Game theory and the budget - Marginal REVOLUTION

Matt Yglesias writes:

…the right is big government’s best friend…You have a government set to steadily increase spending on autopilot as a result of demographic change and rising health care costs. And you have a Democratic President urging congress to enact spending cuts. But you have conservative politicians refusing to make a serious effort to reach an agreement out of some blend of taxophobia and fear of giving the President a win. The result, again, whether the right realizes it or not, is a gift to the wing of the Democratic Party that disagrees with Obama about the desirability of enacting spending cuts.

I tend to agree with this, but it’s always worth trying to solve for the case where one is wrong. The strategy of “no trade” with Obama could be rational for the Republicans if:

1. Not much will happen this time around anyway, so the Republicans are investing in credibility for a future bargain, perhaps post-2012.

2. Republicans think that prevailing economic conditions will turn public opinion in their favor, over time, and so a later bargain is preferable.

3. Republicans think that if a fiscal crisis comes, drastic spending cuts are especially easy to enact, relative to tax increases, and they are willing to risk that crisis. It’s hard to argue that this belief is true (reindexing benefits to a saner level takes a lot of time), although I would not rule out that some Republican Party politicians may hold it.

4. Wait for party leaders to move first, for political cover, and that is a dragons and ballroom dancing game (pdf).

And there is always:

5. Republican politicians are investing in the value of their non-electoral options and that implies group loyalty above other considerations.

None of us know the true model, but we all know the literature on irreversible investment and option value. If you’re not sure of the true model, wait rather than commit. Here is Jeff on deadlines. Another way to put this point is that we can’t, from current Republican inaction, infer much about the likely final outcome.