Planet Money - Two indicators: Congressional Game Theory and the Debt Ceiling

Episode Date: October 22, 2021

We bring you two stories from The Indicator on the recent battles being fought in Congress. | Subscribe to our weekly newsletter here.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

NPR. So it has been a very confusing and very chaotic couple of months in Congress, no doubt. They couldn't even pass the bipartisan infrastructure bill, which the president... Core infrastructure legislation hostage... Legislation was basically hold one hostage over the other. There is an enormous infrastructure bill for things like ports and highways. And there is also a social spending bill, which proposes things like cheaper prescriptions and an expanded child tax credit. And as politicians argue among themselves, we've seen redrafts, voting delays and a lot of frustration in Congress.

All or nothing policy demands making this process quite difficult. You know, there was... It is really not playing fair. So all of this sounds very chaotic and, you know, just sort of like the big mire of politics. But there is actually a science underneath all of this. The golden threads of logic do run through this tapestry of seemingly endless debate. There is an academic field, which is often used in economics, that can actually help explain what each side is doing in these tussles over the spending bills. And it is

game theory. Hello and welcome to Planet Money. I'm Stacey Vanek-Smith, host of Planet Money's daily podcast, The Indicator. Today on the show, two indicators that shed a little bit of light on decision making in Washington. From games of brinksmanship to the dreaded debt ceiling. First up, Darian Woods and I talk about game theory. That's after the break. Darian Woods and I talk about game theory. That's after the break. So game theory. It's often used in economics in situations where there are conflicts and negotiations. Places like in Congress. Also, naturally, the movies. Like in this scene from the classic film The Princess Bride. In the movie,

the princess's rescuer brings out two goblets of wine and the kidnapper has to figure out where the poison is. But it's so simple. All I have to do is divine from what I know of you. Are you the sort of man who would put the poison into his own goblet or his enemies? Now a clever man would put the poison into his own goblet because he would know that only a great fool would reach for what he was given. I'm not a great fool, so I can clearly not choose the wine in front of you.

But you must have known I was not a great fool. You would have counted on it, so I can clearly not choose the wine in front of me. Is he bluffing? Are they bluffing? Are they not bluffing? Or is he bluffing that he's bluffing that he's bluffing? Which is like the negotiations in Congress at the moment. It's situations like these that it gets so complicated that you almost need mathematics and computer simulations to figure out what the best strategy is. And that is where, non-ironically, the game theorists come in. Like Kevin Zolman. He's a game theorist at Carnegie Mellon.

Kevin Zolman. He's a game theorist at Carnegie Mellon. I'm the author of The Game Theorist's Guide to Parenting, a book about applying game theory to some of the toughest strategic situations we face being parents. So Kevin has all these strategies to help kids share with each other or to play nicely in the backseat of the car. Don't cross the imaginary line. And speaking of getting others to play nicely, we asked Kevin, what the heck is going on with these spending bills? Why aren't these bills passing even though the Democratic Party has a majority in the House of Representatives and in the Senate? Like, why can't they get themselves together to agree and pass this bill? Kevin says that the progressive and moderate wings of the Democratic Party are using game theory against each other.

And to understand the game, you need to map out politicians' incentives. Game theory maps those out using grids or decision trees with numbers and even artificial intelligence models to work out what everyone's best strategy is. It's math weighing up risks and rewards to figure out how to act based on everyone's incentives. And Kevin says that democratic politicians' incentives are, well, getting re-elected. Each of them has an incentive, private incentive, from their own voters to be hardline in opposite directions. So the conservative side has an incentive to try and appear more conservative than they would really like. And the liberal side would have the incentive to appear more liberal than they really like. And then what happens is they end up failing to compromise on a thing that they both would like

precisely because they're each sort of pursuing their own private interests. Then, once the incentives are mapped out, each politician has a question. The question that both sides are facing right now is, are the threats from the other side credible? Would you really opt to not do a policy that you would like because it doesn't include everything that you want? Right. So threats. Now, just how credible a threat is, that is one of the key considerations in game theory. For instance, if the other side is going to do what they are threatening to do, like break their toys and hurt everyone,

