As the country (and the world) watches the ongoing brinkman-ship over the budget negotiations and the debt ceiling, many observers are asking how it could have come this far. There are many explanations for this highly unnecessary crisis, from the surge of the Tea Party to positioning for the 2012 presidential elections. Of course, down-to-the-wire budget negotiations are nothing new to the U.S. political landscape. Most of the time the worst consequences are avoided, but sometimes bad outcomes result, such as the the 1995 shutdown of the U.S. federal government. As a consequence of that shutdown, passports and visas were left unprocessed, national parks closed, and veteran services curtailed.
There is confidence (shared by the financial markets) that a default on U.S. debt can and will still be avoided, in part because the consequences would be catastrophic. But this has not stopped extensive delays, walks away from the bargaining table and other negotiation theatrics. As in any bargaining setting, none of this is unusual.
When there is uncertainty about the resolve of the other side, delays and the willingness to walk away can credibly signal toughness. (This is well known from many negotiations, such as the NFL talks.) And when the parties finally agree after mutual damage has been inflicted, many observers wonder why they could not have agreed in the first place. Game-theoretic models of bargaining point out that the pervasive uncertainty in negotiation agreements may be difficult to reach, as both sides believe they can reach a better deal. But the costs associated with strikes and delays also reduce incomplete information over time, making an agreement possible. That said, in many settings negotiations can break down permanently even after long negotiations.
Through its extensive set of checks and balances the U.S. Constitution was designed to force policy makers into these bargaining situations. The need to find common ground between the President and Congress aims to ensure moderate policies with broader support. Other democracies, such as Great Britain, lack this structure, as parliamentary democracies encourage unity between the executive and its supporting majority in Parliament. There are pros and cons to each structure.
A British Prime Minister can make far-reaching decisions without periods of extensive bargaining. This was last seen in the austerity measures passed in October 2010, which implemented far more radical cuts in the UK budget than discussed in the current U.S. debate. On the other hand, the possibility of radical change can lead to highly disruptive policy changes as different parties assume power, as seen in the waves of nationalization and de-nationalization of British industry in the 70s and 80s.
Such inefficient policy shifts are far less likely in a system of checks and balances, but in addition to the usual bargaining shenanigans known from any negotiation, there are unintended consequences that make the current situation particularly severe. In a paper with Roger Myerson, the 2007 Nobel Laureate in Economics, we have argued that a system of checks and balance can create the incentives for Congress to create inefficient decision structures. The argument goes as follows: In a bargaining situation each chamber wants to get the best deal for its members and their constituents. By creating internal veto players that need to sign off on any deal the chamber, can secure a better outcome for itself.
We are all familiar with this phenomenon when buying a car at a dealership. The salesperson first has to talk to the boss who takes a tougher line and so forth. In the car dealer case we may recognize these tactics as bluffs that can easily be circumvented. A good way to counter this is to have only one person go to the dealer and then consult the absent spouse over the cell phone who, of course, is conveniently busy and does not really want to buy the car, etc. Now we are again on equal footing. In the car dealer case we look at these tactics as bluffs lacking credibility. To give them credibility they need to be ingrained as institutions.
In Congress such internal veto structures can take many forms: strong committee chairs, a decentralized leadership, or super-majority voting rules like the filibuster in the U.S. Senate. The problem is that having more players who need to agree makes a deal less likely. By setting up internal veto players to get the best deal each chamber creates an externality for the other chambers. The consequences are fewer agreements, and an inability to pass tough policies and gridlock.
Increased partisanship makes this problem more severe, but not its root cause; it is a feature of our system of governance. What can be done? First, anything that creates bonds across chambers will be a positive step, whether these are joint committees or strong personal relationships. Second, voters that hold members of Congress accountable for failure to reach agreement change the incentives to engage in intransigent behavior. Third, moving from a system where all chambers have to agree with the President to one where only one chamber needs to sign off would create incentives to remove internal hurdles and lead to more efficient bargaining while maintaining the quintessential features of checks and balances.