When the debt limit increase finally passed, the law included the creation of a 12 person committee, the SuperCongress, which will negotiate the next round of spending cuts and tax increases. If they fail to agree, automatic spending cuts go into effect. These spending cuts include elements that are painful to both parties and this punishment is meant to help the committee members compromise. Also, the automatic spending cuts that kick in if there is no compromise are not as painful for the economy as a failure to increase the debt limit. This seems to be the idea. I have a couple of points.
First, the Democrats partly caved this time around because they feared the Tea Party wing of the Republican House members were “crazy types” who were willing to destroy ratings of American Treasury bonds to get dramatic spending cuts. Next time around, the threat of disagreement has to police the Tea Partiers. Do they really care about defense? If they care about small government and less foreign intervention, they may actually want defense spending cuts. To get these guys to compromise, the disagreement point should have included libertarian-unfriendly policies. Federally mandated rules that everyone should brush their teeth twice a day, extra additives in drinking water, gun control laws and perhaps a constitutional amendment to eliminate the right to bear arms. Stuff like that should have been in the disagreement point.
Second, the parties face a choice of whom to put onto the SuperCongress. Each party will have six members, three drawn from each chamber. The strategic problem is fairly familiar as it resembles Schelling’s discussion of delegated bargaining. Each party has the incentive to appoint extreme members with tough bargaining stances so the other side will be more likely to give in. Paul Ryan is an obvious choices for the Republicans. Dick Durbin is an obvious choice for the Democrats. If both parties pursue this strategy, there will be deadlock and the disagreement point will come out of the SuperCongress (another example of Prisoner’s Dilemma everywhere).
This analysis is normative – it does not account for strategic errors. And there have been plenty of those. During the health care negotiations we had Max Baucus fruitlessly pursuing his Republican friends trying to get them to sign on. Olympia Snowe got a lot of one-one-one face time with the President. As Krugman points out (see also Jon Stewart a couple of nights ago!), the debt limit extension could have been folded into the extension of the Bush tax cuts last December but the President believed John Boehner at his word. So, my guess is that while Nancy Pelosi and the Republicans will follow the rational choice predictions because they are quite clearheaded, Harry Reid will try to forge a bipartisan compromise. Max Baucus is on (and Kent Conrad would have been if he were not retiring). Ben Nelson is a maybe. Why not go take the extra step Harry and nominate Susan Collins or Olympia Snowe to show that you mean well? With that kind of strategy, the Bush tax cuts may get extended again as part of the SuperCongress compromise and remarkably the Democrats might be forced to implement a compromise that is worse for them than the disagreement point.