Game Theory and the Government Shutdown
By this point, it is old news that the United States government is facing a budget crisis. The “shutdown” of our government may have put many Americans out of work, but thousands of other government employees (including Congress) remain at work because their jobs are deemed essential. In the end, something has to give. If neither party chooses to give in, it will have major ramifications on the United States economy. The Dollar is already at an eight month low point against the Euro, and who is to say what would happen if the shutdown does not come to a close soon. The intangible effects are also noticable. As time goes on, people will realize that the battle in Washington will soon hit much closer to home.
So with all these reasons to stop the madness in Washington and end the shutdown, what is keeping the two parties from reaching an agreement. Game Theory provides us with a logical answer. Let’s take a look at all four possible scenarios. If both parties backed off, and came to some sort of compromise, both parties would come out on top. The Republicans would look like they slowed the release of obamacare (or added some stipulation to the plan), and Obama would look good for appeasing the Republicans and ending the shutdown, while still getting Obamacare to pass. If one side backs down, and the other side does not, the side who backs down appears weak, and loses the game. Here is where the game get’s interesting. If both sides continue to fight, Obama wins the game, but why? It all comes down to image. Obama never again has to face the voters, so he has nothing to lose by fighting to the bitter end for his signature health care plan. Unlike Obama, members of Congress have to face the people at some point again for reelection. The shutdown of government looks bad, but it looks worse
for Congressmen who are putting Americans out of work. The situation above reduces to the following game:
As you can see, the dominant strategy for President Obama is to fight the GOP, because it provides him with the best outcome no matter what the GOP does. Knowing that President Obama will fight, the GOP knows that they will lose no matter what they do. The only way out for the GOP is for them to silently back off as much and as fast as possible, and accept any small concessions the white house offers. But because it is a lose-lose scenario for them, Obama needs to be generous and at least offer them some concession, allowing them to save some dignity. If he tries to be stingy about it, he may push the GOP into making more irrational decisions.
http://www.globalpost.com/dispatch/news/thomson-reuters/131003/game-theory-and-americas-budget-battle-0
http://www.bloomberg.com/news/2013-10-02/dollar-near-eight-month-low-versus-euro-on-shutdown-impasse.html