Towards a Simple Model of the Budget Impasse

by robekulick

This is the first of two planned entries about the budget impasse. I know, it’s sort of lame to blog about something like this when there are important issues of bathroom etiquette that require more careful analysis, so I beg your forgiveness from the outset.

So the budget impasse is an interesting issue for me to blog about because, until the last few months, I wasn’t even aware the US had a budget ceiling. It’s also interesting for me to blog about because with all the mass hysteria about it, it’s taken a lot of research to even get an inkling of what’s really going on and now I feel like I have something to show for all of that time I spent trying to figure out what’s going on.

My first entry is my casual attempt to put together a “positive” economic model of the crisis. For those of you unfamiliar with economic jargon, “positive” doesn’t have its normal meaning here. Rather it’s an unnecessarily confusing term that economists use to indicate that they’re not making any value judgement in their analysis, they’re just supposing that the parties involved are acting out of rational self-interest. We economists being the wily creatures that we are than use the word “normative” when the issue of values becomes involved. Really it’s just the difference between trying to describe what is (positive analysis) and what should be (normative analysis).

My economic model of sorts (real economic models include lots of math to make them even scarier) begins with the simplification of considering only the motivations of the President and the “tea party” wing of the house of representatives. Of course tea party doesn’t necessarily mean they’re actually in the tea part caucus, it’s just a convenient way for me to refer to that element of the Republican party which opposes any revenue increasing measures in approving an increase in the debt ceiling.

What’s cool (to me) about this mini-model is it illustrates the workings of two of my favorite economic concepts, “strategies of commitment” and “collective action problems.”

Strategies of commitment are a game theory concept developed by the Nobel Prize winning economist Thomas Schelling. I know that all sounds like it’s going to be a rough read from here on out, but just ignore that last sentence now. Really it’s just the simple idea that if I’m competing with you in some context and I commit to a strategy that will hurt us both a lot and you believe I’ll really do it, you’ll give in to what I want. Think nuclear weapons. Once the US launches a nuclear missile at Russia, Russia really isn’t any better off if it launches one back because then both countries are just going to end up being destroyed. However, Russia and the US commit to that strategy ahead of time and the result is mutually assured destruction.

On the other hand, collective action problems refer to situations where as a whole a group might want something (like a compromise) but no individual member wants to bear the cost of going out on a limb because of some enforcement mechanism (like a primary challenge).

So the story as I see it as this: clearly no one wants the US to default on its debt and the vast majority of people, tea party Republicans included, don’t even want a government shutdown (a distinction I will discuss tomorrow). However, because any single member of the tea party caucus who voted for a tax increase would be punished in the next primary for deviating from the party line, no individual tea partier wants to go out on a limb and compromise. What’s really of interest here, is that now the collective action problem has become a commitment strategy! In turn, President Obama responded with his own commitment strategy, when he asserted that he would not approve any short-term deal on the debt. Now if the tea party were a unified whole at this point, the President’s counter strategy may have forced a compromise. However, because of the collective action problem, the tea party Republicans in congress remain entrenched in their original position of non-negotiation. The net result: stasis.

Ok so that’s over and done and I promise the next post will be a lot less conceptual and will contain more facts and links to other articles and such. However, my entire purpose in going through this is to draw a normative implication from this model. Certainly, as I’ll discuss next, I’m not impressed by the intransigence of some Republican members of congress. (On the other hand, I’m very impressed by some of the compromises that have been floated). Yet, the blame for the current state of affairs is not solely the fault of the intransigence of congressional Republicans. President Obama certainly escalated the situation when he decided that there would be no short-term compromise. And so at least in my eyes, there is enough blame to go around for both sides. Of course, the beauty of a positive economic model is you can agree with the relevance of my model and totally disagree with my normative conclusion.