The Federal Deficit and the Prisoner's Dilemma

Reading this weekend's news about the impending release of the House Republicans' budget proposal for FY2012, I couldn't help but think of the Prisoner's Dilemma.  (Totally random aside: shouldn't it be punctuated "Prisoners' Dilemma"?)  For the unintiated, the Prsioner's Dilemma is a classic problem in game theory which is often used to represent the negative social consequences of individuals' rational efforts to pursue self-interest.  Wikipedia summarizes the setup, which should be pretty familiar to most viewers of Law and Order:

Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated the prisoners, visit each of them to offer the same deal. If one testifies for the prosecution against the other (defects) and the other remains silent (cooperates), the defector goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation.

To minimize the total amount of time the suspects spend in jail, both of them should keep silent, i.e. both should play the cooperate strategy.  However, each suspect is better off individually if he rats out the other suspect (i.e. plays the defect strategy)---no matter which strategy the other suspect has chosen for himself.  If the second suspect stays silent, the first suspect can avoid jail altogether by defecting and testifying for the prosecution.  If the second subject rats him out, the first suspect reduces his prison sentence from ten years to five years by also working with police.  In game theory jargon, ratting the other guy out (defecting) is a "dominant strategy."

There are some obvious parallels between the Prisoner's Dilemma setup and the current politics of the federal deficit.  Unless you are Paul Krugman, the federal deficit (and the related problem of the national debt) is an objectively dire public policy problem.  Eliminating the deficit (and paying down the debt) will require substantial reductions in federal government spending (including spending on popular entitlements like Social Security and Medicare as well as outlays for national defense), increases in federal revenues (raising taxes), or some combination of the two.  Neither cutting spending on programs that people like nor raising taxes is likely to endear a political leader or party to the voting public.  Yet, we are collectively up a creek without a paddle if the deficit is not resolved.

I am afraid that our two major political parties find themselves in the following situation.  Each party may seriously participate in an effort to eliminate the federal deficit (cooperate), or it may opt substantively out of the process and demagogue the other party's efforts to balance the federal budget (defect).  If both parties cooperate, they could eliminate the deficit (in some sense, creating a public good) and split the electoral liabilities for making a compromise that includes difficult and unpopular choices.  However, if one party defects while the other cooperates, the balanced budget will go away and the defecting party will reap the electoral rewards of ensuring the worried mass of voters that they may continue to receive their lunches for free (while the patsy party collects the more modest benefits that accrue from trying to actually address the budget problems).  If both defect, the balanced budget is gone, but the parties are able to split the electoral liabilities of failing to address the deficit.  Presuming that both parties value short-run electoral advantage over long-term (and less certain) public goods, both parties have a dominant strategy to defect and leave the budget situation largely unresolved while they continue to squawk at one another.

If this is the setup, we are screwed, quite frankly.

I hope the setup is wrong in at least one of two ways.  First, I hope that my assumption about the parties' preferences is wrong.  Even if parties are generally more sensitive to electoral imperatives than policy outcomes, I hope that the magnitude of the deficit-debt problem tips the balance in that calculus and create rational incentives for cooperation.  Second, I hope my assumption about the electorate's response to defection is incorrect.  The bad defect-defect equilibrium is a product of the asymmetry in electoral incentives for serious policy work relative to those for cynical attacks on difficult but necessary policy decisions.

I want to believe in statesmanship and the wisdom of ordinary citizens, but I am not exactly optimistic about either one at the moment.