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Brooks Wilson's Economics Blog: Rewrite of Political Chicken and the Debt Ceiling

Wednesday, June 29, 2011

Rewrite of Political Chicken and the Debt Ceiling

This post is a rewrite and combination of two recent posts that evaluate the debt ceiling impasse as a game of political chicken.  This first (here) was incomplete and the second (here) completed the game but required readers to view two posts.

Congress is engaged in a game of political chicken over raising the debt ceiling.  Instead of two cars racing toward each other in a single lane, Republicans and Democrats are screaming at each other across the aisle about conditions that they will require to raise the ceiling.  If left unresolved, this political crisis will precipitate an economic crisis.  Leaders in both parties acknowledge that the ceiling must be raised or the government will not be able to use debt to meet its financial obligations, and both sides know that the government could not simply cut more than a trillion dollars from this year’s budget to remove the need to borrow.  In short, if a political solution is not found the government will default on its obligations.

This is where the game of chicken begins.  Both parties are attempting to use the current crisis as a fulcrum to leverage future budget negotiations over a bigger looming economic crisis caused by unfunded entitlement programs, the big three being Social Security, Medicare and Medicaid.  To greatly simplify arguments, the Republicans prefer to cut spending and reduce the federal government’s size and scope through reform of entitlement programs[1].  Democrats want the federal government to retain its size and scope and would rather close deficits with increased taxes[2]; their reforms to entitlements would attempt to cut expenditures through government reform.  It is beyond the scope of this post to comment on the merit of their agendas. 

Incumbents in both parties are wooing voters through political theater and both parties will gain or lose support depending on the actions of the other party and the economic outcome of those actions.  The following political outcomes are pure conjecture, and are only meant to illustrate the game.  If both parties stay the course causing a financial meltdown, incumbents in both parties will lose votes, say 10 million nationally.  If Democrats stay the course and Republicans capitulate, Democrats will gain 2 million votes and Republicans will lose 2 million votes.  If Republicans stay the course and Democrats swerve, the opposite outcome occurs (Democrats lose 2 million votes and Republicans gain 2 million).  If the parties compromise neither party gains or loses votes.Voters are affected by the economic outcomes of political actions.  The best outcome depends on the economic effectiveness and political sustainability of each party’s solution and the compromise solution.  Voters are members of a party because they believe that it offers the best economic solutions.  Their beliefs may or may not be correct but the implications of this assertion on the political game of chicken are clear.  The best outcome for a Democratic voter would be for Congressional Republicans to swerve and Congressional Democrats to stay the course.  The best outcome for a Republican voter would be the reverse.  Voters from both parties benefit from a compromise but less so than if their party holds the course and the other swerves.  The worst outcome for voters is for both parties to hold their course and fail to raise the debt ceiling because the impasse would trigger a financial crisis.     

I believe that tying the increase in the national debt ceiling to spending cuts and market oriented institutional reforms to entitlements is the best economic solution.  On this issue, I hew closer to Republicans.  I believe that it would cause the greatest level of economic growth and that growth would be balanced.  I would hope that the subsequent prosperity would be sufficient to make a more limited government politically sustainable.  I fear that my preferred solution or any political solution offered by one party is not politically sustainable or even attainable.  Our country is politically divided.  Republicans hold the House and the Democrats, the Senate and the executive branch.  A compromise solution that acknowledges this fact and takes the best elements of each party’s offerings represents the least political risk and offers a reasonable economic outcome.   

[1] A small group of Republicans insist that they will not support an increase in the debt ceiling under any circumstance.  I am not sure if this is a negotiating stance or a statement on their future vote.  I do not know if an economist that supports this position or believes that not raising the debt ceiling will have anything less than major costs to the economy.

[2] A small group of Democrats that they will not support an increase in the debt ceiling that reduces entitlement benefits or increases taxes on anybody but the wealthy.  The wealthy do not earn enough to make projected levels of entitlement programs financially sustainable.

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