Tuesday, October 15, 2013

We Are Living In The Age Of The -Hunger- Moron Games!

The games go on and the default on the national debt looms larger and larger. NBC's Chuck Todd recently asked Senator C.(rackpot) Cruz (R-TX) about his place of residence in this galaxy: "What planet do you live on?" The drum major for the Moron Marching Band dumbfounded Todd with his blather. And so it goes in October (traditional month for national fiscal disasters) 2013. The inmates are running this asylum. If this is (fair & balanced) insane stupidity, so be it.

[x HBR]
Understanding The Game Being Played In Washington
By Justin Fox

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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.”

That quote is from economist H. Peyton Young’s "The Evolution of Conventions," [PDF,1993] one of several works of game theory I plowed my way through this week in an attempt to find a way to think about the government shutdown and looming debt ceiling fight that didn’t make me want to bang my head against a wall. My reading made the dynamics at work in Congress and at the White House a bit clearer — and thus slightly less maddening, if not less ominous.

The debt-limit game

There are lots of different games being played in Washington at the moment, but the main one I have in mind pits the Democratic White House and Senate against the Republican House of Representatives over the federal budget. The deadlocked players have already landed us in a partial government shutdown, but it’s the 18th since 1976 and thus really not that big a deal. The far bigger stakes involve the federal borrowing limit that is due to be breached in a couple of weeks if Congress doesn’t approve an increase. Without further borrowing, much higher taxes, or draconian spending cuts — none of which may be possible or even legal on short notice — the government might not be able to service its existing debts, leading to a default. Congress has never allowed this to happen, so the consequences are unknowable, but they could be really bad.

Threatening to cause something really bad to happen in order to get your way is a negotiation tactic known as brinkmanship. Here’s a description from game theorist Thomas Schelling, in his 1960 classic The Strategy of Conflict:

If I say “Row, or I’ll tip the boat over and drown us both,” you’ll say you don’t believe me. But if I rock the boat so that it may tip over, you’ll be more impressed.

Not all brinkmanship is seen as acceptable. If a member of Congress showed up in the Capitol with a bomb and threatened to blow the place up unless his colleagues agreed to name a post office after him, he’d surely end up dead or in jail. The debt limit, originally written into law during World War I [PDF] and raised many, many times since, has often played a role in budget negotiations, and been the subject of much political posturing through the years. But no majority party in the House or Senate appears to have seriously threatened not to increase the ceiling when needed before 2011. That year, a new GOP majority in the House used the threat of a debt ceiling breach to force a number of concessions on government spending, and since then debt-limit brinkmanship has been a recurring feature of the Washington scene.

Democrats and commentators of varying political leanings have argued that by putting the debt ceiling in play the GOP is effectively breaking the rules of the game. They’re right that such behavior hasn’t been the norm. But the don’t-push-it-too-far-with-the-debt-ceiling convention is, like most political norms, subject to revision. With a few Constitutionally determined exceptions (and even those are of course subject to repeated reinterpretation), the rules of political conduct in the U.S. change over time, not in a smooth progression but along a path of punctuated equilibrium. That notion was imported from evolutionary biology (where it’s not entirely uncontroversial) into political science in 1993 by Frank Baumgartner and Bryan D. Jones, with the book Agendas and Instability in American Politics. In this account, politics is usually in equilibrium, with the rules clear and the opportunities for change few. But things can change, and when they do it usually happens quickly.

Trial and error

In game theory, which had long been dominated by the idea that games tended toward a single, rational equilibrium result (a “Nash equilibrium,” for you Beautiful Mind [1998, 2011] fans), similar notions began bubbling up in the 1990s. If the players in today’s Washington were all perfectly rational and oozing with foresight — or, better yet, could repeat the debt-ceiling game a few hundred times, switching positions from time to time and experiencing the consequences — they would probably settle into a long-run equilibrium that didn’t involve brinkmanship. But real people aren’t perfectly rational, and they usually don’t get to keep playing games until they’ve got them down pat. Instead, they proceed by “trial-and-error … without having any clear understanding of the strategic realities of the game they are playing,” game theorists John Gale, Kenneth Binmore, and Larry Samuelson wrote in 1995 [PDF]. “They simply learn that certain stimulus-response behaviors are effective.”

This paper, and other work by Binmore and Gale in the 1990s, was an attempt to explain the results of the Ultimatum Game, a bargaining experiment first conducted in the early 1980s by economists Werner Güth, Rolf Schmittberger, and Bernd Schwarze that bears some similarities to the current debt-ceiling quandary. In the Ultimatum Game, the proposer decides how to divide a sum (in the original experiment it varied between four and 10 German marks) between himself and a respondent. If the respondent accepts the share he is offered, both get to keep the money; if the respondent rejects the offer, neither player receives anything.

Economists had argued that the equilibrium result of this game is one in which the proposer offers the respondent a penny (or a Pfennig), and the respondent accepts (because a penny is better than nothing). When people played the game in experimental economics labs, though, things didn’t work out that way. As Richard Thaler described in his “Anomalies” column in the Journal of Economic Perspectives in 1988 (highly recommended: the 1994 compilation of these columns titled The Winner’s Curse), proposers offer 50-50 splits more often than any other allocation, and offers below about a quarter of the total tend to be rejected.

