Tag Archives: debt ceiling

Credible Commitment, Painful Triggers, and the Debt Ceiling Compromise

President Obama signs the Budget Control Act of 2011, which threatens automatic spending cuts distasteful to both parties.

The resolution of the debt ceiling standoff in Congress provides a nice illustration of the problem of credible commitment and the unusual steps that are required for political leaders to overcome this problem.

The problem of credible commitment is ubiquitous in domestic and international politics–it afflicts individual leaders, political parties, countries, ethnic groups, and IGOs–and it centers on the difficulty actors have in credibly (believably) promising to do something that appears not to be in their interests.  For example, Israel could seek to achieve a two-state solution with the Palestinians by promising that if the Palestinian state had no army or foreign troops on its territory, Israel would never reoccupy the Palestinian territories.  But given Israel’s military superiority, its past behavior, and its likely desire to reoccupy territories such as the West Bank if it perceived threats coming from those territories, this commitment is not inherently believable.

In order to overcome this problem and make an inherently unbelievable threat or promise believable, an actor needs to set up mechanisms that increase the likelihood that it will abide by its commitment.  This has been called a strategically self-imposed constraint, and it involves “tying one’s hands” in some way so that backing down from the commitment becomes difficult.  In the game of chicken, referenced in a previous blog post on the debt limit showdown, this would involve removing the steering wheel and throwing it out the window to signal that even if one wanted to swerve it was now impossible.

Public pledges to act a certain way create audience costs (particularly in democracies) such that backing down will make the leader look weak or untrustworthy to key constituencies and carry serious political costs.  In the case of the U.S. Congress’ promise to cut the deficit, public pledges were not deemed sufficient constraints and Congress resorted to an interesting “trigger mechanism” that will unleash automatic, deep cuts in the event Congress fails to agree on specific spending cuts.  Significantly, the automatic cuts would slash $600 billion from defense spending (anathema to Republicans) and $600 billion from domestic programs (a bitter pill for Democrats).  The hope is that these blunt automatic cuts would be so distasteful that even a bitterly divided Congress would keep its word and reach agreement on a plan to cut spending by $1.5 trillion.  As an Economist blog post summarizing the deal concluded, “The thinking is that these cuts would inflict such pain on both Republican and Democratic pet priorities that they will labour mightily to come up with an alternative.”

However, as one advocate of a balanced budget pointed out, “Anything Congress does, Congress can undo. They can’t really bind themselves. You really have to have a political will to make these things work or they won’t.”  Is this critic right?  Will this trigger threat prove effective, and if not, is there any way for Congress to bind itself?

Brinkmanship and the U.S. Debt Ceiling Standoff

A tense meeting between President Obama and House Speaker Boehner this morning at the White House.

Brinkmanship is defined by Merriam-Webster as “the art or practice of pushing a dangerous situation or confrontation to the limit of safety especially to force a desired outcome.”  It was a common practice during the Cold War standoff between the U.S. and the Soviet Union, when strategists such as Herman Kahn and Thomas Schelling mined metaphors like “rocking the boat” and the game of “chicken” to analyze superpower brinkmanship.

The logic of brinkmanship as a bargaining strategy is that by raising the stakes and threatening to let events spiral out of control you can coerce the opposing actor to back down and accept your demands.  During the Cuban Missile Crisis President Kennedy’s decision to place a naval “quarantine” around Cuba increased the chances of a naval clash and subsequent escalation between tense, nuclear-armed adversaries.  In this crisis, both sides used the very real threat of impending doom to wring concessions from the other.

Today we are witnessing a good example of brinkmanship in the standoff between President Obama and Congressional Republicans  over raising the debt ceiling.  The August 2nd deadline is looming for the U.S. to raise the ceiling or risk defaulting on its obligations–not quite as bad an outcome as nuclear holocaust, but bad enough that many analysts are using the terms “apocalypse” and “armageddon” to describe the economic consequences of a default.  For analyses of the consequences of a default for the U.S. and the global economy see here, here, and here.  Summing up the concerns, a senior economist at Wells Fargo is quoted in a recent Huffington Post article as saying: “It would be an earth-shattering event. It’s taken as a given that U.S. Treasuries are a safe asset. Once you question that assumption, it shakes the foundations of global finance, and the way it’s been established over the last 50 years.” Yet despite these dangers, President Obama walked out of talks last week and House Speaker John Boehner broke off talks last night, raising the heat and signaling that they were willing to court economic disaster if the other side didn’t budge. Some analysts believe that the willingness of some Congressional Republicans to accept the prospect of no deal by August 2nd gives them the upper hand in negotiations, and analysts such as Thomas Schelling would agree. The problem with brinkmanship, however, is that it requires increasing the likelihood of catastrophe, and if that catastrophe happens both sides have lost.

What do you think?  Who is playing the game of brinkmanship better in this standoff?  How will it end?  Are both sides acting irresponsibly by raising the risks of economic disaster, or is one side more to blame for holding the economy hostage to extract self-interested concessions?