How did the chicken cross the road?

While reading an open newspaper, according to my host for lunch a couple of weeks ago. Apparently this is the most efficient way for a pedestrian to cross a street in Boston, where signs are few and confusing and drivers aren’t fond of traffic laws. (Sound like any other city we know?) An open paper is a big gray signal to the driver that you have no idea she’s there, and if she doesn’t want to run you over, she has to stop. It’s not unlike ripping out your steering wheel and waving it out the window in a game of Chicken.

The city of Philadelphia is aware of this, of course, and the Philly police are cracking down on pedestrians who text and walk. Clearly a cell phone is just not a visible enough signal.

Disclaimer: Play at your own risk, and look both ways. We do not endorse breaking traffic laws.

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Hot deficit potato!

I had originally wanted to share some really cool veto math today, but I’m really fascinated by the chicken endgame being played out — it has to be periodic and not simultaneous near the end. Vetoes will have to wait.

Deficit chicken is starting to look a lot like hot potato in these final days before August 2nd. Even though bank analysts believe the Treasury will be able to hold things together for a few days longer, it’s probably in everyone (in the District)’s interest to take the deadline seriously — better the deadline you know than the one you don’t.

Even if default and/or downgrade don’t happen, Congress is quite aware that the situation is FUBAR and that passing the blame is the name of the game. Whichever of the Dems, GOP, or Obama happens to say the last “no” via veto, filibuster, or downvoting by the time the deadline rolls around will be blamed for preventing legislation of any kind from passing. Whereas we have previously modeled the situation as a game of Chicken, by now we can pretty much count the number of days it will take to get anything through the legislature. Now, if you’re unfamiliar with the game, Hot Potato involves passing an object back and forth or in a circle while music plays. The loser is the player holding the potato when the music stops.

In our game, all parties know exactly when the music will stop, and if all threats to defeat, filibuster, and veto are actually carried out, one of the three players is going to have to say the last “no.”

This is why I don’t find Obama’s threat to veto House Speaker Boehner’s bill (if it passes in both houses) credible — if he vetoes, legislature is basically out of time to draft something else that will pass in both houses. Obama would almost certainly get stuck with the hot potato.

No wonder he’s upset — it’s a Catch-22 for him, since he’s already looking weak to the Democrats for offering such a steep compromise. But, “singlehandedly” causing a default would be much much worse for Obama, which is exactly what the Tea Party hobbits seems to want, according to Senator McCain.

So, why is Obama making this threat in the first place, if it’s not credible? If he makes it seem like vetoing the bill is on the equilibrium path for him, it saves the Senate Democrats some face if they kill Boehner’s bill if/when it arrives in Senate. Otherwise, if the bill is stopped in the Senate, the Democrats in Senate will be left holding the hot debt potato at the end of the game.

Meanwhile, Senator Reid is biding his time before putting his version of a compromise to vote in the Senate. If Boehner’s bill fails to pass today, Reid will have the upper hand because he figures there’s just enough time left to pass his bill in both houses. Obama is supportive, so there’s no threat of veto, and even if the Senate Republicans filibuster as they’ve threatened to do, the GOP will certainly be saddled with the blame, since filing for cloture will set Senate back at least a day or two[1]. If it passes in Senate, the House has little choice but to pass the bill, or be blamed. Unless, of course, they really believe there’s more time to continue tossing the potato, or that doing this might actually make Obama look bad.

Quote of the day, from Reid: “Magic things can happen here in Congress in a very short period of time under the right circumstances.” Right circumstances => Not when filibustering is involved.

A very simplified game tree follows:

As we can see, all current threats, if carried out, lead to someone’s becoming a scapegoat. Interestingly, even though it looks like Boehner might get the votes he needs today, the Senate Democrats are using some excellent commitment strategy, by leaking a letter signed by all 53 members (hey, it looks like they didn’t get Joe Lieberman the Independent on the bandwagon) stating that they do not support the Boehner bill.

Next time: how having veto-power can hurt your outcome.

