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Can Game Theory Remedy The Debt?
By Cameron Moseley
9/21/14
GTD
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Game Theory and Its Use in the Government
What is game theory, and why is it important to everyday life? Game Theory
is essentially the erudition of strategy and tactics; that is, game theory is the science
behind the decisions we humans make every single day. The real world applications
of game theory are limitless, whether it is deciding on what to order from Panda
Express or how to convince a perpetrator to fold on his partner in crime. Where
game theory is probably most prevalent though is when the government uses game
theory to balance the nations budget and auction off its enormous debt. Let’s take a
look briefly at how this massive debt came to be.
There are two words that can essentially sum up how the United States
accumulated such an enormous debt, government spending. Below is a graph of how
the government has spent its money over the past 10 years.12
Government Spending (trillions)
7
6
5
4
Series 1
3
Series 2
2
Series 3
1
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Fiscal Year
http://www.usgovernmentspending.com/federal_spending_chart
Amadeo, Kimberly. "How the National Debt Tripled Since 9/11." 30 July 2014.
Web. 18 Sept. 2014.
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As one can see, government spending over the past ten years has been
extensive to say the least. With spending over the past few years reaching upwards
of 7 trillion dollars, the gross domestic product of the United States cannot
physically keep up. As of today, the national debt is $17,748,582,890,752.14. There
is a zero percent chance the United States debt will be eliminated in our lifetime, so
the best way to deal with it is to better budget the spending and to auction off as
much of the debt as we can. This is when game theory comes into play.
Balancing the Budget Through Game Theory Tactics
Below is a pie graph showing what percent of the budget was spent on what
aspects of society during the fiscal year of 2013. The United states spent $3.44
trillion dollars while the total revenue was only $2.77 trillion, leaving a $680 billion
dollar deficit. This deficit plus the money that the United States borrowed
contributed to the $6.2 trillion dollars that the government spent in 2013.3
3
"GET INVOLVED." Federal Budget Pie Charts. 1 Sept. 2013. Web. 22 Sept. 2014.
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Balancing the budget is the most difficult task that the House of
Representatives deal with. The Republicans and Democrats can talk about cutting
costs and decreasing the role of the government in society and any other relevant
topic that is discussed in the H.O.R, but what it all comes down to is a vote. Game
theory can help level the playing field for the Democrats or it can shift the vote in
favor of the Republicans. 4
When the time for voting arrives, the results are pretty much predetermined
due to the two-party system, which was in turn caused by the plurality voting
method this nation uses. How do the representatives get to these predetermined
results? The answer is voting blocs and vote splitting.
Voting blocs are essentially a group of voters that base their voting not on
their political party that they are affiliated with but with the issues at hand, in this
case balancing the budget. Voting blocs can be both “long standing and
institutionalized such as for support of business and labor”5. The key behind voting
blocs is the creation of an incentive to cause people to join them in the first place.
Incentives are rewards that are provided due mostly in part to a greater effort being
given. In the case of the voting blocs in the House of Representatives though, there is
what we would call ex-ante incentive. This is essentially a “binding contract [that]
guarantees perfect commitment, so that once voting blocs form, party/coalition
Gimein, Mark. "151 House Republicans Voted Against the Deal. Now They'll Reelect Boehner as Speaker. Huh?" Bloomberg.com. Bloomberg, 2 Jan. 2013. Web. 22
Sept. 2014.
5 "Voting Bloc." Wikipedia. Wikimedia Foundation, 22 Aug. 2014. Web. 22 Sept.
2014.
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discipline is enforceable.”6 An example of a powerful voting bloc within the House of
Representative is the liberal wing of the Democratic Party. The Liberal Wing of the
Democratic Party focuses more on the progression of civil liberties and fair trade
rather than budget spending and democratic initiatives.7 Getting back to the point,
voting blocs use the idea of power in numbers to sway the vote in their favor.
When a Representative thinks about whether or not to form a coalition, he or
she faces what is known as the prisoner’s dilemma. If a rep were to join a coalition,
then their voting power would increase no matter how the other voters act; but, if
all of the reps were to join individual coalitions, then each rep’s voting power would
diminish greatly. So in order to counteract the prisoner’s dilemma, a rep must vote
rationally as well as consider how other reps will vote. The problem though with
voting coalitions in the forms of voting blocs is the fact that it has a negative impact
on society, by isolating those who are not included in given coalitions and ultimately
diminish their average voting power. But because just about every rep is a part of a
specific voting coalition, the voting power of each coalition is diminished anyways. 8
The voting bloc/coalition that is the most active in budget spending in not
only the Democratic Party but also the Republican Party is the Libertarian wing. The
Libertarian wings of both parties are trying to limit the budget spending by trying to
accumulate enough votes to counteract the Balanced Budget Amendment. The
Libertarians are looking to balance the budget, not by increasing tax rates but by
Eguia, Jon X. "Voting Blocs, Party Discipline and Party Formation." NYU Press, 25
Jan. 2011. Web. 22 Sept. 2014.
7“Factions in the Democratic Party.” Wikipedia. Wikimedia Foundation. Web. 22
Sept. 2014.
8 Gelman, Andrew. ""Contributions to Economic Analysis and Policies"" Columbia
University Press, 1 Jan. 2003. Web. 22 Sept. 2014.
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cutting expenditures9. Another major problem that arises from the Balanced Budget
Amendment is the fact that the amendment uses projected fixtures, not factual ones;
therefore the budget could end up being unbalanced in the fiscal year. This could
happen through “inflating revenue projects, or directing spending to off budget
channels”.10 The Libertarian wing is gaining momentum by forming coalitions
within the House of Representatives so that the average voting power of the
electorate as a whole is diminished. Once the Libertarians get enough votes to
overturn the amendment, real changes can be made to the debt will stop increasing
at astronomical rates. Now the question remains, how to deal with the alreadypresent exorbitant debt?
