For what it's worth, the mainstream media seems to have some understanding that this is what happened (google "fiscal cliff chicken").

Actually I thought they would reach a deal *right after* they went over the cliff, cos that's what Tyler Cowen or some other prominent econblogger said would happen!

I've found it completely obvious--too obvious to be worth mentioning--that brinksmanship is part of what was going on here. And I'm generally of the view that people are actually pretty rational given their incentives and desires. But I won't claim to have know this is what would happen three months ago. Here's why:

First of all, I'd point out an apparent prediction between your saying it will continue happening this way forever and "this [brinksmanship] is very dangerous." There are lots of ways this sort of thing can go wrong, and I'm going to sketch some that are specific with respect to US budget negotiations.

One issue is that it's not always obvious what constitutes "the last second." I know Matt Yglesias was arguing that the pain from the fiscal cliff isn't something that was going to happen all at once; it was something that was going to happen gradually, and furthermore Obama would be a better negotiating position post-fiscal cliff because what would have been a tax increase pre-fiscal cliff would be a tax cut post-fiscal cliff.

And in fact what happened is we technically went over the fiscal cliff for two days (the bill was passed on January 1st and signed by Obama on January 2nd) and Republicans claimed they got a tax cut while Obama claimed they got a tax increase (see here: http://www.slate.com/blogs/moneybox/2012/12/31/last_minute_deal_metaphysical_and_absurd.html). Did you know that would happen three months ago?

Furthermore, the two sides may have different ideas about where the fair 50-50 split lies, and what their "nuclear options" are. Take the debt ceiling crisis, which we'll be seeing a rerun of soon. You may think the nuclear option is to hit the debt ceiling and let the economy go to hell, and the 50-50 split will involve agreeing to a repeat of the crisis down the road. But some people think that Obama has another option of avoiding the whole thing through an absurd loophole and the 50-50 split is to get rid of the debt ceiling forever while closing the loophole (http://www.slate.com/blogs/moneybox/2013/01/03/platinum_coin_option.html).

There are other options some people think Obama has. Like deciding to claim the debt ceiling is unconstitutional. Or deciding to hit it and then pay people who are especially strong supporters of the Republican Party in IOUs.

The fact that none of this happened last time is some evidence that it won't happen next time... but maybe Obama will decide *constant* crises are unacceptable, and this time the fair 50-50 split involves abolishing the debt ceiling forever. Which comes with the risk that he'll try a really extreme legal maneuver only to have the Supreme Court or whoever tell him that he didn't actually have that option and now the economy is going to hell.

Which is a long-winded way of saying that just because there are uncertainties here, and just because there was a game-theoretic rationale for the way our leaders acted during the Cold War doesn't mean their behavior wasn't also, in some sense, completely insane.

"WHEN YOU SEE PEOPLE WHO SHOW EVERY SIGN OF BEING SMART GUYS - LIKE GETTING ELECTED TO LEAD THE MOST POWERFUL COUNTRY IN THE WORLD -

In what way is that a sign of being smart? Intelligence has little to do with electability.

In any case, I think the fundamental issue here is only partly brinksmanship, and is, perhaps, even more about Best Alternative to a Negotiated Settlement. Whenever you're negotiating something, you always keep in mind the effect of NOT reaching a deal -- if you walk away from the table, what happens?

And, for many members of Congress, the BANS was better than any deal offered.

The "fiscal cliff" is far, far from ideal. But, from a deficit-hawk point of view, it's not all that bad. You get significant tax increases, and massive spending cuts, which is exactly what a deficit-hawk wants.

A "supply side deficit hawk", aka "someone indebted to the Tea Party for their election" doesn't have a real problem with the "cliff", either. They get the budget cuts they want, and, although they're really against the tax hikes, they DON'T get BLAMED for them, so it doesn't hurt their re-election chances. Indeed, they would now have the opportunity to fight to re-lower taxes, which would HELP them.

A liberal like me likes the massive defense cuts, likes the higher taxes on the highest income bracket, and doesn't mind the middle class tax increases. I hate the entitlement cuts, but think that some of that can be fixed through more Obamacare legislation, and hate the discretionary spending cuts, but think that some of THAT might be fixable through further legislation.

So -- the real question here is: the deal that was passed -- better or worse than not passing anything, and for whom?

"Massive defense cuts" in the middle of a war are rarely a good idea, and lead to a very obvious possibility of disaster outside the realm of pure economics: to wit, we may find ourselves faced with an immediate or near-immediate threat (such as Iran deploying nuclear weapons) demanding military action, and find that we can't afford to handle it. In which case we may discover that we're back to Cold War brinksmanship, but with the signal difference that we really will be playing against madmen.

