Game Theory for Government Shutdowns

While there are many ways to try and understand the government shutdown, I like to take a game theory perspective. By focusing on incentives, it helps clarify each side's behavior, and it helps paint a road map for the next couple of weeks. Even if it's all pure speculation, and there's a nearly 100 percent guarantee that things will turn out differently, it's still intellectually stimulating. So let's give it a go!

I'll start with Chait's description:

Obama’s incentive structure is simple, then: Allowing Republicans to default on the debt now is better than trading something that allows them to threaten it later. His best option is to refuse to negotiate the debt ceiling and have the House raise it before October 17. His next best option is to refuse to negotiate the debt ceiling, allow default, and never have to go through it again. Bargaining merely postpones, and worsens, the next default crisis. No negotiated debt-ceiling price is small enough to be acceptable. There is therefore no circumstance under which bargaining for a debt-ceiling hike makes sense, even if the alternative is certain default.

 I think he's wrong on one point. Obama's second best option, before default, is the Constitutional problems created by his unilateral intervention. Raising the debt limit on its own (or just abolishing it), invites a continued fight with Congress, but it avoids economic harm. He's stuck with a shut-down government anyway, a continued political crisis is essentially the same thing.

One of the biggest mistakes of most observers on the left is to label the behavior of Republicans in Congress as crazy. This isn't just offensively dismissive, it does the observer a huge disservice by ignoring the other side's incentive structure. In fact, as Justin Fox writes over at HBR, the incentive structure for Republicans is very clear and very easy to decipher. Especially since it's completely rational!

Let’s consider what House Republicans have learned from their two years of debt-limit brinkmanship. They have learned, first of all, that it works. They got the White House to agree to a bunch of automatic spending cuts (the sequester) in 2011, and then in early 2013 they were able, from what seemed to be an exceptionally weak bargaining position after President Obama’s reelection, to keep most of the Bush-era tax cuts from expiring and to force yet another debt-ceiling battle only a few months later. More broadly, Republican office-holders and activists have learned over the past couple of decades that making what at first sound like unreasonable demands (no new taxes, no gun control) and repeating them for years on end can actually shift the terms of the debate to the point where the demands seem normal. It has been a successful strategy.

There have been downsides to the GOP’s debt-ceiling brinkmanship. It was a drag on economic growth, for one thing, but that’s pretty distant and diffuse and hard to prove. More tangibly, it also probably played a role in the Republicans losing six seats in the House and failing to unseat President Obama in the 2012 election.

From the perspective of the 30-odd hardline members of the House GOP that for the sake of convenience I’ll call the Tea Party, though, this wasn’t actually bad news. Their districts tend to be pretty safely Republican, so their jobs aren’t at risk. A smaller Republican majority in the House increases their leverage within the caucus. And in part because Republicans controlled the redistricting process in most states after the 2010 census (a byproduct of the anti-Democrat backlash in the 2010 elections), they don’t have to worry much about the GOP losing its House majority soon. As for Obama’s victory over a Republican nominee the Tea Party never fully embraced, that wasn’t the worst thing in the world either — it certainly helps with fundraising and energizing the base. So while it has become popular to label the Congressional Tea Partiers, and their seemingly increased zeal after a lost election, as “crazy,” most of their behavior can be pretty readily explained by self-interest and learning from recent experience.

Going into the shutdown, the Republicans now have an even smaller incentive to reach a decision before the debt limit than before. Paul Ryan stated this pretty clearly awhile back. We're guaranteed to see no resolution before then. If we do, they're basically guaranteed to face backlash for creating a crazy mess for no reason. They're probably better off digging in.

Moreover, they too have very little pressure to compromise as long as the Hastert rule is maintained, since electoral consequences are small. This leads to some fun possible scenarios. Even the most extreme options aren't totally off the table.

Since Republicans don't think the President will let the country default, they'll intentionally skip the debt ceiling deadline. We'll get a unilateral debt ceiling increase and Republicans will get the opportunity to impeach Obama. This is something they've always wanted, and it fulfills the underlying motivation for this mess. They believe Obama's presidency is illegitimate, and now they get to show it. The Senate will acquit, and maybe then, and only then will we see sides back down. But that basically guarantees a shuttered government for something like a month, and it firmly establishes the precedent for more insane behavior in the future. Fun times.

Obviously, this is one of just many options. And this sort of events would seem totally insane for most people around the world. And yet, both sides would still be operating in a rational way that maximizes a sense of well-being over a certain times. Uncrazy behavior, under unusual incentive structures, often has some really crazy consequences.