Some thoughts on the fiscal cliff negotiations and Schelling points (I intend to keep this limited to political strategy, not taking sides on substantial policy questions):
The way Congress Republicans have been approaching the negotiations has perplexed some observers. The basic point is, the Bush tax cuts are scheduled to expire at the end of the year. Republicans want to extend all of them, but they are powerless to do it, controlling only the House. Democrats want to extend only those for “the middle class” and let those for “the rich” expire (cutoff is at $250K income). At the same time, there are a bunch of other negotiations going on on spending cuts, tax code reform, debt ceiling, etc.
Since all the tax cuts are going to expire automatically at the end of the year anyway, it seems to make sense for the Republicans to “concede” the increase in taxes for the rich, using this concession to bargain on other items on the agenda, before December 31st. However, most discussions I’ve read see it as very unlikely that they will do so.
As strategy, this seems to make little sense; after the end of the year, reducing the (automatically hiked) tax rates for the middle class is something on which both Ds and Rs agree, so neither has leverage on this, and if anything it is the Ds who will now be able offer some slight reduction in the tax rates of the rich to extract concessions from Rs on other issues. There may be some complicated strategy on which the R conduct makes sense in a direct utility-maximizing way, but one alternative plausible explanation is in terms of Schelling points and deontological rules.
Many Republicans have signed a pledge to never raise taxes, and even those who haven’t or don’t consider it binding see “never raising taxes” as a key item of their policy agenda. This codifies what we call here an Ethical Injunction: “Thou shalt not raise taxes”. This deontological rule, agreed upon by Republicans decades ago, does not come with a qualification “unless they will rise anyway ”. Violating the rule is eliminating a Schelling point on which Republicans can coordinate and agree. The situation is like the classic example of a river being a natural boundary between two countries, so that if Country A asks for a few miles of territory on B’s side of the river in exchange for intrinsically more valuable concessions on other fronts, B refuses because then the Schelling point is lost and A can ask for more and more territory in the future. Republicans may fear that if they vote “Aye” on tax hikes before December 31st, regardless of how meaningless this “concession” is in substance in the current situation, this will settle a precedent that they “can” raise taxes and then in subsequent negotiations they may find themselves pressed to do it again and again.
Its interesting that you mention Schelling and the fiscal cliff negotiations. I recently wrote a detailed blog post about this you may be interested in. I would love your feedback as well:
Interesting post! I agree with much of your analysis but disagree with your main conclusion that:
Far from being undesirable, we actually need more “fiscal cliff” like deadlines in the future – because in Washington today that’s the only way the parties are going to get serious, put their cards on the table, get a partial solution, and (gasp!) realize that in the end, the compromise was mutually beneficial.
I think creating more scenarios like the fiscal cliff to force “compromise or else…” is a recipe for disaster: some time is bound to arrive where no compromise will be reached despite the elaborate set-up to force one lest disaster follows… and disaster will follow.
Instead, I think that the parties should abandon the concern with long-term policies (like the size of the government, the deficit and entitlement programs, two decades from now) that require Grand Bargains, and address only short and medium-term problems where compromise might be easier, because they cannot foresee what unexpected problems and societal changes there will be over such long times, and their current decisions cannot bind the future government anyway. In addition, the US should try incremental moves (like eliminating or reducing the filibuster) that make it easier for an elected party to enact its agenda without so much veto power to the opposition, thus eliminating the need for Grand Bargains. Let the voters throw out the rulers if their policies are too extremely partisan.
Are there any predictions being made on the possible outcomes of the “fiscal cliff?” I’ve been trying to find information, but I’m either treated to various articles that leave a distinctly alarmist taste in my mouth, versus people who seem to be saying everything will work out just fine.
If you mean predictions as to “what will actually happen”, this depends heavily on the outcome of the current negotiations, and I don’t think anybody has a reliable idea at this point.
If you mean predictions as to “what would happen if absolutely no change to current law was made”, then I think the standard prediction is that there would be a negative hit to the US economy from the “austerity”, pushing it back into recession. But this would happen over a period of several months, not right away on January 1st, leaving quite a lot of time for a compromise changing the laws to be negotiated. So there is no immediate reason for alarmism. In addition, this prediction assumes no extra non-legislative policy measures, such as new monetary stimulus by the Fed, that could potentially soften the impact of the cliff.
I don’t think there are any predictions that can be identified as very reliable a priori, to be honest; economics is hard, and economics combined with politics is super hard.
If you want to have a good negotiating position you don’t signal publically beforehand that you are comfortable to give up specific demands that you made in the past.
The speculations referred to what smart observers following carefully the DC chatter believed would happen, not the official public statements. Or rather, it is the impression I got from reading some such observers. This more recent post implies that I was wrong and that a December deal raising taxes is looking plausible after all.
You are making a mistake if you consider journalists to be “smart observers”. Just look at science journalism.
Science is even a field where scientists don’t have much to gain by deceiving journalists about the true nature of their scientific findings.
Politics is on the other hand a field where a lot of actors have a lot to gain by getting journalists to write stories that don’t accurately reflect the truth.