One interpretation of this is that real people care a lot more about fairness than the self-interested “economic man” of the textbooks does. Another, explored by Gale, Binmore, Samuelson, and others, is that we are self-interested but not all-knowing. Humans seldom make optimal choices, but we do learn, from playing the game and from similar experiences in life, what we can get away with. It’s an evolutionary process — one that, if repeated enough times under exactly the same circumstances might lead to an optimal result but under more realistic conditions is more likely to oscillate between different norms/conventions/equilibria. “If … the players sometimes experiment or make mistakes,” wrote H. Peyton Young, whom I cited at the beginning of this piece, “then society occasionally switches from one convention to another.” I don’t get the sense that anyone has figured how to build this realization into a reliable predictive model — no game theorist is going to be able to tell you with great confidence how the budget standoff will play out. But the very exercise of looking at the current showdown as a game in which the players have limited knowledge but are able to learn illuminates a lot.

Let’s consider what House Republicans have learned from their two years of debt-limit brinkmanship. They have learned, first of all, that it works. They got the White House to agree to a bunch of automatic spending cuts (the sequester) in 2011, and then in early 2013 they were able, from what seemed to be an exceptionally weak bargaining position after President Obama’s reelection, to keep most of the Bush-era tax cuts from expiring and to force yet another debt-ceiling battle only a few months later. More broadly, Republican office-holders and activists have learned over the past couple of decades that making what at first sound like unreasonable demands (no new taxes, no gun control) and repeating them for years on end can actually shift the terms of the debate to the point where the demands seem normal. It has been a successful strategy.

There have been downsides to the GOP’s debt-ceiling brinkmanship. It was a drag on economic growth, for one thing, but that’s pretty distant and diffuse and hard to prove. More tangibly, it also probably played a role in the Republicans losing six seats in the House and failing to unseat President Obama in the 2012 election.

From the perspective of the 30-odd hardline members of the House GOP that for the sake of convenience I’ll call the Tea Party, though, this wasn’t actually bad news. Their districts tend to be pretty safely Republican, so their jobs aren’t at risk. A smaller Republican majority in the House increases their leverage within the caucus. And in part because Republicans controlled the redistricting process in most states after the 2010 census (a byproduct of the anti-Democrat backlash in the 2010 elections), they don’t have to worry much about the GOP losing its House majority soon. As for Obama’s victory over a Republican nominee the Tea Party never fully embraced, that wasn’t the worst thing in the world either — it certainly helps with fundraising and energizing the base. So while it has become popular to label the Congressional Tea Partiers, and their seemingly increased zeal after a lost election, as “crazy,” most of their behavior can be pretty readily explained by self-interest and learning from recent experience.

For Speaker John Boehner and most of the rest of the House GOP, the loss of seats and failure to unseat Obama was bad news. But Boehner is now playing such a complex game, with the White House, the Senate, and a big chunk of his own delegation his adversaries at least some of time, that the 2014 election must seem awfully far off. All he’s trying to do is survive to fight another day.

Finally, for President Obama and Senate Majority Leader Harry Reid, the lesson from the last two years is that negotiating over the debt ceiling is a loser’s game. Every time they accede to House Republican demands, the GOP comes back a few months later demanding more — even after a clear election loss. So it shouldn’t be surprising that Obama and Reid might be willing to risk economic calamity in order not to have to submit to such blackmail again.

Put all this together, and it looks like we have the makings of a train wreck. It also looks like it’s probably up to Boehner to avert it, which he appears to acknowledge. But that’s not as reassuring as it might sound when you consider how unstable the tactical ground is upon which he stands. So, that’s depressing.

Room for negotiation

But looking at the short-term interests of the different players, as opposed to their stated goals, does open up opportunities for negotiation and cooperation. When you focus on others’ interests, rather than their passions, you’re far likelier to be able to predict their behavior and to come to some sort of accommodation with them. I got that idea from the 17th and 18th century thinkers quoted in Albert O. Hirschman’s The Passions and the Interests (1977, 1997), but I think it’s a major theme of the negotiation bible Getting to Yes (1992) as well. I definitely know that, as somebody who has on occasion been driven to indignation by the statements of the Tea Partiers, the simple act of writing the last few paragraphs has significantly lowered my outrage level and increased my empathy with them (if not necessarily sympathy for them).

Determining just what the opportunities for negotiation and cooperation might be isn’t so easy, of course. The most obvious commonalities of interest involve President Obama and the Tea Party — the Tea Party owes its very existence to Obama’s presidency, while he owes the current unity of the Democratic Party and possibly his 2012 reelection to the Tea Party. But it’s hard to see how to translate this into deals. Would fire-breathing Georgia Republican Paul Broun trade a vote to raise the debt limit for an Obama promise to come to his district and loudly condemn him on the day before the next Republican primary? Probably not.

Still there must be room for horse trading somewhere. And it’s much more likely to be discovered if the different players actually talk to each other. I’ve been dubious of the frequent calls for more face-to-face contact between the two sides in Washington (more “schmoozing,” as Jack and Suzy Welch argued the other day). But the lesson from game theory is that yeah, schmoozing can help.

The reason is that if the players in a game don’t or can’t talk to each other about what they’re doing, they have to fall back on trial-and-error and the prejudices and misconceptions they held going into the game. To go back to Schelling, whose work in the 1960s and 1970s prefigured much of modern economic thinking about games: “Excessively polarized behavior may be the unhappy result of dependence on tacit coordination and maneuver.” Ω

[Justin Fox is Executive Editor of the Harvard Business Review Group and author of The Myth of the Rational Market (2009). Fox received a BA from Princeton University.]

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