Guide to Understanding Washington's `Damn Game'

Paula Dwyer writes editorials on economics, finance and politics for Bloomberg View. She was London bureau chief for Businessweek and Washington economics editor for the New York Times, and is a co-author of “Take on the Street: How to Fight for Your Financial Future.”
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Last week, when House Speaker John Boehner angrily declared, "This isn't some damn game," he couldn't have been more wrong.

A partial government shutdown and the possibility of a debt-ceiling breach aren't children's play but a confrontation with deadly serious consequences. Still, academics see numerous parallels to game theory, the subset of economics and social science that teaches us that people negotiate based on what they expect the other side to do.

The reason it's difficult to understand why President Barack Obama and congressional Republicans are willing to shut down the government and let the U.S. default on its obligations is that they are playing a game within a game. This is the only way to comprehend Washington's unfolding melodrama.

The simplest analogy is the game of chicken, in which the drivers of two cars recklessly race toward each other. The object is to make the other driver swerve before you do by declaring in advance that you're so determined to win the game that you've locked your steering wheel. In other words, the winner is the one who seems most insane.

Others have written recently about the role of game theory in budget politics. An excellent piece by Nicholas Thompson reveals how game theory played out during the 1962 Cuban missile crisis. Another article by Anatole Kaletsky reviews the costs to the players of fighting and backing down from the budgetary game. Justin Fox runs through the ideas of major game theorists, starting with the 1960 Thomas Schelling classic, ``The Strategy of Conflict.'' And a blog post by Dylan Matthews features game theorist Daniel Diermeier explaining the role of elections and public opinion in the budget game.

Drawing on their ideas, here's a guide to understanding the Great Budget Impasse of 2013 through a game theory lens:

What does Obama hope to achieve?

The president is determined not to have another spending-authority or debt-ceiling crisis -- ever. To do this, he must not only win this year's version, but he also must convince Republicans that they will never win the budget game again by threatening a shutdown or debt default. In other words, Obama says he won't swerve -- ever.

Republicans are just as determined not to be the ones who turn the wheel and avoid the head-on collision. Of course, if neither side swerves, they all but guarantee the outcome they claim to abhor: a debt default, with catastrophic consequences, including higher borrowing costs for years and a loss of credibility throughout the world.

Why won't Obama negotiate?

Unlike past versions of the budget games in which mutually beneficial outcomes were possible, this one is different: If one side loses, the other side wins. Naturally, each side is determined not to lose. But to win, each must convince the other that it absolutely won't back down, come hell or high water.

Thus Obama takes every opportunity -- including at a news conference today -- to declare his "no-negotiations" stance even though a compromise could be reached in hours. This also helps explain why Obama won't sign House-passed bills to fund selected parts of the government, including national monuments and military personnel.

How has the game changed?

In the past, Obama has shown a willingness to be flexible, after first stating that he wouldn't. For example, Obama agreed in 2011 and 2012 to compromises that cut domestic spending, ended the payroll tax cut and lifted the debt ceiling.

Compromise is what most Americans want their leaders to do, but it's also a liability. It's that trait in Obama that leads Republicans to expect him to bend. In this game, good behavior is punished and irresponsible behavior is rewarded. By refusing to negotiate, Obama is trying to convince his adversaries that he is following a different strategy than in the past.

What role did the 2013 sequestration play?

The $100 billion in across-the-board spending cuts in domestic discretionary programs was the outcome of the last game of chicken. The cuts were designed to be so onerous that neither side would allow them. Both sides were supposed to swerve at the last minute by agreeing to a compromise deal in which lawmakers and the White House would cherry pick from the best deficit-cutting ideas. Of course, that didn't happen and sequestration was triggered.

How have the Republicans shown no-swerve resolution?

It's been tough at times to keep a unified front, which is why Senator Ted Cruz, the Texas Republican leading his party's side of the chicken game, and House allies suggest that a debt default might not be so bad. This way, Cruz keeps reminding Obama just how little control he has of his speeding car.

The problem for Cruz is that his strategy could cause collateral damage. This brings up the game-within-the-game. If the U.S. doesn't increase its borrowing limit and Social Security checks don't go out, voters may blame Republicans more than Democrats, according to polls. Republicans in swing districts could lose their races. This explains why some House Republicans want to end the stalemate. Cruz and Tea Party-backed colleagues have safer seats and less to worry about.

How is the game within the game played?

While signaling intransigence, both sides also hope to sway public opinion. To do so, however, they must appear to look reasonable. Obama today, for example, talked about how willing he is to negotiate -- so long as the government reopens and the debt limit is raised first. In other words, he will swerve if the other side does first.

Republicans say all they want is to reduce the role of government in the economy. By failing to defund or delay Obamacare, they have had to change tactics -- now they claim to want more deficit reduction -- and look like they are flailing. Polls so far indicate Obama is winning this sub-game, which reinforces his resolve not to swerve because he believes Republicans will bow to public opinion.

Why won't Vice President Joe Biden get involved?

If Biden jumps in again, as he did in late 2012 to end the standoff with Senate Republican leader Mitch McConnell, he would signal that Obama is willing to turn the wheel. Keeping Biden away from Capitol Hill is another way for Obama to say he's not the swerving type.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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Paula Dwyer at