Pandemic Chronicles: Vaccination and the Tipping Point to Herd Immunity

Society is at a tipping point with two critical issues: climate change and the COVID-19 global pandemic. A tipping point is a phenomenon where enough people have collectively changed their social behavior to push society towards either a positive or negative direction. The climate change crisis is similar to the current public health pandemic in that it requires coordination among individual members of society in order to avert a disaster.

Ideally, countries would make good on their treaty commitments by investing in clean energies and take steps to meet greenhouse gas reduction targets. But since the Paris climate change treaty is voluntary and non-legally binding, what actually happens is some countries set meaningful national targets and takes steps to get there while other countries free ride by staying their current course.

In a Nature article “Tipping Climate Cooperation,” the authors use game theory to explain the global coordination dilemma between nations to address a problem that might become dangerous some day but not immediate.Their insight shows that When the uncertainty is small, however, societies are much more likely to coordinate efforts and avoid the tipping point.

In climate change forums, countries like America and China are strategic actors who weigh the choice of cutting or not cutting greenhouse gases depending on their payoffs. Each country’s pay-off (or expected benefits) in treaty adoption are dependent on the other country’s choice. As the payoff matrix above shows, there are two states of the world that represents Nash equilibria. A Nash equilibrium is a condition where neither country can improve its payoff or outcome by changing its strategy.

One Nash equilibrium captures the ideal scenario in which both countries don’t renege on their treat commitments and take actions at home to cut CO2 emissions. But the other state of the world (i.e. Nash equilibrium) is where neither country chooses to invest in clean energy or measures to cut carbon emissions. That’s a less desirable scenario because society is worse off. Yet, given then uncertainty around climate change risks in the short term, there is no immediate pending disaster.

Because of short-sightedness or lack of domestic support, free rider countries are less likely to jump on the bandwagon. To reach the ideal scenario, several things need to happen, including directly observing the real catastrophic impact of extreme weather patterns, or improving scientific research to reduce the uncertainty about the tipping point. These social, political, and economic considerations are similar to the current state of the COVID-19 pandemic.

Herd Immunity – Coordination Problem

At the beginning of May 2021 the U.S. government and the Centers for Disease Control and Prevention updated its guidance to allow Americans to go about their daily lives without a mask if they are fully vaccinated while calling out those unvaccinated to get vaccinated in order to get the same treatment in common public squares. After an intensive COVID-19 vaccination campaign to reach millions of Americans, experts believe America is at an inflection or tipping point to averting the raging pandemic. Previously, there were a lot of uncertainty whether we would reach the end of the tunnel on this dark chapter in the modern public health crisis. But since vaccinations and aggressive public health measures have taken place, more people will have an incentive to get vaccinated. Why? The tipping point.

Tipping point in collective behavior: over half of the U.S. are vaccinated. The unvaccinated are now the minority. Monthly cases and deaths are trending down. Society, governments, and organizations are rewarding the vaccinated to prompt social change in the unvaccinated population.

There are places that people would like to attend, like places of worship, grocery stores, and night clubs. These places have different levels of restrictions for those who are not vaccinated while allowing those who are vaccinated to enter without wearing a mask.

Chart: CDC's New Mask Guidance for Vaccinated, Unvaccinated People
Source: CDC Guidance

For churches, since it’s a place of faith, those centers recommend attendees who aren’t vaccinated to follow health guidelines by wearing masks and maintaining social distance. Worship centers tend to not impose hard requirement to show attendees are vaccinated, rather it’s an honor system.

Church Mask Policy Change

Nightclubs and Ride Shares

Nightclubs, on the other hand, are social spaces that attract people of all backgrounds. People interact closely and crowds tend to be more concentrated. Those places have an incentive to impose a requirement for people to show evidence of vaccination to enter. For example, Rumi is a nightclub in New York City populated with millenials and Genzers. To enter, customers go through two checkpoints: (1) age verification and temperature check; (2) vaccination card. These same people often commute using ride sharing services including Uber and Lyft, both of which have stated that they will maintain current mask restrictions for all customers (or no service).

Shopping Centers

Grocery stores approach the new government guidance in different ways, ranging from requiring all shoppers to still wear masks and maintain social distance to allowing the vaccinated to be maskless. Because of either hard requirements or public pressures from a large number of people who are vaccinated, people who are unvaccinated will have an incentive to get vaccinated. The combination of these policies carried out by private organizations, accompanied by local ordinances and requirements, as well as sustained commitment and guidance by the government to end the pandemic, will help push American society over the tipping point.

Consider the scenario below, where each Customer can choose to get vaccinated or not get vaccinated. Their individual choices and payoffs are dependent on what the other Customer do. If Customer 1 takes an effort to vaccinate, Customer 2 could be a free rider and not vaccinate. Why? Customer 2 may not want to take the effort, and may want to take advantage of others getting vaccinated and free ride off a perceived herd immunity. The expected payoff for C1 and C2 is (1,2), respectively.

