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Wednesday, December 08, 2010

"Barack Obama's Time Consistency Problem?"

Did Obama make it more likely that there will be "future political 'hostage' situations"?

Barack Obama's Time Consistency Problem?, Twenty-Cent Paradigms: When I explain the time-consistency problem to my students, I begin by asking them what the stated position of the government is about negotiating with hostage takers. They know, of course, that the official line is that the government will not negotiate.

The reason why governments always say they will not negotiate with hostage takers is that, if they won't negotiate, there is no incentive to take them in the first place. But, once hostages have been taken, the government has a strong incentive to negotiate because they don't want to be responsible for the hostages getting killed. And the problem is that the would-be hostage takers understand this, and therefore do not believe the government will follow its announced policy of not negotiating.

That example may not work next semester, if my future students saw President Obama's press conference:

I’ve said before that I felt that the middle-class tax cuts were being held hostage to the high-end tax cuts. I think it’s tempting not to negotiate with hostage-takers, unless the hostage gets harmed. Then people will question the wisdom of that strategy. In this case, the hostage was the American people and I was not willing to see them get harmed.  

One of the implications of the time consistency problem is that a better outcome would be achieved if the government didn't have discretion to negotiate with the hostage takers. In the real world, no perfect "commitment technology" exists so, in practice, we think about "credibility". That is, how can the government behave so that the prospective hostage takers believe the authorities really mean it when they say they won't negotiate?

So, the question is: did President Obama diminish his credibility, thereby increasing the likelihood of future political "hostage" situations, or did he just say what everyone already knows?  And was the Republican threat credible to kill the hostages let the tax code revert to its 2000 levels if the tax cut extension for incomes over $250,000 wasn't included?  (John Boehner's slip in September notwithstanding). ...

    Posted by on Wednesday, December 8, 2010 at 12:34 AM in Economics, Politics | Permalink  Comments (24)


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