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[1] If the GOP decides to filibuster until the Fed defaults, it’s going to be pretty hard to pin this on Obama. Just saying.
[2] Fun infographic table thingy.


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.


How We Learned to Stop Worrying and Love the Game.

It is the mid-1950s, and the United States and Soviet Union are in the midst of a nuclear arms race. In the “War Room,” the President, a general, and an eccentric, wheelchair-bound genius with a thick European accent debate the merits of a first-strike attack that would obliterate all of the Soviet Union before it can retaliate. Here, fiction diverges from reality.

Indeed, a Hungarian wheelchair-confined mathematician on the verge of chemotherapy-induced dementia, John von Neumann, was transported to the White House to advise President Eisenhower[1]. Von Neumann, a founding father of game theory, believed that a first-strike that destroyed the Soviets before they could build an H-bomb was the key to ending the nuclear threat as well as allowing the US to maintain its position as the only nuclear superpower[2].

In Stanley Kubrick’s Dr. Strangelove, the Soviets have a deterrence plan — a Doomsday Device that automatically activates and destroys life on Earth for 100 years if Russia is bombed. The device also cannot be disarmed, and so by building such a machine, the Soviets have made a “completely credible and convincing” threat for deterrence[3]. However, it is revealed by the Soviet ambassador that no one yet knows of the device, since the Soviet Premier had wanted to unveil it with fanfare.

The Americans also have a retaliatory measure in place, “Wing Attack Plan R,” which allows Field Commanders to bomb the Soviet Union in the case that Washington is destroyed by a Soviet first attack. It happens that Brigadier General Jack D. Ripper believes that Communists are poisoning the water and, knowing nothing of the Doomsday Device, orders his nuclear-armed B-52s to attack. He too has effected measures to prevent the recall code from being obtained — and even when it is finally obtained and broadcasted, one of the bombers has a defective radio and was beyond contact. Major Kong rides the bomb as it falls from the plane, and mushroom clouds erupt around the globe.

“The whole point of having a Doomsday Machine is lost if you keep it a secret. Why didn’t you tell the world?”

The nuclear game of Dr. Strangelove shares characteristics with the game of Chicken, where two vehicles accelerate toward each other and the loser is the driver who swerves. If neither swerves, mutual destruction results:

Swerve Straight
Swerve Tie, Tie Lose, Win
Straight Win, Lose Crash, Crash
Fig. 1: A payoff matrix of Chicken
Swerve Straight
Swerve 0, 0 -1, +1
Straight +1, -1 -10, -10
Fig. 2: Chicken with numerical payoffs[4]

The only pure strategy equilibria for Chicken are (straight, swerve) and (swerve, straight). Likewise, in Dr. Strangelove‘s game of nuclear chicken, the pure strategy equilibrium is to allow one country to be the nuclear power and for the other not to threaten:

Disarm Bomb
Disarm Tie, Tie Lose, Win
Bomb Win, Lose Armageddon, Armageddon
Fig. 3: Nuclear Chicken

As can be seen, the game might be won by either the US or USSR by striking first. One strategic move that can be made in Chicken is commitment to a credible threat (called Brinkmanship) — e.g. you could rip out your steering wheel and throw it out the window, demonstrating that your car must go straight and that your opponent must swerve to avoid mutually assured destruction.

This is the strategy that the USSR attempts to play in Dr. Strangelove, and it would have been effective if only the US and USSR both had known that the other had effectively ripped out their steering wheels. And even so, destruction of all life would not have been assured but for one deranged General Ripper’s conspiracy theories.

Game theory is often criticized for its flippance toward irrationality. What about the General Rippers of the humanity, they ask? The whole point is far from lost if we keep it a secret, because rational choices are by their nature not a secret; they can be teased out and brought out into the light. Why not tell the world?

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[1] Paul Strathern, Dr Strangelove’s Game: A Brief History of Economic Genius. There’s also evidence that Dr. Strangelove was modelled on Wernher von Braun, the former Nazi inventor of the ballistic missile (Jeff).
[2] This is known as a first-mover advantage.
[3] Dr. Strangelove in the film.
[4] Example from Wikipedia.