A Game of Chicken With the Debt Ceiling?

When I was 16 a friend of mine challenged me to a game of chicken.   I had my 1963 Chevy Bel Aire, he had a 1966 Chevy Nova, both old cars.   He described the game — we’d go to a parking lot, start driving toward each other at high speeds, and the first to veer away would lose and have to buy the other a pizza and root beer.    After thinking it over we decided not to, and just went for the pizza.

In a game of chicken the key to winning is to convince the other person you are actually crazy enough to keep going straight ahead even if it means a potentially fatal head on collision.   The other person, realizing that his or her opponent might actually refuse to swerve will ‘chicken out’ and swerve away first, losing.   Two top quality players will wait until the last possible second and both swerve away in time to narrowly avert a crash.   That’s exciting!

Right now in Washington it appears  something analogous to a game of chicken is taking place.   The Republicans, in control of the House but neither the Senate nor the Presidency, what to use the debt ceiling issue to push through legislation that they would otherwise have no chance to pass given their relative lack of power.    The President, recognizing that the House needs to pass something, has tried to broker a compromise, promising significant spending cuts in exchange for both letting the Bush tax cuts expire and closing some loopholes.

Many Republicans, especially those in the Senate and probably House Speaker John Boehner, recognize that this is a good deal for them.    The cuts are significant, the revenue increases minor (still far below what taxes were after Reagan’s tax cut) and the people most upset are Obama’s own liberal base.   Take this deal and the GOP might be setting up a split in the Democratic party.

Speaker Boehner, however, has a problem with his own party — many of them seem to believe that compromise is a lack of principle, and they should stand firm.   So what if the government defaults — most of them don’t like government anyway!    Going into 2012 with the Democrats potentially threatening to take back the House, Boehner doesn’t want a Republican civil war, so he has to get a deal acceptable to his majority.

President Obama’s efforts to negotiate a deal went far, but ran into a barrier when the “Gang of Six” put forth their ideas.  This group of moderate/conservative Democrats and Republicans apparently had more revenues in their plan than Boehner and Obama had been talking about.   Politically, Obama now realized that to get a plan past the Democratic Senate he could not be closer to the GOP side than the Gang of Six was.   He had to increase the new revenues in his compromise plan, causing Boehner to walk out.

Realizing that the Senate rather than Obama was the big hurdle, Boehner sat down to work out a deal with Senate Majority leader Harry Reid.   After all, just as the Republicans in the House want something they can support, the Democrats in the Senate aren’t going to sign on to a partisan Republican bill.   Yes, the House has to pass it, but so does the Senate — and then it has to be something the President can sign.

Sunday night those meetings broke up without a positive conclusion, causing markets in Asia and Monday morning in the US to go down, fearing that the world’s largest economy and major super power might become insolvent.   Symbolically, this would mark the date when the US officially lost its perch as the world’s dominant power.   The potential chaos this could cause in markets scares even the most seasoned investors and bankers.     No one wants this, and some of the biggest donors in the GOP have sent a message to Senate Minority leader McConnell and Speaker Boehner that this would be catastrophic for the US.

Headlines Monday morning told of the talks breaking down, Boehner accused Reid of not bargaining in good faith, and Reid shot back that the Republicans want it “their way or the high way,” unable to compromise.   Meanwhile both the Treasury department and the Federal Reserve are working on contingency plans of what to do if the US defaults, silent about the specifics so as not to cause more market speculation.

To me this looks like a high stakes game of chicken.  Both sides know a head on collision would be potentially fatal to the US economy.     The Democrats come into this a bit stronger.   Besides having both the Senate and the Presidency, they’ve successfully cast this as the Republicans trying to simply get their way, unwilling to compromise.   Indeed, most Democrats in the House believe that compromise proposals out there already give too much to the GOP, they’d prefer the President to be less willing to compromise.

With time running out to reach an agreement to have it passed and signed by August 2nd, the two cars are racing towards each other.   Reid and Boehner stare coldly at each other as they step on the gas, determined to get the other to swerve first — to give in to their demands.   The analogy isn’t perfect.   To “swerve at the same time” they have to find ways to craft a compromise that each side can accept, even without enthusiasm.   There could be some creative flourishes (agree to consider a Balanced Budget amendment later?) or symbolic victories that can allow each side to “save face” for the concessions they make.

