Game Theory, US Politics, And The Fiscal Cliff

Game Theory, US Politics, And The Fiscal Cliff

Game theory has always been relevant to American politics, and politics generally.  The basic rule in a multiple player game is “create a coalition that has a majority of the voting interest,” and you win.  Because of division of powers, in the US, this is more complex than in a parliamentary setting.  But let’s take as an example the US House of Representatives.

Imagine for a moment that the House has the following breakdown:

  • 45% Democrats
  • 45% Republicans
  • 10% t-party Republicans

I don’t think that set-up is far from the truth, but how would anyone get a majority there?  In this stylized example, there are only three ways to do it:

  • Democrats ally with Republicans, and the center rules. “La grande coalition”
  • Democrats ally with the t-party — good luck with that.
  • Republicans ally with the t-party. (And any proposal gets shot down by Barack Obama, if not the Senate.)

The fourth possibility is that nothing happens, which has been my default view for some time, and we go over the cliff and hit the debt ceiling.

This is why a small part of our legislators can play such a big role.  One can argue that it is unfair, but they are playing by the rules, and the results are not all that different from what European countries with multiple parties experience.  You have to assemble a coalition in order to govern.  Often it is one small party near the center or the edges that holds the balance of power.

Thus, in  situation like this, how could it get resolved? Obama needs to talk to the Tea Party and agree to something mutually acceptable.  Ronald Reagan reached across the aisle to Democrats.  Bill Clinton did deals with Republicans.  Obama needs to do a deal with the t-party, or strike a deal that non t-party Republicans and Democrats could accept.

My view here is different than most, but in my view there are two more intransigent parties here: Obama and the t-party.  If the the non-t-party Republicans and Democrats in the House could agree, that proposal could go through the Senate, and be signed by the President.  Boehner should not negotiate with Obama, but Pelosi.

The alternative is going over the fiscal cliff, which I have argued for a longish amount of time might not be so bad, though Congress will regret ceding control of spending to he Executive Branch.  At least the budget will be balanced, and we will have more certainty on economic policy.  Also, it will force a better negotiation, and sharpen the concerns of voters.

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If we really want to improve our nation, we need to take action to remove the entrenched powers of the Republicans and Democrats, so that other parties can get some representation.  We need to have laws such that anyone can submit a redistricting map, and so long as the map meets the test of other laws, the map with the shortest amount of internal boundaries wins.  Maryland, which is a poster child for corruption, would be far better governed if the power was taken out of the hands of entrenched political interests, and given back to the people.  Or at least a computer, which can be neutral.

Governments mostly reflect cultures, leaving aside gerrymanders and such. If we want to improve the US, we need to improve our own moral nature individually.  If we are weak and lazy as individuals, so will our government be, and it will be our fault collectively that we let a great nation fail.  If a culture fails, the nation will not be far behind.

By David Merkel, CFA of Aleph Blog



About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.