Auctioning off the Debt
From the year 1980 to 2013, the United States debt has increased from $930
billion to approximately $18 trillion; the debt today is now twenty times would it
was thirty four years ago.11 It is hard to put in the words how deep a whole the
United States government has dug itself. Luckily though, there are ways to begin
damage control, and one of those ways is auctioning off treasuries. Half of the United
States debt is held in treasuries which are bills, notes and bonds while the rest of it
“is held mostly in federal and federally sponsored agency securities and US Saving
9
Ibid
10"Balanced
Budget Amendment: Pros and Cons." Pgpf.org. Web. 22 Sept. 2014.
"Treasury Auctions." - Federal Reserve Bank of New York. 1 Apr. 2007. Web. 22
Sept. 2014.
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Bonds, which cannot be auctioned off.”12 This makes it possible to sell these
treasuries to the highest bidders. The auctions take place at Federal Reserve Bank of
New York and the Bureau of Public Debt which is located in Washington D.C. The
auctions themselves are complex and intricate situations that I will explain in detail
below.
“Primary dealers” are the financial establishments that have formed a
partnership with the New York Federal Reserve Bank and the Bureau of Public Debt
in order to sell and buy government securities. These institutions are the primary
buyers at the auctions, but small investors also purchase government securities
directly from the United States Treasury at auction so that they do not have to
purchase them through brokers and banks in the secondary department. Once the
buyers are recognized, the bidding begins. Bids are taken up to thirty days before
the actual day of the auction. The auctions consists of two types are bidders noncompetitive contenders and competitive bids. The non-competitive bids are
typically submitted by the small investors and individuals not affiliated with any
specific company.
The game theory involved with these auctions come with the fact that sellers
must predict how the bidders will act, while the bidders must predict how other
bidders will act. To determine how one bidder will act depends specifically on how
much the bidder values the object as well as how much that bidder expects other
bidders to bid. Without information of the object that will be bid on, the seller and
the bidder will not be able to predict how other bidders will act; therefore, the more
12
Ibid.
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information that is provided on the treasuries, the more successful bidders and
sellers will be in predicting one another’s actions.13 Also though, a bidder has to
make a bid whilst also keeping in mind the information the other bidders received
on the treasuries. This type of bidding though is quite risky though because of the
high chance of one’s predictions of other’s behavior’s being wrong. Still, this noncooperative game theory can be avoided when a bidder shifts his/her attention
away from the bidding and towards the bidding strategy. This means that a bidder
must figure out the other bidders’ pure strategy, which is “a description of the
relationship between what is known- the information of the bidder and the history
of the auction- and what should occur- for each bidder’s information and each stage
of the auction, the appropriate decision for the bidder to make. Once the bidders
predict how one another will act, Nash Equilibrium is made, which is when the
collection of bidding strategies, given the strategies of the other bidders, do not
change for each individual bitter.
Charri, V.V., and Robert J. Webber. "Quarterly Review." 1 Jan. 1992. Web. 22 Sept.
2014.
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Summary
To summarize, game theory is a set of strategies that we humans use on a
daily basis to help make decisions easier. Game theory is used daily around the
world, with its most prevalent use being that in the United States Government. After
years of over spending and borrowing money we know we cant return, the United
States has reached a staggering amount of debt, almost $18 trillion: this is
insurmountable and the repercussions could be gut-wrenching. Luckily, we can stop
the monetary bleeding by better budgeting the government’s money and auctioning
whatever parts of the debt the United States Treasury can. Voting blocs and voting
coalitions use the science of game theory to better position themselves when the
time arrives to vote on the budget. This allows changes to be made from the ground
up so that future generations of American people are not resting with trillions of
dollars of debt. By auctioning of bits and pieces of the debt, the seemingly
impossible feat does not seem so unmanageable. This can only be done though by
respective institutions and investors acting rationally by using game theory tactics
in order to better their bids. Game theory alone though will not make this exorbitant
disappear overnight, but it is a tool the government use to right their financial
wrongs.
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Bibliography
Amadeo, Kimberly. "How the National Debt Tripled Since 9/11." 30 July 2014. Web.
18 Sept. 2014.
"Balanced Budget Amendment: Pros and Cons." Pgpf.org. Web. 22 Sept. 2014.
Charri, V.V., and Robert J. Webber. "Quarterly Review." 1 Jan. 1992. Web. 22 Sept.
2014.
Eguia, Jon X. "Voting Blocs, Party Discipline and Party Formation." NYU Press, 25 Jan.
2011. Web. 22 Sept. 2014.
“Factions in the Democratic Party.” Wikipedia. Wikimedia Foundation. Web. 22 Sept.
2014.
Gelman, Andrew. ""Contributions to Economic Analysis and Policies"" Columbia
University Press, 1 Jan. 2003. Web. 22 Sept. 2014.
Gimein, Mark. "151 House Republicans Voted Against the Deal. Now They'll Re-elect
Boehner as Speaker. Huh?" Bloomberg.com. Bloomberg, 2 Jan. 2013. Web. 22 Sept.
2014.
"GET INVOLVED." Federal Budget Pie Charts. 1 Sept. 2013. Web. 22 Sept. 2014.
"Treasury Auctions." - Federal Reserve Bank of New York. 1 Apr. 2007. Web. 22 Sept.
2014.
"Voting Bloc." Wikipedia. Wikimedia Foundation, 22 Aug. 2014. Web. 22 Sept. 2014.