playing games with the debt ceiling

It has been, at times, mind-boggling to watch the debates over the debt ceiling. It seems like Democrats are continually offering more and more (Reid’s most recent proposal gives up on the idea of any tax increases) while Republicans say “Nope, we’re going to need more.” Do they not understand the idea of compromise?

But this approach makes more sense when looked at through a game theoretical perspective. The debt-ceiling negotiations are playing out like a repeated game where the actions are fairly predictable. Game theory says that each player will choose the best outcome for themselves, given the potential actions of the other player. For the debt ceiling bill, a simplification of the possible actions (Compromise/Don’t Compromise) and outcomes (in the boxes) looks like this: 

The problem for Democrats is that Republicans know that they find the possibility of default (or failing to make payments on government programs as they continue to make their bond service payments) unacceptable. They don’t have a “dominant strategy” that they can employ regardless of what the Republicans do, but have to employ a “mixed strategy” that’s conditioned on the Republican action. In contrast, the Republicans have shown that they do have a dominant strategy (Don’t Compromise) that satisfies their base: a majority [53%] of Republicans and a plurality [43%] of Independents think the US “can go past August 2 without major problems”. Regardless of the action taken by the Democrats, Republicans prefer an outcome where they “stick to their guns”.

That’s what has gotten us to the point we are at right now, though today shows that maybe the Democrats are changing tack. Senate Democrats released a letter today promising to reject Boehner’s plan, making that “Default” outcome much more likely. Or maybe the Republicans will realize that a majority in one of the two chambers of Congress does not mean that nearly half of the country can be ignored…


Another interesting data point in the poll I linked above is the relationship between concern about the debt limit and the extent to which the respondent has been following the debate: those who followed the debate very closely are more worried about the consequences more than those who have not. Among respondents who have been following the debate “very closely”, 45% think it’s essential to raise the debt limit (v. 41% who think there won’t be major problems). Among those who have been following the debate “fairly closely”, it’s 42-40. And among those who have not been following the debate, 34-38 (i.e. more think there won’t be major problems).

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