Sunday, February 24, 2013

The Prisoners' Dilemma

On March 1, 2013, if Congress does not come its senses, the dreaded sequester is going to take effect. For those who do not follow closely all of the machinations of Congressional budget negotiations, here is a brief recap of how we got here:

On August 2, 2011, as a compromise measure to prevent the government from defaulting on its debt obligations, Congress passed the Budget Control Act of 2011. That statute required Congress to agree to certain levels of deficit reduction measures over the next ten years. If they could not agree, a package of automatic spending cuts, half to defense and half to domestic spending, would take effect on January 1, 2013. The important thing to understand about this deal is that the sequester was deliberately designed to be something that almost everyone would hate. The whole, entire idea of the sequester was to force Congress to enact a more sensible deficit-reducing plan, because if they failed to do so, the horrible sequester that nobody wanted would take effect. 

Congress created the so-called super-committee to come up with something better. Naturally, they couldn't agree on anything. So then Congress decided to just wait until after the 2012 election, which both parties thought might increase their leverage. The Republicans lost, and Congress somehow managed to fix some other horrible things that were supposed to happen on January 1 (the so-called "fiscal cliff"), but they still couldn't agree on how to avoid the dreaded sequester. All they could do was agree to extend the deadline to March 1, 2013, in the hope that by separating this sequester problem from all the other "fiscal cliff" problems, maybe we could solve this one down the line.

And that's where we still are today, because essentially no progress has been made on breaking the deadlock in the last two months. Instead, it has become a popular sport of late for all sides to point fingers at each other for creating this problem. But if we go back and look at who voted for the Budget Control Act, we find that in the House, 174 House Republicans and 95 Democrats voted for it. 66 Republicans and 95 Democrats voted against it. In other words, Democrats were split down the middle on the sequester. Republicans were for it three to one. So this is something all of us did to ourselves. In any case, the blame game gets us nowhere. The task now is to avoid allowing a self-created problem, that hardly anybody wants to happen, to go into effect. Sounds easy, right? Congress could just cancel the whole thing if they wanted to. But for some reason this is one of the most difficult negotiations Congress has ever faced. Why?

If the sequester is something nobody wants, wouldn't almost any alternative be better? Shouldn't either side just decide to be the grown up and agree to what the other side wants so as to avoid the sequester? Is this sequester fight just a game of chicken?

In a game of chicken, either party is better off jumping off rather than going over the cliff, and each has the independent ability to make that decision. The only point of the game is to wait until the last possible second to jump off, so that you are not the "chicken." It's a stupid game, because you have to chicken out at some point to survive the game. All you can do is hope that the other guy chickens out before you do. And that is not exactly what is happening in Congress right now, because for both parties right now, the sequester might appear to be a better alternative to giving in to the other side completely. Right now the Republicans are saying to the Democrats, if you don't want the sequester, then you must agree to a different package of spending cuts, cuts that will harm social programs instead of defense and operations. Most Democrats respond that while the planned cuts to defense and other discretionary spending are terrible, cuts to social safety net programs would be even worse. On the other side, the Democrats are saying to the Republicans, if you don't want the sequester, then you must agree to a package that includes some revenue increases. And most Republicans respond that while they agree with Democrats that the sequester cuts are terrible, any kind of revenue increase, even by closing tax loopholes or eliminating deductions, would be worse. So in the case it appears that the sequester is not the worst possible outcome for either side. Each side believes it would be worse to agree to the other side's demands than to allow the sequester to happen.

A better analogy to the sequestration fight might therefore be the classic game theory problem known as the prisoners' dilemma. The prisoners' dilemma goes something like this: the police separately approach two prisoners who are accused of committing a crime together and give each the following choice: you can give evidence against your alleged co-conspirator (defect) and go free if he does not confess, or you can stay silent (cooperate), but if your partner gives evidence against you, you will get a twenty year sentence. If both parties cooperate and stay silent, however, the police only have enough evidence to convict both of a lesser crime, so both will serve only a one year sentence. If both defect, on the other hand, both get put away for five years. Here's a depiction of this typical example of the problem:

Obviously, it is best for both prisoners to cooperate and receive the second best outcome for each, and the best outcome for both, but how can each one learn to trust the other? The temptation is powerful to hope the other party will trust you and stay silent while you rat him out and go free. And that's why parties in early stages of negotiation, before they learn to trust each other, will usually end up with the second worst outcome. The "rational" choice, when each party is thinking only of his own selfish interests, is for both to come to the conclusion that they should rat out their partner, in the hope of going free, but at worst getting 5 years instead of 20. The best choice, on the other hand, is not the same as the rational choice. The best choice requires trust and cooperation, and gives both conspirators a minimal one year sentence.

Can Democrats and Republicans, through a process of trust and cooperation, come up with a better alternative than the sequester? Of course they can, but that alternative must involve some pain for each side. The only alternative to the sequester is a negotiated resolution, in which both sides have to accept a bit of something unpleasant for each that the other side wants. Otherwise they are surely headed for getting a lot of what both sides don't want.

It is rare for Congress to design its own prison, but that appears to be what they have done in this case. It probably seemed to make sense at the time to design a process in which an acceptable outcome could only be reached by a process of trust and negotiation. But as in most prisoner's dilemma negotiations conducted by people who do not trust and do not want to cooperate with each other, we are instead likely headed for a very bad outcome.


michael webster said...

Neither side minds the sequester if they can plausibly blame this on the other party.

Neither chicken nor pd is a good model for this type of blame game.

Joe Markowitz said...

There is certainly going to be plenty of blaming. The blaming has already started. So you are right about that.

But I just don't think it is true that neither side minds the sequester. In fact, doesn't all the blaming prove that nobody likes the sequester? Republicans don't like it because it will fall very hard on the defense industry. And Democrats don't like it because it will cause some major dysfunction in the government and also hurt the economy. So unless the Republicans are trying to crash the economy and blame the Democrats for that (and I would never make that accusation), it's hard to see anyone wanting, or even not minding, the sequester.

michael webster said...

Joe, I may prefer outcome A over B, yet if I can arrange the blame to fall on you for me having to take B, I might like that even more.

Joe Markowitz said...

I don't know, Michael. I don't think the guy who gets sent to prison for 20 years is going to take too much comfort in knowing he can blame his partner for his fate.

In the political situation, which I realize is not exactly the same as the prisoners' dilemma, the parties do probably enjoy the blame game as much as they enjoy accomplishing their goals. But let's say the sequester happens. Democrats will only want to blame Republicans for that so that the public will turn on the Republicans, and Republicans will relent and free up some of the sequestered spending. I think that is what they are counting on, in fact. And what will Republicans get out of letting the sequester happen? At most, if they can successfully blame the Democrats, the public will still be miserable, but maybe will take it out on the Democrats in the next election. Neither one sounds like an optimum outcome to me.

Wouldn't it make more sense at some point for both parties to compromise their principles and come to an agreement that the public will like better?

michael webster said...

Yes, you are right. The person who gets convicted because of a squealer isn't going to be pleased.

But, that is not this situation.

Yes, what both parties are counting on is political pressure on the other side. And both are wrong to think they will be relieved of the burden of deciding.

Neither side knows how to signal a credible compromise at this point.

This round goes back about a year, when the private talks between Obama and Boehner failed.