The US is currently confronting two separate, yet closely related, problems. (At the time of writing, House Republicans were on Tuesday, according to some media reports, working towards a solution to these issues.) One is the ongoing partial federal government shutdown. Under this, most ‘non-essential’ government services stand suspended.

Thus, national parks are closed and passport applications go unprocessed. On the other hand, military and police activities as well as certain other essential time-sensitive services — such as air traffic control and hurricane tracking — continue unhindered.

Although not an ideal situation, overall this will have a relatively minor impact on the US economy. We saw this happen even before, from the mid-1970s through the mid-1990s.

The real cause of worry is the second, even larger looming problem. That issue — which, if it comes to pass, would be truly unprecedented — is the showdown over the federal debt ceiling.

The US Congress has passed contradictory laws over the years, calling for certain levels of spending and taxation, while also imposing limits on how much debt the government can issue. The current limit is about to be reached. When that takes place, the Treasury Department is left with several bad options.

Non-options

The first is to continue making interest payments on treasury bonds. While this option may help prevent a collapse in bonds markets, it would, however, also entail serious curtailing of spending elsewhere. The severity of such spending cuts could well push the US economy back into a recession.

A second option, of defaulting on payments on treasuries, is of course a sure recipe for chaos. The First Law of Bond Markets — if such a law were to exist — is that US treasury bonds carry zero risk of default. Violation of it would trigger panic selling and even cause widespread global scale economic disruption.

Other options exist as well. One of them would be for the US treasury to use its power to mint coins, to issue currency of high face-value to finance ongoing government operations.

Another would be to simply declare that the debt limit, the tax code and the spending bills are in conflict with each other, making it impossible to follow all of them at once. It, then, creates, ‘reasonable grounds’ for violating the current debt limit.

While these alternative options have some appeal, questions regarding their legitimacy will render the chances of success unlikely. In any case, they won’t help in calming the bond markets.

The debt limit, to be sure, isn’t a new development. Unlike in the past — when it had been relegated to a minor, uncontroversial piece of legislative housekeeping — what has imbued it special character this time is the possibility of a catastrophic default. The effects of that would be so disastrous that, except for a tiny fringe element in American politics, nobody really wants it.

Hollywood barn

The debt limit negotiations that we are seeing today have virtually become a high-stakes game of chicken. To understand its meaning, recall the memorable Hollywood classic, Rebel Without a Cause , which has a game where two drivers begin driving at high speeds towards the edge of a cliff. The one who panics and jumps out of the car first is the loser. The other driver, having proven himself to be braver by continuing to drive towards the cliff (though he, too, must eventually get out!), earns the group’s respect and the girl’s love.

However, the consequences are disastrous if both drivers keep waiting for the other person to get out first and neither jumps. In that event, both go over the cliff: A dead driver is obviously not a winner.

The appeal of this game, beyond macho teenage boys believing themselves to be immortal, is the high danger involved. Without the possibility of something terrible happening, the game loses its appeal.

Note here that if one driver is more reckless or suicidal in the sense of not being afraid of death, he will win (as long as he gets out in the last few seconds).This is because the other driver, who is afraid of death like any rational individual, will jump out of the car well before the edge of the cliff is reached, giving the suicidal driver enough time to bail out. Thus, in a game of chicken, the player with a reputation for being irrational has better chances of winning.

At any given point, each driver has two strategies: either jump out or keep driving. If one of them gets out while the other continues driving, he loses the game and suffers a loss of respect. The driver who keeps going gains respect and, hopefully, does not lose his life. If both jump out, it’s like a tie: both lose an equal but small amount of respect.

The worst outcome is when neither gets out and both fall off the cliff! Clearly, playing the Rebel Without a Cause version of chicken would require that the players continue driving until the last possible moment, and then get out. However — as it always happens in Holly, Bolly or Tollywood — eventually sleeves get caught, brakes fail, and a whole host of other things play out in the last moment. The result is only our Jim (James Dean: you could easily substitute him with Dharmendra or Rajnikant) lives on.

Although they are not even rebels without causes, what is taking place in Washington right now is just one such game of chickens being played between Congressional leaders and President Barack Obama.

Rebels with cause

The Republican Party, which has little leverage otherwise, is using the threat of not allowing breach of the debt limit to force concessions on other legislations, to which they are hostile. Since Obama is committed to these legislations, he is obviously unwilling to play ball.

The Republican side’s reasoning is that breaching the debt limit is such a bad idea that Obama will eventually blink first, and agree to some concessions to prevent falling off the cliff.

The trouble here, though, is that actually hammering out an agreement and passing it takes some time.

When that possible moment of striking a deal will arrive isn’t obvious; both sides may well continue until it’s too late to prevent a default.

Further complicating the situation, John Boehner and other Republican leaders are simultaneously playing an internal game of chicken with some extreme members of their own party, who are apparently more willing to risk default.

Boehner in this case is caught in an unenviable situation: To maintain his own standing within the party, he has to show to these radical Republicans his willingness to adopt extreme measures in a confrontation with Obama.

Thus, even if he wants to bail out, he may be trapped in the car as it plunges over the cliff. That’s what happened to the big bad bully Buzz Gunderson (Corey Allen) in our Hollywood movie.

(Sarangi teaches microeconomics and game theory at Louisiana State University. Wiser is a post-doctoral researcher in the same university with interests in contest theory. The views are personal)

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