you know, you might think twice about upsetting them and be more tempted to give them what they are threatening to do, like break their toys and hurt everyone. You know, you might think twice about upsetting them and be more tempted to give them what they want. Yeah. So an example would be threatening to let the highway maintenance budget expire by refusing to vote yes on the infrastructure bill. Kevin says that the politicians do have options there to make their threats more credible. They're making public commitments. So they're saying things out loud on news programs and in social media saying, I will vote against that. Take Alexandria Ocasio-Cortez. She went on TV to publicly talk about whether she'd vote for the bipartisan infrastructure bill. We will not support bipartisan legislation without a reconciliation bill. The reconciliation bill,

also known as the big social spending bill. And also Joe Manchin on CNN. He was asked whether Chuck Schumer would have his vote on that social spending reconciliation bill. He will not have my vote on 3.5, and Chuck knows that, and we've talked about this. And by making a public commitment to something, a politician is sort of, in a certain sense, tying themselves to the mast or at least imposing a very high cost on if they go back on it. Because now they're, you know, they've done the worst thing a politician can do, which is to say they're going to do one thing and then do the other. And this feeling that in Washington everything is kind of spiraling out of control, that is not an accident. Kevin Zolman says this is called brinkmanship. Brinkmanship is that each side is sort of trying to create a crisis in order to get a thing that

they prefer as a resolution. Like actually trying to create a crisis. Trying to create a crisis. Exactly. So that's the goal. And look, I mean, it's all fun and games until someone loses an eye. Until a pothole doesn't get filled. Yes. Yeah, exactly. Because the infrastructure That's the goal. And look, I mean, it's all fun and games until someone loses an eye. Until a pothole doesn't get filled. Yes. Yeah, exactly. Because the infrastructure didn't pass the other day, the highway maintenance budget, it briefly expired.

I mean, it was then reinstated, but it goes to show there are real world consequences to these games. Also, the midterm elections are coming up and this protracted democratic infighting is presumably not endearing to a lot of voters. The danger is, of course, if two sides are both engaging in brinkmanship, they're both sort of trying to create different crises. You may end up with a lot of crises all at once and it may end up backfiring. Kevin Zolman is watching the debates in Washington and he's hoping all of this brinkmanship will not push us like over the brink. And he has a message to politicians from the mouth of a game theorist that, you know, while game theory is about conflict, it is also ultimately about cooperation. And he says, you know, something that can seem like an I win, you lose, you know, like a zero sum game situation doesn't always need to be that way.

They need to remember that they have other cares too. They want to live in a country that's a good country. They have values presumably that led them to want to be politicians. They also care about making the world a better place. Look, unlike in a simple math equation, politicians can talk to each other. They can find compromises and maybe even strike a deal. Believe, Darian, believe. That brinksmanship was on full display in Congress in recent weeks, all about the debt ceiling. So after weeks and weeks of arguing, Congress decided to, you know, delay having to make a decision. It kicked the can down the road and passed legislation to raise the debt ceiling temporarily to just under $29 trillion, which should buy the country two months.

And the U.S. is pretty much the only country in the world that handles debt like this. So Adrian Ma and Sally Herships take us on a trip back in time to figure out why this is and to take a look at how other countries handle their debt. That's after the break. So, like, how much of your psychic space these past few weeks is taken up by debt ceiling coverage. Well, regrettably, a little bit too much. Simon Rabinovich writes for The Economist, where he is a U.S. economics editor. Editor is, in fact, a glorified title. Really, I'm just a correspondent.

I write lots of articles. I don't edit anybody's articles. But it sounds good. It does sound all right, yeah. Simon is being humble. We called Simon up because he has been covering and thinking about the debt ceiling drama in D.C. more than most people. And he says there was a time in American history when all of this drama around the debt ceiling just didn't happen. You can go back a little over a century. Before 1917, there was no debt ceiling in America. Congress would just issue authorization to the Treasury for every bit of borrowing that it would do, kind of bond by bond, loan by loan.

For instance, around the turn of the century, Congress wanted to build the Panama Canal. Problem was, the Treasury didn't have that much cash lying around. So the Treasury said, hey, Congress, let us sell some government bonds. We take on a little debt. We pay for the canal. But that was sort of inefficient. And it really became a problem when the United States got into World War I, because who knows how much a gigantic war is going to cost? I feel like a lot. Like, you couldn't even imagine it, right? So Congress decided to basically give the Treasury an allowance. And it did that by passing the Liberty Bond Acts of 1917. So the initial idea was to actually give the Treasury more leeway. You know,

you could do whatever borrowing you need to do. We're not going to authorize you on a bond-by-bond basis, but there's this overall ceiling that you got to stay under. Back then, the limit was around $9.5 billion. That is around $200 billion in today's money. And since then, this thing that has morphed into the debt ceiling has been raised or suspended dozens of times to keep up with national spending. And today, well, after this recent two-month extension, the current debt ceiling is just under $29 trillion. On the one hand, Simon says it makes sense that the government wants to try and constrain its own ability to issue debt. And that's because of something economists call the common pool problem.