We're not functionally in the middle of a war, in the sense that the phrase would mean historically. Our homeland is completely unthreatened, and we could get the fuck out of Iraq and Afghanistan with no danger to america beyond loss of face.

Which World War threatened out homeland?

The one where our involvement started with our homeland being bombed? (i.e., the Global War On Terror)

dealing with people who do not recognize this as a war, one presumes they will not recognize it as a World War, either, and speaks their language. 0:)

This is a variant of and implication deriving from Only America Is Real. If Only America Is Real, then obviously any war from which we withdraw goes away, because foreign Powers stop existing when we stop paying attention to them.

This also meshes which the weaker version of the delusion: Only Acknowledged Great Powers are Dangerous, which has been with Mankind since the emergence of the first Great Powers sometime in High Antiquity. This assumes that being acknowledged as a "Great Power" is what makes a State powerful, rather than that it is a State's power which makes one an acknolwedged "Great Power."

You've seen this already by implication: note that drethelin ignores the threats posed by a potential (nuclear-armed) Iran or (Taliban-influenced) Pakistan? He's doing it because they are not "Great Powers." For that matter, while he probably acknowledges that China's a Great Power (it's difficult to ignore this in the modern world), I don't know if he realizes that India has sufficient might to have earned that status as well.

He does not grasp that the laws of physics don't care what status one affords a State: its nuclear and other weapons work just fine regardless of the title he gives their owners.

I was kidding, the World War where our involvement started with the bombing of our homeland was actually World War 2.

One notes that in fact Hawaii was a terriority at the time.

Our homeland is completely unthreatened, and we could get the fuck out of Iraq and Afghanistan with no danger to america beyond loss of face.

Quite aside that "loss of face" is dangerous in and of itself (since it invites aggression), your statement is regarding a lack of threat to the homeland is demonstrably incorrect. The war aganist the Islamists began on 9-11-2001 with an attack on our homeland, showing that our enemies desire to launch such attacks. Indeed, there has been a drizzle of terrorist attacks on the American homeland since 9-11 -- what Al Qaeda hasn't been able to do is coordinate another large-scale strike, which may have more than a little to do with the way in which we've been hitting them day after day (look up "spoiling attack").

Assuming that we simply pulled out of Iraq or Afghanistan, then, how exactly would this action end the war? Al Qaeda would still be in the field, and now able to operate abroad with little interference from our forces, thus having the time and resources to strike new blows against our homeland. The Taliban would exercise greater power in Pakistan, and might well succeed in getting an overtly Islamist regime in power over that atomic-armed country. There would be no obstacle to Iran acquiring atomic weapons.

Our pullout would not have ended the war: there would have been no surrender of either side, whether unconditionally or on terms. There might be a treaty or truce, but how could we trust any such agreement with the jihadists? They have never honored such with India or Israel: why would they be more likely to honor one with us?

Seriously, you need to explain just how you imagine merely getting out of Iraq and Afghanistan would end the war. You should keep in mind that the rest of the world doesn't go away when we get bored and walk away. Real life isn't a computer-game.

Huh, I guess technically the US is still occupying Afghanistan.

Even if the US were to remain at war with Iraq and Afghanistan indefinitely, the expensive military stuff isn't necessarily useful in context. US doesn't need better airplanes or carriers or missiles to continue fighting those wars, and I suspect remote control drones aren't all that expensive comparatively.

We haven't been at war against Afghanistan since 2002, or Iraq since around 2004, and we haven't been significantly fighting in Iraq since around 2008. If our war in Afghanistan and northwestern Pakistan was our only concern, you'd be quite correct.

The real dangers are presented by Iran, and possibly Pakistan if the Pakistanis overtly switch sides. Notice that they've more or less admitted they've covertly switched sides since their outrage at our killing of Osama bin Laden -- which makes it kind of obvious that they wish us ill.

And yes, we do need to keep up our carrier and air and missile strength to deal with Iran and Pakistan, both of which are Regional Powers (and Pakistan a Regional Great Power, given its possession of dozens of nuclear weapons).

I'm inclined to think that intelligence has a lot to do with electability-- but the intelligence may only be getting applied to getting elected.

Thank you for that excellent summary!

