In economics, individuals or entities act based on the hope that the benefits of their actions will outweigh the costs. The economic value of an action is measured by the benefit it provides.
A current hot topic in news media is the potential agreement between the United States and Iran. Economically speaking, what would the value of this interaction be?
Let’s first establish the basics of this agreement. The players, led by the U.S., are the five permanent members of the U.N. Security Council — America, Russia, China, France and Britain — as well as Germany negotiating with Iranian representatives. The purpose of the agreement is to limit Iran’s nuclear capabilities through centrifuge and uranium enrichment reductions as well as extend the amount of time it would take for them to create a nuclear weapon. In addition, Iran will be required to submit to inspections by the International Atomic Energy Agency — the nuclear watchdog for the U.N. In exchange, the U.S. and the European Union will lift many sanctions on Iran. It will last for 15 years. There is currently just a basic framework, and final decisions will be made as early as June 1.
Next, let’s consider the history between these two nations. According to the U.S. Bureau of Near Eastern Affairs, the U.S. and Iran (then Persia) established diplomatic relations in 1883. In 1979, after a series of events including revolutions and the taking of 66 U.S. diplomats and citizens as hostages at the American Embassy in Tehran, relations were cut. As of March 10, 2015, the bureau states, “The U.S. government does not have diplomatic relations with Iran.”
But now the U.S. is entering an agreement with Iran.
If America’s goal is to reduce Iranian nuclear abilities and Iran’s goal is to get the sanctions lifted, then this deal could have value. Further benefits may include finally having a cooperative relationship between the two countries.
When calculating value, multiple views must be considered. This agreement could threaten other relationships — thus reducing the end value of the interaction.
The ball now rests in Congress’ court, and lawmakers from both parties are wary. In addition, President Obama has told Congress — particularly Republicans — that if they kill the deal without “expert analysis” or “offering any reasonable alternative,” the U.S. would be blamed for diplomatic failure.
Diplomatic relations are political, but decisions can also be explained economically. What decisions will have the lowest cost and produce the greatest value? Granted, there are countless other facets to consider.
In the end we have to ask ourselves what we are willing to pay. Is negotiation over nuclear capabilities acceptable? Is the benefit of a potential relationship with Iran worth it? Are we willing to potentially lose other allies over it? The costs might be high and the benefits might not create a balance.
On the other hand, sometimes cost/benefit analysis may not be the best way to approach problems. Working on this column made me analyze who I am communicating with. This introspection made me take steps to try to open up communications with two people with whom I have lost communication. Perhaps a key question is: Should there ever be times when we are unwilling to have communications with people or countries?
Questions over nuclear negotiations and economic sanctions are complex and perhaps above my pay grade. But I don’t think there is ever a time when we should completely cut off communications with people or countries. I repent of my own weaknesses and I hope the U.S. will continue to re-establish ties with countries we have ended relationships with.
What the nuclear deal means for the future of sanctions: Act Now
John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the School of Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development.
Maren McInnes, Hoffmire’s colleague at Progress Through Business, did the research for this article.