The Cliff Game

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst. She recently edited and contributed to “For Love and Money: Care Provision in the United States.“

The latest fiscal cliffhanger was only one in a series of games of political brinkmanship in Congress that are likely to continue. So it's worth trying to understand the underlying strategic dilemma.

What political and economic factors are making negotiations over the future of government spending increasingly contentious?

Economists increasingly rely on game theory as a tool for understanding behavior in situations where individual or group actors can't be sure what others are going to do. This is not the kind of theory that informs online games (though you can find plenty of apps that involve little furry animals jumping off or over cliffs).

Rather, it's a theory that emerged partly out of efforts to understand military conflict and is often explained metaphorically by anecdotes that set the stage for a consideration of the relative payoffs to different possible choices.

In technical terms, the fiscal cliff game fits the description of a “game of chicken” made famous in the 1955 film “Rebel Without a Cause.” James Dean plays a young man pressured to prove his manhood by racing his car toward a seaside cliff, in competition with another young man named Buzz. The first one to swerve is a chicken.

In this game, both lose if they follow the same strategy. In the worst case, they both go over the cliff and die. If they both swerve at once, they are both labeled cowards. Each hopes the other will swerve first. In the film, Buzz tries to jump from his moving car but catches his sleeve and goes over the cliff to certain death. Dean's character jumps clear before his car goes over the cliff (sadly Dean died in a car crash just before the film was released).

The outcome reminds us that unanticipated events amplify the uncertainty of the game itself.

Another cinematic illustration, based on two countries th reatening each other with nuclear annihilation, is Stanley Kubrick's zany 1964 film “Dr. Strangelove, or: How I Learned to Stop Worrying and Love the Bomb,” which was influenced by the director's conversations with the game theorist and Nobel Prize-winning economist Thomas Schelling.

Professor Schelling has emphasized several points in his work that are particularly relevant to budget negotiations, including the advantage of “precommitment” that can persuade other actors to swerve (for instance, pretending to tie the steering wheel of the car in place). Acting crazy or irrational, as though one doesn't care about risk, can also serve as an effective strategy.

House Republicans, especially Tea Party enthusiasts, did their best to strengthen their side's negotiating position by refusing to accept the compromise that the speaker, John Boehner, brought to them in late December.

Though a tax deal was approved, one could assert (and some have) that President Obama and the Democrats swerved first, agreeing to compromises that, in historical perspective, reveal significant Republican gains.

This outcome can't be explained by differences in boldness or willingness to take risks. In this game, unlike the classic game of chicken, the payoffs to both players are different. Going over the first fiscal cliff by failing to compromise on tax rates would probably have imposed much greater losses, in the long run, on Democrats than on Republicans.

True, the Republicans might have taken more blame for economic disruption if a tax-rate agreement had not been struck. But a party that hopes to reduce the role of governm ent also gains from political stalemate and dysfunction, which foster disgust with Congressional partisanship. Republicans have the advantage of being able to undermine the very institution they are elected to.

Furthermore, lack of a tax rate agreement would almost certainly have hurt Democratic constituents the most, taking the wind out of any economic recovery and driving unemployment up. Republican constituents are generally more prosperous and less vulnerable. The Democratic vehicle, rushing toward the cliff, was full of women, children, the elderly and the unemployed. It had no air bag or golden parachute. No wonder it swerved first.

The political cliff game, likely to shape the coming debt ceiling debate, is likely to have negative economic consequences, creating uncertainty for both consumers and investors. But causality runs the other way as well, from economics to politics.

Increased inequality of wealth and income reduces the incentives for cross- class cooperation. Our most affluent citizens now have less to gain from cooperation with the rest of us than they once had. They can effectively threaten to opt out and invest elsewhere. They can also invest vast resources in lobbying and electioneering.

As a result, both political parties have altered their strategies. In his book “Unequal Democracy: The Political Economy of the New Gilded Age,” the political scientist Larry Bartels of Vanderbilt University offers evidence that “elected officials are utterly unresponsive to the policy preferences of millions of low-income citizens.”

The intensity of partisan disagreement has a lso increased. James C. Garand of Louisiana State University has published research showing that United States senators from states with high levels of income inequality are more ideologically polarized than other senators.

The greed-is-good game clearly has the potential to drive democracy itself off the cliff.