I think an additional problem is that, unfortunately, when everyone says "we won't compromise WHATEVER HAPPENS" often enough, they start to believe it, and in order to make it convincing, they spend a lot of time coming up with reasons to convince their supports its a reasonable thing to do. And then it's never clear if they will actually compromise at the last second, or if they've gone too far and won't.

I guess you could find out with a sufficiently detailed look at the compromises actually reached: are they actually 50:50, or does one side consistently get an advantage be being less sensible than the other?

But if either side admits that they care about disaster befalling the US economy, then if the other does not so admit, this second side can blackmail the first side for whatever they want.

Not sure that was the dynamic exactly. Pretending not to care about the economy may be good for the fiscal cliff negotiations, but is likely bad for getting re-elected.

That depends on what congressional district you represent. If a large majority of your constituents don't follow the news, and/or don't believe there's really a 'cliff', and/or like the idea of crashing the economy ("What if the job creators all go Galt?") -- then that may be a good way to get re-elected.

How to better understand the US economic system - Old Deuteronomy 8:18

Fiscal Cliff put in a much better perspective.

Lesson # 1:

* U.S. Tax revenue: $2,170,000,000,000 ( that's.. trillions! )

* Fed budget: $3,820,000,000,000

* New debt: $ 1,650,000,000,000

* National debt: $14,271,000,000,000

* Recent budget cuts: $ 38,500,000,000


Let's now remove 8 zeros and pretend it's a household budget:

* Annual family income: $21,700

* Money the family spent: $38,200

* New debt on the credit card: $16,500

* Outstanding balance on the credit card: $142,710

* Total budget cuts so far: $38.50


Got It ?????

OK now,

Lesson # 2:

Here's another way to look at the Debt Ceiling:

Let's say, You come home from work and find
there has been a sewer backup in your neighborhood....
and your home has sewage all the way up to your ceilings.

What do you think you should do ......

Raise the ceilings, or remove the shit?


amen! if you can do that, remove the shite, i want to invest with you!!

As others have observed elsewhere:

a) running a country is not the same as running a household;
b) false analogies contribute nothing to the debate;
c) debt is not the same as deficit.

a) running a country is not the same as running a household;

How is it different in any way which affects the outcome of long-term deficits? If a country consistently spends more than it takes in, its wealth will decline: declaring political independence doesn't render one's resource utilization magical.

Yes, we can always print more money, or default on our debts. So can a household, in the sense that "money" are simply "IOU's" writ large. A household which keeps putting out IOU's or defaults on them will eventually find no merchants willing to lend to them. A country, being bigger, takes longer to reach this point, but the end is equally inevitable.

The one thing a country can do that a household can't (outside of anarchy) is gain wealth by conquest. But I notice that nobody in the political mainstream has as yet considered

america is impossible to actually govern, but then so are most households, but it's a never ending debate.. and life goes on with more news commentary than is necessary for a full and happy life. like, wtf is a fiscal cliff? and who made it up? just like einstein if they can't solve the part they don't understand, they ignore it. so, should i invest with you?

"Total budget cuts so far: $38.50"

Should be $385.

Edited at 2013-01-04 03:11 pm (UTC)

i like 38.50 better. it reflects my reality..
; )

There are LOTS AND LOTS of situations where *as an individual* it is to my advantage to borrow money against the hope of future earnings rather than struggle on with what I've got.

For instance if I am unemployed and flat broke it is to my advantage to borrow some money to get things like "transport" and "a smart suit" and "an internet connection" and so forth that I can use to job-hunt and attend interviews.

For instance if I am offered an opportunity to do something that will make me more employable at higher salaries in the future (and I believe that this is true) such as for instance an offer to study for a degree, or train as a plumber, or something - then it is to my advantage to borrow money to pay for it and pay the loan back with my new, higher salary than try to get the money together whilst working minimum wage or on benefits.

For instance if I need a new expensive-thing that I can't afford but can't live without (for instance a house) then it is often (not always) to my advantage to borrow money to buy one rather than to pay money to rent one whilst saving money to buy one later or to choose to rent one and never buy.

It is simply NOT AS SIMPLE as "you shouldn't borrow money". What's important is whether the borrowed money is being spent on things that are going to improve the overall economy such that in future years tax-income will be larger or whether it is being spent on pointless fripperies (like borrowing loads of money for a new TV when you've got a perfectly good one).

There are LOTS AND LOTS of situations where *as an individual* it is to my advantage to borrow money against the hope of future earnings rather than struggle on with what I've got.

Very true. And people do. But if one keeps on borrowing and borrowing, and increases one's indebtedness without increasing one's income, the consequence is bankruptcy. Being an "individual" in the Axis Powers Hetalia sense does not change this basic reality.