Some thoughts on the fiscal cliff negotiations and Schelling points (I intend to keep this limited to political strategy, not taking sides on substantial policy questions):
The way Congress Republicans have been approaching the negotiations has perplexed some observers. The basic point is, the Bush tax cuts are scheduled to expire at the end of the year. Republicans want to extend all of them, but they are powerless to do it, controlling only the House. Democrats want to extend only those for “the middle class” and let those for “the rich” expire (cutoff is at $250K income). At the same time, there are a bunch of other negotiations going on on spending cuts, tax code reform, debt ceiling, etc.
Since all the tax cuts are going to expire automatically at the end of the year anyway, it seems to make sense for the Republicans to “concede” the increase in taxes for the rich, using this concession to bargain on other items on the agenda, before December 31st. However, most discussions I’ve read see it as very unlikely that they will do so.
As strategy, this seems to make little sense; after the end of the year, reducing the (automatically hiked) tax rates for the middle class is something on which both Ds and Rs agree, so neither has leverage on this, and if anything it is the Ds who will now be able offer some slight reduction in the tax rates of the rich to extract concessions from Rs on other issues. There may be some complicated strategy on which the R conduct makes sense in a direct utility-maximizing way, but one alternative plausible explanation is in terms of Schelling points and deontological rules.
Many Republicans have signed a pledge to never raise taxes, and even those who haven’t or don’t consider it binding see “never raising taxes” as a key item of their policy agenda. This codifies what we call here an Ethical Injunction: “Thou shalt not raise taxes”. This deontological rule, agreed upon by Republicans decades ago, does not come with a qualification “unless they will rise anyway ”. Violating the rule is eliminating a Schelling point on which Republicans can coordinate and agree. The situation is like the classic example of a river being a natural boundary between two countries, so that if Country A asks for a few miles of territory on B’s side of the river in exchange for intrinsically more valuable concessions on other fronts, B refuses because then the Schelling point is lost and A can ask for more and more territory in the future. Republicans may fear that if they vote “Aye” on tax hikes before December 31st, regardless of how meaningless this “concession” is in substance in the current situation, this will settle a precedent that they “can” raise taxes and then in subsequent negotiations they may find themselves pressed to do it again and again.
Its interesting that you mention Schelling and the fiscal cliff negotiations. I recently wrote a detailed blog post about this you may be interested in. I would love your feedback as well:
http://options-trading-notes.blogspot.com/2012/12/how-i-learned-to-stop-worrying-and-love.html
Interesting post! I agree with much of your analysis but disagree with your main conclusion that:
I think creating more scenarios like the fiscal cliff to force “compromise or else…” is a recipe for disaster: some time is bound to arrive where no compromise will be reached despite the elaborate set-up to force one lest disaster follows… and disaster will follow.
Instead, I think that the parties should abandon the concern with long-term policies (like the size of the government, the deficit and entitlement programs, two decades from now) that require Grand Bargains, and address only short and medium-term problems where compromise might be easier, because they cannot foresee what unexpected problems and societal changes there will be over such long times, and their current decisions cannot bind the future government anyway. In addition, the US should try incremental moves (like eliminating or reducing the filibuster) that make it easier for an elected party to enact its agenda without so much veto power to the opposition, thus eliminating the need for Grand Bargains. Let the voters throw out the rulers if their policies are too extremely partisan.
Are there any predictions being made on the possible outcomes of the “fiscal cliff?” I’ve been trying to find information, but I’m either treated to various articles that leave a distinctly alarmist taste in my mouth, versus people who seem to be saying everything will work out just fine.
If you mean predictions as to “what will actually happen”, this depends heavily on the outcome of the current negotiations, and I don’t think anybody has a reliable idea at this point.
If you mean predictions as to “what would happen if absolutely no change to current law was made”, then I think the standard prediction is that there would be a negative hit to the US economy from the “austerity”, pushing it back into recession. But this would happen over a period of several months, not right away on January 1st, leaving quite a lot of time for a compromise changing the laws to be negotiated. So there is no immediate reason for alarmism. In addition, this prediction assumes no extra non-legislative policy measures, such as new monetary stimulus by the Fed, that could potentially soften the impact of the cliff.
I don’t think there are any predictions that can be identified as very reliable a priori, to be honest; economics is hard, and economics combined with politics is super hard.
Thanks. Good to know.
If you want to have a good negotiating position you don’t signal publically beforehand that you are comfortable to give up specific demands that you made in the past.
You rather negotiate mostly in secret.
The speculations referred to what smart observers following carefully the DC chatter believed would happen, not the official public statements. Or rather, it is the impression I got from reading some such observers. This more recent post implies that I was wrong and that a December deal raising taxes is looking plausible after all.
You are making a mistake if you consider journalists to be “smart observers”. Just look at science journalism.
Science is even a field where scientists don’t have much to gain by deceiving journalists about the true nature of their scientific findings. Politics is on the other hand a field where a lot of actors have a lot to gain by getting journalists to write stories that don’t accurately reflect the truth.