It appears the GOP would like to have the debt ceiling raised for a short period, to bring the issue back around election time.   That’s risky for both them and the Democrats.   It also could get a very negative reaction from markets.  The Senate probably will not back down on that — at least not in the form of  the GOP would prefer.

My prediction is that they will “swerve at the same time,” an argument will be made, each side will claim they gave up more than they wanted to, but it was necessary for the good of the country.   They’ll then say that if the voters strengthen their side in 2012 they’ll be in a stronger position, and this will become a campaign issue.   President Obama will hail the compromise, and this bit of political theater will pass.

Then again, sometimes in a game of chicken the two cars crash, even if both drivers realize too late that they’ve waited too long and try to swerve away.   Small miscalculations can have devastating consequences.   So now is the time that Reid and Boehner have to show they’re competent to steer their parties vehicles in this high stakes game.

Though as entertaining as this is, one has to wonder if this really is the best way to obtain compromise and help the country out of an economic crisis?

  1. #1 by Black Flag® on July 25, 2011 - 16:13

    They will remain in gridlock.

    Obama will order the checks to be sent out. The propaganda machine will cheer.

    Most voters will accept it. The recipients want their checks.

    If he gets away with it, as I think he will, this will send a message to Congress: “You are irrelevant and pointless”

    I think this will be an accurate message.

    The country will have taken a giant step toward unchecked executive power.

    The precedent will be set.

    There will be a legal protest, but I think the Supreme Court will uphold Obama. It will find a way to sanction the decision.

    Once this is behind us, the deficit will be permanent.

    It will be clear to everyone that there will be no brakes applied by Congress.

    You can calculate the rest.

    • #2 by Scott Erb on July 25, 2011 - 17:00

      If that happens the legal argument will be the 14th amendment which can be interpreted as requiring the US to pay its obligations. I think that’s a weak argument, I suspect the Court would not uphold it.

  2. #3 by Black Flag® on July 25, 2011 - 19:24


    A visual on the size of the problem.

  3. #4 by modestypress on July 25, 2011 - 19:44

    Is money REAL?

    In a time of thirst, can you drink it? In a time of hunger, can you eat it? Even if the money comes in the form of gold coins, which a lot of people think are “real money,” they are hard to drink, chew, and swallow. On the other hand, without symbols (such as coins or paper money) it is hard to convince the well driller to drill a well or the farmer to deliver the beans and eggs to your door.

  4. #5 by Black Flag® on July 25, 2011 - 20:07


    Many, many people are very confused about what is money.

    Money is merely another economic good in a market place, like any other economical good and obeys every law of economics like every other economic good in the market place.

    It’s only other quality it is the most valued economic good in that market place.

    Whether it is a piece of colored paper, a gold coin or a pinch of salt does not make it money. People’s valuation of these things make these goods “money” (at one time or another).

    Money is real – you hold it in your hand, right?
    A diamond is real, and you can’t eat it or drink it either…..

    Money is not a matter of use or usefulness, it is a matter of value.

    If I gave you $1 million dollar bills, you would not turn up your nose!… because you value those pieces of paper very highly because other people also value those pieces of paper very highly too and are willing to trade other goods they have for those pieces of paper. In other words, you can trade money for other goods very easily.

    Because it is the highest valued commodity, it trades easily because every one wants it.
    Everyone wants it because it is so easy to trade with it for other things they want.

    When you hold a proper understanding of what is money, you can easily understand economic effects of supply and demand on money.

    Like any other economic good, the more supply, the lower the price. Same with money – we call this “inflation”, but really it is merely another way to express supply/demand. If there is a huge supply of money, its price falls – but because everything is priced in terms of money, a fall in the price of money equates to a rise in prices of other goods.

    Deflation is the other way: money is in short supply and its price goes up. But as things are priced in terms of money, we will see the value of money go up, which means it takes less money to buy other goods – the price of goods goes down in terms of money.

    ..so on and so forth…

  5. #6 by Michael on July 26, 2011 - 03:38

    Is there some way that the President and the Speaker can provide each other with enough cover to carry an agreement with revenue and cuts that make a big dent in the debt?

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