I guess the platinum coin won’t be minted after all. We will end up in a game of chicken between a player who caved the last time the game was played, and a player who has publicly downplayed the negative consequences of losing. Everyone who advocated this should compute the Nash equilibria of that game.
To state the question more directly, are all the laws but one to go unexecuted and the Government itself go to pieces lest that one be violated?
I woke up this morning to a direct message from Bøtter telling me that Aaron died and that his last tweet was to me. Aaron’s work was a great inspiration and I will miss him. I don’t really have much else to say today, but reading all that’s been written today only serves to remind me of the great person he was. It is a tribute to him that almost every story on the front page of Hacker News right now is about Aaron.
I couldn’t help but smile at the image of Aaron reading Robert Caro aloud to Quinn: the second-to-last time I met Aaron was when we went to a Caro reading at the Union Square Barnes & Noble in May. We argued about how much credit Caro gave Ina in The Path to Power. As Caro was signing his copy, Aaron asked him who he’d write about next.
Read more by The Tech, Cory Doctorow, Aaron’s mom, Larry Lessig, The New York Times, Alex Stamos, Tim Berners-Lee, Philip Greenspun, Aaron’s family, Rick Perlstein, Glenn Greenwald, Dean Baker, danah boyd, Matthew Yglesias, Henry Farrell.
Crooked Timber posts a brilliant new-to-me article about what James Buchanan and his public choice theory really mean.
The central points of the Marxist-Leninist theory areTranslating to public choice theory, we get:
- Politics is about struggle between economic classes. The state acts in the interest of the capitalist class as a whole, and arbitrates differences among ‘fractions’ of capital;
- Political ideas (except Marxism-Leninism) are ‘ideologies’ designed to rationalise class rule;
- The masses acquiesce because of ‘false consciousness’ associated with submission to a dominant or ‘hegemonic’ ideology.
On the Leninist implications of both theories
- Politics is about the struggle between interest groups. The state responds to the pressure of organised interest groups, typically tight coalitions of producer groups. Logrolling between these groups produces an outcome which benefits them collectively at the expense of taxpayers and consumers;
- Political ideas (except free-market ideas) are ideologies designed to rationalise policies serving various interest groups;
- Voters acquiesce because of ‘rational ignorance’ which leads them to take little interest in politics and makes them easily subject to manipulation by political interests.
If ideas do not matter, free speech is at best a luxury and at worst a distraction. Even if speech is not actually suppressed, it is debased. When political debate is seen as a charade by its participants, it naturally becomes one. Furthermore, since the system cannot be changed by reason, some form of ‘short sharp shock’ is required. The result is a cult of ruthlessness (the catchphrase here is ‘tough decisions’). Since opposition to one’s policies is interpreted as a sign that interest groups are being hurt, it may be taken as evidence of correctness. The correct response is not to persuade one’s opponents, but to override them.
Since this is a post about game theory, I should probably say by way of disclaimer that it’s been three or four years since I’ve solved for a Perfect Bayesian Equilibrium. It appears to have been even longer for Felix judging by his game theoretical analysis of #mintthecoin, the platinum coin that will save us all from doom.
Justin Wolfers was first to point out that something is fishy. At the top of the post is this 2×2 matrix:
| Don’t mint | Mint the coin | |
| Threaten to mint the coin | Bluff | Open Defiance |
| Don’t threaten | Negotiate | Last Resort |
Normally when you see a matrix like this under the heading “game theory”, you think it’s the reduced form of a game, where the rows are the possible strategies of player A and the columns are the possible strategies of player B. In the cells you have the outcomes (profits or utilities) for each player. Here’s an example from the Wikipedia article on the prisoner’s dilemma:
| Prisoner B silent | Prisoner B betrays | |
| Prisoner A silent | Each serves 1 year | Prisoner A: 3 years Prisoner B: goes free |
| Prisoner A betrays | Prisoner A: goes free Prisoner B: 3 years |
Each serves 2 years |
All the key elements of a game are here: there are at least 2 players, each of whom have at least 2 strategies available, and the “middle” of the matrix labels the outcomes for each player, which depend on the strategies of the other players. Without these elements, it’s not a game, but a decision problem.
What Felix describes in his matrix is not outcomes of a 2-player game, but rather strategies for a single player at two different stages of the game. Games with multiple stages are generally represented in extensive form, rather than reduced form, but that doesn’t change the fact that he hasn’t considered how the House Republicans would react to a threat or non-threat to mint the coin, and how outcomes would depend jointly on the Treasury’s and Republicans’ actions. If, as Felix suggests, the Treasury should adopt the strategy of not threatening to mint the coin and also not minting the coin, then we need to know what he thinks will happen if negotiations fail and default is imminent.
