Game Theory and the US Debt Ceiling
Yet again, the United States faces the issue of the debt ceiling – the maximum amount of debt the federal government can take on before it has to repay or default on its loans. CNN reports that, were the US government to fail to raise the debt ceiling by the October deadline this year, the treasury would fall short $80 billion, and thus be unable to pay 23% of its bills. This would place great strain on the US economy, as well as likely have serious political ramifications for whoever was deemed “responsible” for the government hitting the debt ceiling.
However, the US government is not one entity but two, the Democrats and the Republicans, who both have their own goals aside from the wellbeing of the country. First and foremost, each party wants to remain in power and/or gain more power. We can thus look at the debt ceiling situation in terms of game theory concepts from the course, although the discussion of payoffs becomes a bit more complex when dealing with such nebulous ideas as political gain.
In this discussion, let’s assume that Democrats and Republicans vote as unified entities and can either vote to pass a debt ceiling increase or not pass (P or NP, for simplicity). If both Democrats and Republicans vote NP, the debt ceiling is not raised. If Republicans, or Republicans and Democrats vote P, the ceiling is raised (this is because Republicans hold a majority position in Congress).
Let’s first consider the Democrats. Currently the Democrats do not hold majority power in either side of Congress (where the budget is formed- let’s ignore the other two branches in this discussion for simplicity). Thus, they are unlikely to suffer much fallout if the debt ceiling is not passed, unless their actions are seen as particularly egregious (extended filibustering in favor of NP, for example). Democratic constituents typically are in favor of debt ceiling increases, as typically they are more supportive of government spending programs than Republicans. Thus, the P strategy has a large positive payoff for Democrats, while the NP strategy has a small negative payoff. This shows the Democrats have a dominant strategy – fight for the debt ceiling to be raised, no matter what the Republicans do.
The Republican story is a bit more complicated. If they vote NP, and the debt ceiling is not raised, they are likely to face political backlash for causing economic issues. However, if they vote P, and the debt ceiling is raised, they could face backlash from their constituents for not voting according to the constituents’ preferences and succumbing to Democratic will, even if they avoid the backlash from not raising the debt ceiling. Thus, the Republicans face potentially negative payoffs for either strategy they could take. The question is whether voting for or against the debt ceiling will lead to a smaller negative payoff for them. In previous years, it seems the Republicans have calculated voting P will lead to a smaller loss, as the debt ceiling increases have always previously passed. However, only time will tell how they calculate those values this year.
Source: http://money.cnn.com/2017/08/24/news/economy/debt-ceiling/index.html