Whatever government is in power today has a big incentive to spend a lot of money because they want to get re-elected and people like, you know, governments that deliver things to them. Things like new roads and bridges, spending on social safety net programs, or free prescriptions for seniors. And, you know, people who are benefiting

from whatever the programs are today, they don't think about the cost they're imposing on taxpayers more generally, and they certainly don't think about costs they're imposing on taxpayers down the road. So in a way, the debt ceiling could be rationalized as a way to protect this common pool resource of government spending for future generations. But Simon says the persistence of the debt ceiling today has less to do with this kind of loose economic justification and a lot more to do with the fact that it has become a very effective political football. Yeah, it's like

football is this quintessential American game and so is the debt ceiling showdown. So whereas other countries do think about trying to rein in their debt and they do impose certain constraints, you know, they don't want to have a situation where every couple of years they're threatening default for political reasons. So what you're saying is we're special. America is exceptional.

There is no question about that. Okay, maybe he's being a little sarcastic, but also kind of not. One of the only other examples of another country with a debt ceiling is Denmark. But their ceiling is so high that the government's debt is nowhere near it, so it's not the same kind of reoccurring controversy that it is here. Most other countries don't have, you know, hard numerical caps on overall debt. If you want to be jargony about it, their fiscal rules are more flexible. Other countries use what's called a debt break. There's a rule that says the debt has to stay under a

certain percent of the country's gross domestic product. For example, in Poland, that means staying under 60% of GDP. And in Germany, they have a target of keeping new borrowing within a third of a percent of GDP. Although worth saying that rule has been suspended during the pandemic. True. So by contrast, New Zealand doesn't even have a specific number it has to stay under by law. Instead, they have what they call a debt anchor. So the way that works is each newly elected government sets its own target for what they consider a prudent amount of debt.

Simon says most economists he talks to agree that these more flexible rules make more sense than what the U.S. is doing. But I think even smarter are the economists who say that, you know, ultimately all of these debt limits, debt ceilings, debt breaks, debt rules, whatever you call them, you know, are ultimately very arbitrary. Like, why not come up with ways to make debt accumulation more manageable?

Like, look at what the government spends on regularly and find ways to cut back. So instead of trying to rein in debt after the fact, this is a fiscal rule that comes before the fact and tries to ensure that the debt accumulation, you know, is more reasonable, is more targeted, and is ultimately more sustainable. Do you think that's doable for us? No, no, I don't. I think it's, sadly, no. I think it's a great idea. And I think it's a great fodder for discussion and maybe for other countries to implement. I think, sadly, the political reality in America is that, you know, although the debt ceiling, you know, as it exists in America, nevertheless, politically, it's clearly a very powerful tool. A tool that for a lot of politicians seems a little too powerful to put down for now.

And it's kind of ironic when you think about it. The debt ceiling began as this way to allow one branch of government, the executive branch, to support another branch, Congress, so they could more easily spend the money they said they wanted to spend. Yeah, but nothing about this feels easy right now. Yeah, think about that when you see lawmakers debating this in the coming weeks. These stories were originally reported by Darian Woods, Sally Herships, Adrian Ma, and me, Stacey Vanek-Smith, for The Indicator from Planet Money. These episodes were produced by Julia Ritchie, Brittany Cronin, and Emma Peasley, with help from Isaac Rodriguez and Josh Newell.

They were fact-checked by Brittany Cronin and Taylor Washington. The Indicator is edited by Kate Kunkanen. Viet Le is our senior producer. Today's episode of Planet Money was produced by Andrea Gutierrez. If you like these stories and want more economics in your life, we at The Indicator are here for you five days a week. You can find The Indicator from Planet Money wherever you get your podcasts. I'm Stacey Vanek-Smith.

This is NPR. Thanks for listening. And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.