A Congressional Debt Ceiling Game (Theory)

In a new letter to House Speaker Nancy Pelosi, Treasury Secretary Janet Yellen said that the Congress has just three weeks to avoid economic calamity. If they do not elevate the debt ceiling (that limits U.S. borrowing), then the Treasury would have “limited resources that would be depleted quickly.” As a result, a U.S. default would lead to a financial crisis.

The response was strategic.

Debt Ceiling Strategies

Republicans appear to be saying that they want no part of Democratic spending. At the same time, Democrats point out that a higher ceiling would just let them pay for Trump administration spending obligations. Both seem to recognize that no action would be catastrophic. However, Democrats say raising the debt ceiling is a bipartisan issue. Republicans disagree.

One solution is an immediate vote with widespread support. Senate Majority Leader Schumer wanted a simple majority vote to let Democrats deal with the issue. However, Senate Minority Leader McConnell blocked his attempt. Still though, House Majority Leader Pelosi hopes Republicans will just agree to a suspension of the ceiling rather than raising it. The House of Representatives did pass a bill (through the Democrats’ majority) that funded the government through December and suspended the ceiling through December 2022. But it died in the Senate.

I wonder if we have an example of the prisoner’s dilemma.

The Prisoner’s Dilemma

Imagine for a moment two prisoners who were just arrested. Interrogated by police in separate rooms, each prisoner wants to minimize jail time. The problem is that each one’s fate depends on what the other prisoner does. And, neither knows the other’s strategy.

1. The best alternative is to confess, incriminate the other prisoner and get a suspended sentence but that works only if the other prisoner remains silent.
2. Another alternative is to remain silent and get a brief jail term. But then both need to say nothing.
3. Finally, if both confess, then they each receive a very long jail term.

You can see that #1 is best for each person but tough to achieve. #2 is the compromise. #3 is the disaster. Similarly, with debt ceiling negotiations, we have an undoable resolution, a compromise, and a disaster.

Simplifying past negotiations one blogger summarized the alternatives. They say Democrats and Republicans can vote P (Pass) or NP (Not Pass). If both vote P, we have the higher ceiling. An NP decision from both means we do not. There is a positive payoff for a Democratic P (but not necessarily for more conservative party members.) For the Republicans it gets even more complicated. Voting P means opposing the leadership. But the consequences of NP could backfire.

Our Bottom Line: Game Theory

An example of economic game theory, the prisoners’ dilemma involves strategizing against a second party that has the power to affect the consequences of your decisions. For example a Republican NP won’t backfire if the Democrats make sure there is no default. But, Republicans cannot be positive.

You see the problem. Sometimes you have to know what your opponent will do in order to decide how to act. The problem though is that it’s all a prediction. You have to figure out your response before you know what to respond to. What you do can be explained by game theory.

Game theory has been called the economics of cooperation (or non-cooperation). Whether looking at disarmament negotiations, Pepsi and Coke flavors, or Democrats and Republicans, the basic strategic patterns are similar. John Nash won a Nobel Prize for his research about game theory. Below, he gives a traffic example that could easily apply to debt ceiling negotiations:

My sources and more: Although the facts are shifting each moment, I used CNBC for recent events that relate to the prisoner’s dilemma and this blog. Then, for more on John Nash, you could go to Econlib. You also might enjoy (as did I) the game theory side of soccer. (Please note that several of today’s sentences were in a previous econlife post.)