(I say “default” and don’t consider the option of prioritizing payments because it’s clear from the BPC analysis that prioritization would be logistically difficult and the Treasury may not have enough cash to even cover interest payments due on February 15 and 28 even if no other bills are paid. If you think there’s some possibility that I’m wrong about this, that could be modeled in the game, or you could simply change the assumption.)
I actually think the game could have more than 2 stages. The Treasury could:
At various stages of the came, the House Republicans could:
Here’s my simplified extensive form that doesn’t include all the options above, with the player with the move on the nodes and the moves on the edges:
To actually solve this game, I’d need to assign utilities to each of the terminal nodes. They would be based on both political and economic outcomes. We can assume that the Treasury really wants to avoid default. I might also need to introduce some uncertainty about how the market would react to default, and uncertainty about the political preferences of the players. We could also introduce the option of the Treasury rejecting the platinum coin option now to make the game even more complicated, and we could introduce the Fed and the courts as players.
We can’t solve the game fully without further assumptions, but we can evaluate some of the strategies. Felix is arguing that regardless of the Republicans’ reaction, the Fed should not threaten to mint the coin and also not mint the coin, under any circumstances. That means we’ll end up with this game:
I think that at the final stage, if the Republicans don’t raise the debt ceiling even after a catastrophic default, Obama would cave on spending cuts, but the Republicans would look bad. Your solution to the game then depends on how much political damage House Republicans would take from that outcome.
Another complication is that unless the debt ceiling is simply abolished, this will be a repeated game. If the Treasury caves just before default, the Republicans know that they’d probably do it again next time, which means they will always wait until the last minute to raise the debt ceiling. The repeated nature of the game is probably the most important aspect and the foundation for one of the best arguments for minting the coin: we should accept some silliness so we can abolish the dangerous default option forever.
The US debt ceiling is a very silly idea (unlike the Danish debt ceiling), so Joe Weisenthal and others are pushing for an equally silly way to defuse it: the Treasury should mint a trillion dollar platinum coin, deposit it in its account at the Fed, and use the money to fund the federal government. Steve Randy Waldman proposes to mint a million million-dollar coins instead and pay creditors with them directly, what you could call the #mintthecoins solution.
The power to mint platinum coins is pretty clearly laid out in 31 USC § 5112 (k):
The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.
It’s true, as many critics have pointed out, that the intent of subsection (k) is for the US Mint to produce bullion coins for investors and proof coins for collectors, such as the current $100 platinum coin. But the Mint doesn’t do this to be nice to platinum bugs or because it’s fun. The intent was always to raise money for the Mint, and if there’s anything left over, for the Treasury at large. In 2012, the Mint made a operating profit of $37 million and $128.7 million in seignorage, and transferred $77 million to the Treasury. You know what’s cooler than 77 million dollars? How about a trillion dollars.
A lot of #mintthecoin supporters have pointed out that it won’t cause hyperinflation or even regular inflation. I want to spell out the reason. The Fed ultimately controls how much inflation there will be in the US. How would they do that if the Treasury starts minting trillion or even million dollar coins? They would sterilize the extra money being created. Take a look at the Fed’s balance sheet. They hold $1.7 trillion worth of Treasury bonds. When the Treasury needs to pay a bondholder or a defense contractor a million dollars and sends them a platinum coin, the Fed can sell a million dollars worth of Treasury bonds from its portfolio. The net effect is that no new money has been created, but a million dollars of T-bonds have been sold. That’s exactly what would have happened without a debt ceiling.
What if the House Republicans let this go on for years and the Fed runs out of T-bonds? Well, they have another $927 billion in mortgage-backed securities that they can sell. The effect on the markets won’t be exactly the same, but at least inflation will be under control. After its entire $2.9 trillion balance sheet is exhausted, which may not even happen if deficits are under control by then, the Fed would have to undertake extraordinary measures to sterilize #mintthecoin, and would essentially replace Treasury borrowing with Fed borrowing. It’s not totally accurate to say that #mintthecoin would be the President making monetary policy because the Fed would still retain a lot of control over monetary policy, but the Fed would have to change its policy to account for the platinum coins.
Keep in mind that the Fed has already committed to buying $85 billion in assets per month as part of QE3, so for the first $85 billion of monthly platinum minting, they can just reduce those purchases to sterilize the platinum coins.
Tim Fernholz at Quartz explains that the Obama administration won’t actually mint the coin—which is true, but we’re trying to persuade them to!—but goes wrong here:
Those who fear that President Obama lacks leverage in negotiations may be over-estimating Republican willingness to take the blame for a default, financial crisis, austerity-driven recession, or some combination of the three.
Except some Republicans welcome a default, and President Obama has already caved once on the debt ceiling. If the platinum option is abandoned, Republicans will know Obama will cave since he wants to avoid a default or a financial crisis regardless of who is blamed, and so he will have no leverage. This is very different from a govenrment shutdown scenario or the recent fiscal cliff showdown, where the consequences of failing to reach a deal are bad, but not disastrous.