True Believers

June 19, 2011

Commentators tend to describe political confrontations (e.g. the upcoming fight in Congress over raising the debt ceiling) as negotiations among rational institutions (e.g., the Republican and Democratic Parties).  The implication is that the parties will reach a rational agreement and in particular will not do something that his mutually self destructive.  By this simplistic reasoning, Republicans and Democrats will reach a debt ceiling deal before the impasse causes real problems.  Unfortunately, the lack of a deal and the specter of an American government that is irrational and self-destructive are already causing problems and are likely to cause more.

The rational-institutions model covers up an important complication.  Institutions do not negotiate; only the people who lead those institutions negotiate.  A negotiation cannot produce an agreement that is good for the institutions, unless that agreement is also good for the leaders.   

As a description of the Republican and Democratic Parties, the rational-institutions model is particularly misleading because the American political process increasingly selects politicians that are not rational people, but are true believers.  The selection process is particularly acute in primary elections where voter turnout is thin and dominated by the ideologically committed.  To win in such an election a politician must be seen as an absolutely reliable advocate for whatever issues dominate the ideology.  Ideological voters seek, not representatives who are smarter and wiser than themselves, but uncompromising zealots.

The political parties cannot act rationally unless their leaders are rational.  Unfortunately, it is unlikely that an institution made up of zealots will select rational leaders.  The leaders of both political parties (particularly the Republican Party) are not fully rational.  They are not seeking the interests of their Party or even their own selfish interests.  They are instead people who are animated by their faith in an ideal.

Niccolò Machiavelli’s friend Francesco Guicciardini put the issue nicely in the following quote.

“The pious say that faith can do great things, and as the gospel tells us, even move mountains.  The reason is that faith breeds obstinacy. To have faith means simply to believe firmly – to deem almost a certainty – things that are not reasonable; or, if they are reasonable, to believe them more firmly than reason warrants.  A man of faith is stubborn in his beliefs; he goes his way, undaunted and resolute, distaining hardships and danger, ready to suffer any extremity.”
Francesco Guicciardini, Maxims and Reflections (Ricordi), Pennsylvania Paperbacks edition 1972, p 39

On the rational-institutions view, Republicans and Democrats should nearly always reach a mutually beneficial compromise, and it should be very unlikely that they stubbornly set themselves on a course of action that is destructive to both parties.  However, the abysmal approval ratings that American voters give the U.S. Congress suggest otherwise.  

On the rational-institutions view, Republicans and Democrats will reach a compromise on a bill to extend the debt ceiling.  They will not be so obstinate that they will extend negotiations so long that the uncertainty spooks the market and they will not attach to the bill austerity measures that are so severe that they choke off the economic recovery.   Unfortunately, given the high numbers of true believers, obstinacy is exactly the outcome that we can expect.

U.S. banks believe that the actions of the Congress have already been self destructive.  Because of the protracted negotiations over the debt ceiling, the banks are curtailing their use of U.S. Treasury bond.  Banks use Treasury bonds as collateral for financial transactions because the bonds carry an excellent credit rating and they are so plentiful that they are easy to sell and thus make attractive collateral. 

If banks believe that U.S. bonds are becoming unattractive as collateral, it is a safe bet that demand for U.S. government bonds will decrease and that interest rates will have to rise to spur demand.   This will, of course, increase the cost of financing the debt and do measurable harm not only to both political parties, but to the U.S. economy.