the limits, unintended consequences, public choice issues, we should be skeptical.

58:07 Optimism for Iraq initially: highly educated population, commercial infrastructure. Why was that wrong? Debate over foreign aid. Foreign aid is a form of intervention, to manipulate outcomes. Development/ foreign aid debate. They don't save enough, so we need to fill up the gap; fails; well, they just don't know how to use it; invest in schools; giving them money to invest, why aren't we seeing convergence to development? Incentives and information, lack of property rights. Information problem, don't know how to allocate aid correctly because there is no market feedback or profit-loss mechanism. Easterly's work: have to focus on the searchers, the low level, not top-down. Education is an input, human capital, invest in it to produce other stuff. But need other inputs. Iraq had some entrepreneurship. Why hasn't U.S. been able to leverage that? There was private initiative, but profit opportunities were minimal. Workers in factories waited for directives. Black market, merchants, but big issue is one of security. Worrying about safety, curfews make it hard to engage in trade. State is important, police, but the state can't be everywhere. People are cooperative on their own. Where those beliefs and values are absent at the present moment in time, need continued coercion and force to maintain certain amount of cooperation.