By Jon Riley
Immediately after we wrap up negotiations on the Fiscal Cliff, we will face a separate crisis of an even greater magnitude: the nation will once again reach our statutory limit on the amount the government can borrow to pay the bills it has already incurred. If the debt limit is not increased, the US will default on its debt and the global economy will be hurled into depression.
The debt ceiling game is a textbook game of chicken. Imagine two cars driving toward each other head on at full speed. The first car to swerve loses, but if neither swerve, then they crash and both players are badly injured. If both swerve, then no winner is declared and the two cars line up to play again …and again, until there is a winner -- that is, until only one car swerves while the other car drives straight ahead without flinching.
- If Obama "folds" (i.e. "swerves") by signing a debt ceiling increase tied to a radical Tea Party budget, and the GOP "doesn't fold" (i.e. "drives straight") by refusing to agree to any tax increases, then the GOP wins.
- If the GOP "folds" by passing a debt ceiling increase along with a balanced deficit reduction package including some increased revenue, then Obama wins.
- If neither swerves by the time the government reaches it's debt limit, then the US will default on its obligations and the world economy will crash faster than two reckless teens in a car wreck.
- If it becomes obvious that neither side is willing to push the US into default and both players "fold," then they will agree to some temporary extension of the debt ceiling ("kicking the can down the road") and we will prepare to play the debt ceiling game again in a few months.
This classic game of chicken is outlined below:
In a game of chicken, no one swerves until the last minute: there is no reason to swerve early, because as the crash is not imminent, you'd might as well wait to see if your opponent chickens out before the end. For the same reason, these budget negotiations are never decided until the very last minute before the deadline -- or even after the deadline has past and some amount of economic chaos has already begun. Thus, the chart above is intended to model the players' simultaneous choices the very moment before the deadline, when a crash is imminent and a final decision must be made.
Now, the best known strategy in a game of chicken is to throw your steering wheel out of the window: that way your opponent knows you CANNOT swerve, and the only way they can avoid a crash is swerving themselves, thus guaranteeing your victory. During the last debt ceiling negotiations in 2011, the Republicans implemented this "no steering wheel" strategy using the no-tax pledge: Tea Party representatives in the House promised never to vote for any tax increase as part of a debt ceiling deal. This commitment was credible: the rightwing media worked the Tea Party base into a frenzy such that they would have voted any Republicans out of office who violated the pledge. Thus, they effectively threw their steering wheel out of the window by eliminating their own ability to fold on taxes, credibly committing to crash straight into a US default if they didn't get their way. This changed the structure of the game, which at that point, looked like this:
So last summer, Obama knew he had no choice but to accept the GOP's demands to agree to a bill that included a dollar in spending cuts for every dollar increase in the debt ceiling without any tax increases, because once the GOP eliminated their ability to swerve, the only way to avoid a crash was for him to fold.
Now that we face another debt ceiling fight in a month or so, the question is: will these same dynamics again give the GOP significant leverage in negotiating the final budget deal, or will the President come up with a new strategy to change the structure of the game? Coming soon, we will game-out some new strategies the President might take in this year's debt limit fight, and see how the Debt Ceiling Game interacts with the Fiscal Cliff Game.
