Deficit Chicken

In recent months, there has been much coverage of sovereign debt crises around the world. Just a couple of weeks ago, Greece approved massive cuts to its budget, in a move designed to implement an austerity plan to avoid a devastating default on its debt (though some warn that even this is not enough to prevent a selective default). This past week, Moody’s (a rating agency) downgraded its ratings  of Portuguese bonds to “junk” status, meaning that there is a good possibility that its bonds will not be repaid. Other European countries, such as Italy and Spain, are also considered at risk, as they have large deficits and/or debts outstanding that imperil their abilities to repay.

Even in the United States, there has been much talk recently of what to do about the federal debt limit, which was surpassed in June. The debt limit must be raised, or the United States will cease to be able to pay its obligations, raising the specter of default. Yet the two sides of how to approach the issue have been taking hard stances over how to avoid this possibility. Republicans want to reduce the deficit solely through spending cuts, under the premise that any tax increases will hamstring the economy at this delicate stage in the recovery from the recent recession.[1] Democrats want to do so through a blend of spending cuts and an increase in taxes on “the wealthy” (see Marli’s post on taxation). Despite the necessity to somehow bridge the gap, the debt talks have recently appeared to be on the verge of collapse. House majority leader Eric Cantor, in the past couple weeks, walked out (insert link here) of the debt talks, citing irreconcilable differences. With both sides unwilling to give in, it seems like the United States is barreling toward a crisis.

With a scenario like this, it seems like a perfect time to whip out my chicken suit.

Both sides are heading straight toward the precipice; if neither swerves, disaster strikes: the government collapses, essential services are denied across the country, and politicians will likely be voted out of office for failure to govern effectively. Yet if anyone swerves first, it is also bad: it will mean giving up some of the sacred cows of their party’s platform, whether it be lower taxes for the Republicans (especially for “the wealthy”), or big-ticket items like healthcare for the Democrats. We can therefore model the game as such:

Lose healthcare Stand strong
Higher taxes (-5, -5) (-10, 0)
Stand strong (0, -10) (-100, -100)
Fig. 1: Deficit Chicken

Hopefully, they’ll be able to negotiate some sort of agreement before the August 2nd deadline, so we can avoid the “crash” solution. It seems like Minnesota hasn’t been able to avoid this, so a positive resolution is not guaranteed. We’ll see what happens…

[1] Though, the idea that these lack of tax increases will somehow pay for themselves is completely ridiculous (according to virtually all economists). Also, government spending cuts will impair the recovery of the economy as well, as such a move reduces aggregate demand. But I digress.

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One Comment on “Deficit Chicken”

  1. […] week, Jeff discussed Deficit Chicken and the consequences of playing out the game. The August 2nd deadline is almost upon us, and up […]


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