What are the countrywide equivalents to "transport" and "a smart suit" and "an internet connection"?

Given that it's conspiciously obvious that we aren't getting them -- indeed we're getting stuff that's the equivalent of "beer, so I can get drunk and not thinking about my situation and not apply for jobs." -- perhaps that's an irrelevant analogy.

Well, you need an economist for questions like that. What do we do NOW so that next year our GDP will have gone up? Well AIUI Keynes would suggest "spend money on large infrastructure projects" because that spending gets money moving around (you pay a bunch of people money) and gets you some nice infrastructure that you can now use. Things like roads, railways, airports, sewers, aircraft carriers, space stations, schools, hospitals.

And then things like the on-going running costs of infrastructure that is supporting your economy. Like, for instance schools - if you didn't educate people then many people would not have the skills to do many types of work.

As if the unions would permit those projects. So we get money wasted on "green energy" companies that then go bust.

As for schools, we have spent more and more and more and more money per student without any increase in what they learn. Cutting back would do no harm.

thanks for the great comment!

ok, so now go deeper, are you working to live or living to work? in today's economy, few can actually afford a house, even with borrowed debt. and the other consideration, is at what rate of interest? my parents purchased a home, worked to pay for it their entire lives and paid 6 times the purchase price to the bank for it in interest in the end. there is a great movie titled money as debt which explains why the current global monetary system is actually a ponzi scheme benefiting a few rich people who set it up in the first place. the carrot they dangle in front of us is that we can actually achieve any of that material wealth. maybe the 1 or 2 %. the rest of us will live with debt and take it with us to our graves. there is an alternative to all of this. it existed before monetary systems, it is tribal. it is called the gifting society. a modern version of it would be pay it forward. the book if you are interested that discusses this is sacred economics by charles eisenstein; http://sacred-economics.com/

The heading. I see what you did there.

I agree for the most part with everyone, but want to remember that even when people show every sign of being electable and competently self-interested, they still generally all but entirely lack abstract thought. See here.
http://www.bbc.co.uk/news/uk-19801666

Remember, never rule out stupidity, or even make it not your strong prior. That should be the whole quote. It doesn't get a conditional.

From a game theory perspective, its interesting to note that not only do we have a brinkmanship issue, its compounded with a free rider dilemma. As a congressman, its in my interest to feign craziness and say "do it my way or the economy gets it" right up until the last minute. But its also in my interest for 50.1% of my fellow congressmen to cave in and compromise, while I say "nope, I'm sticking to my guns". This substantially increases the risk that one side or the other will fail to compromise, even at the last minute.

Add to that the fact that this is an *iterated* game (so my behavior and seeming craziness *this* time will effect how you negotiate with me *next* time) and the toxic stew just gets toxic-er. But always quite rational.

I have to say I am tired of this sort of thing too. Not even neccesarily that they are acting rationally with perverse incentives, but that for all that the leaders may seem to be out of touch with the populace, the populace may be incredibly out of touch with the leaders.

I too once thought as you did, but then I read Woodward's The Price of Politics chronicling the last budget negotiation. If you believe the book, its not (entirely) all just an act, they really are that incompetent. Of course I have trouble believing that because I would hope intelligence and success would be correlated and the game-theoretic argument is a strong one. But, the book did shake my confidence that they know what they are doing.

My reaction was essentially "these people are just as naive and partisan as the people on the West Wing except the writer isn't there to bail them out"

And of course the other comments here about how it is more complicated than a two-party chicken game are on the money.

Good analysis of the politicians.

Alas, they're not the only players. At some point the Treasury is going to roll over a bunch of 90-day notes at an auction and a few of the lenders are going to think, "It's getting a little riskier. I'm going to hold back and wait for a better rate." When not all the notes sell in the first round Treasury will offer a higher interest rate. More buyers will suddenly think, "Oh-oh. We have some folks sitting out. What do they know that I don't? I'd better hang back and see what happens." Then the second round doesn't sell out. And the panic begins. Treasury winds up offering 20%/yr interest on bonds or more and Congress still discovers they can't sell new bonds when people are refusing to buy re-issued old ones.

So it'll come down to spend less (which no one gets elected to do) or print money. The politicians played their moves right but the rules of the game changed on them. And soon we'll be changing to a new (but likely not improved) set of politicians.

What happens is that the Treasury "buys" them, which is to say, they roll the printing press. Hyperinflation -- Weimar Germany -- Zimbabwe -- here we come.