How does the game theory apply to the shutdown?

“Some portray it as a Manichean struggle between good and evil. Warren Buffett says it’s “extreme idiocy.” I’d like to recommend another way of looking at the government shutdown and the looming battle over the debt ceiling in Washington. It’s a game, played by flawed-but-not-crazy human beings under confusing circumstances. In other words, it’s an interaction among “agents” who “base their decisions on limited information about actions of other agents in the recent past, and they do not always optimize.” – writes Justin Fox, executive editor New York, Harvard Business Review.

That got us thinking here at GovLoop that all of this shutdown craziness might actually be explained using game theory? Chris Dorobek sat down on the DorobekINSIDER program to talk about how by applying game theory you can see how the pieces of the Congressional puzzle fit into place.

“Game theory grew out of the idea of watching people play poker. The idea is to examine how real world negotiations happen. By that definition the shutdown talks are a game. It is not pejorative, it is sort of describing the fact that you have opposing parties. You have certain consequences if things don’t happen. It doesn’t fit perfectly into any standard game model but it definitely shares a lot of characteristics,” said Fox.

How does applying game theory help us understand the shutdown?

“Most of the early practical applications of game theory had to do with nuclear war. So it was serious from the beginning. What got me going on this was that much of the frustration and outrage surrounding the shutdown stems from the fact that the public feels someone isn’t playing by the rules. Somebody is not doing it the way it has been done.

• I come from the perspective that I feel like it is mostly the House Republicans who were threatening something, that although it had been threatened before, never seemed all that serious. So I can into it from that perspective. But then I started to think in politics the actual rules are pretty few.
• Most of the time they are some informal understandings. And what this clearly was, was a case where the Republicans felt the rules were clearly evolving. They were trying to push them in the evolution where it is totally appropriate to use the debt ceiling as a negotiation tool.
• I was looking for a way to look at the situation in a way that doesn’t drive me totally crazy and I started looking on google scholar, if I could find any papers on changing rules and norms. And it turned out there had been a bunch of stuff written mostly in the 1990s about how that happens.

“The big lesson in most of it, it simply in classic game theory you are dealing with these totally rational actors who could see pretty far into the future. Somewhat predictable. But most people aren’t like that. They aren’t crazy. But they look at what worked last time they played or did something similar. That is basically how rules evolve. If somebody does something that used to be against the rules and they get away with it for awhile oftentimes that becomes the new rule,” said Fox.

Tea Party takes the blame?

“Everyone likes to yell at the Tea Party people for being so extreme and crazy, but if you just look at what has happened to them and what success they have had with their negotiating stance over the past few years – you can understand why they want to keep pushing it. Because it has worked for them,” said Fox.

Is going over the debt ceiling really the nuclear option?

“The impact of the debt ceiling is hugely uncertain. At some level it would be unprecedented and unprecedented things involving basically the oil of the global financial system is scary. People just don’t know. Something really bad could happen or there could be some relatively straightforward way to survive with it for at least a very short period of time. Even if there is not any great global catastrophe there is this popular line on the right over the last week or so that would say we’ll hit the ceiling and the government will start prioritizing payments. We will keep paying the debts but we’ll start cutting back on everything else,” said Fox.

• The Treasury Department says they don’t think they could operationally do it. And they don’t think they have Constitutional authority to do that.
• The other question is say ok, you follow the Republican plan. You would have to cut government spending by 20-25%. That’s a massive recession, if you do it very quickly. That will increase the deficit and the debt. Whatever it is it is ugly. I don’t know what sort of Armageddon we are supposed to portray it as, but it is ugly. And at some level that fear can push people towards negotiations. But there is this sense from the Democrats that negotiating on this stuff is only going to make it worse because it doesn’t make the problem go away. And the other side is pushing for even more. That’s why they are digging in their heels this time.

“People have dramatically different ideas of what doing what is best for the country is. You don’t seem to get very far by pushing that,” said Fox.

You can find all GovLoop’s Shutdown Coverage Here.