There are two important outcomes from this decision matrix. The first is where both Customer 1 and Customer 2 vaccinate, which is the desired Nash Equilibrium, since neither Customer could increase its payoff by changing their strategy. Both Customers 1 and 2 choose to vaccinate after seeing a certain threshold of the population get vaccinated with minimal risk, while the vaccinated have the benefits of attending more more venues and activities. If unvaccinated customers wish to get the benefit accruing to vaccinated customers, then the unvaccinated have an incentive to get vaccinated. If enough unvaccinated people think that way, this establishes a tipping point in the health pandemic that inches us close to herd immunity. The other scenario, the undesirable Nash Equilibrium, is where Customer 1 and Customer 2 do not vaccinate. Here the expected payoffs are (2,2) for Customer 1 and 2, respectively. The social drivers for customers making this choice could be the following:

  1. if they’re skeptical of vaccines;
  2. if the unvaccinated don’t think there’s enough supply
  3. if they believe the pandemic will worsen (no light at the end of the tunnel)
  4. if the unvaccinated think their other people will also stay unvaccinated.

If the above drivers are strong enough, then it pushes society away from the tipping point and further away from herd immunity. The choices that we as individuals make based on our own expected payoff can put our friends, neighbors and overall society at risk.

Bibliography

Lenton, Timothy M. 2014. Game Theory: Tipping Climate Cooperation. Nature Climate Change 4 (1): 14–15

America’s Long Struggle to Create a Central Bank

On this day, December 23, 1913, President Wilson entered the Oval Office. In a jubilant mood he went around the room to shake hands with key advisers and associates while giving a congratulatory nod to the influential Congressman from Virginia, Carter Glass.

Wilson proceeded to use the four golden pens on his desk to sign the Federal Reserve Act. Wilson and his group of partners in arms had achieved the landmark legislation of his domestic agenda: the creation of the Federal Reserve. This culminated from more than 120 years since Alexander Hamilton had attempted the grand experiment of a central bank that floundered through multiple presidential administrations. Arthur S. Link, a Wilson biographer, captured that this moment “Thus ended the long struggle for the greatest single piece of constructive legislation of the Wilson era and one of the most important domestic Acts in the nation’s history.’’

But what is the Federal Reserve? When was it created? Was Presidential Wilson the mastermind behind it or some other driving force?

Wilson’s domestic agenda centered on the New Freedom. One key pillar is banking reform. In the realm of economic policy, creating a central bank would be Wilson’s enduring legacy, following a century of struggle to create a permanent national bank by the nation’s founders. This battle of more than a century has sputtered and spin since Alexander Hamilton’s fight for a national bank under George Washington’s cabinet. Wilson did not command economic thought leadership that motivated him to advocate for a central bank.

The urgency was more in response to a confluence of factors, including the Panic of 1907 and public policy support from various parties from bankers to Congressional leaders. Wilson’s 1912 election ran his campaign on a progressive platform. He was also leveraging on his reformist agenda as a New Jersey governor. He pledged financial reform, but never explicitly mentioned establishing a central bank. Though he was a government cholar, Wilson didn’t have sufficient knowledge of banking. So he relied on two key advisers: Louis Brandeis, a Boston attorney serving as an outside adviser, and William McAdoo, Wilson’s Treasury Secretary.

While Louis Brandeis was Wilson’s most trusted voice from outside the White House bubble, like his predecessors, the president needed someone in his cabinet who could carry through monumental efforts like banking reform. He needed someone who had a business mindset but not beholden to bankers because that person would broker legislative proposals with repercussions for the broader economy. That is where William Gibbs McAdoo played an key role. Like Wilson, McAdoo had roots in the South. He began his law practice in Chattanooga, Tennessee and thereafter moved to New York to lead a railroad company. With an eye for politics, McAdoo became head of the Democratic National Committee in 1912, and gave support to candidate Wilson’s bid for the White House. As an independent lawyer-business leader who also had political ambitions, McAdoo would become Wilson’s U.S. Treasury Secretary and a close confidant. McAdoo was pivotal in the passage of the Federal Reserve Act and financing of World War I which Wilson reluctantly entered.

Congress, who represented various economic areas of the country, wanted regional banks to control the Federal Reserve System. That decentralized representation would be a counterbalance against Wall Street’s influence. Meanwhile, President Wilson wanted a centralized board to place a check on regional Federal Reserve banks, assuming those entities would be owned by private banks. William Jennings Bryan, a progressive voice in the Democratic party leadership, was committed to currency reform but opposed to a Wall Street take over. He was vocal during the 1912 Democratic convention in expressing support for Wilson. Because of his standing as a public leader with oratorical power, and a strong following in rural areas, Wilson appointed Bryan as his secretary of state. Bryan remarked, “The currency can be given all the elasticity it needs without increasing the privileges of the banks or the influence of Wall Street.” Wilson later would echo Bryan’s point, in saying “The greatest monopoly in this country is the money monopoly.”

The progressive wing was highly skeptical that the new system could be taken over by private banks, and Wall Street could undermine oversight on the banking system. Louis Brandeis in particular did not want bankers to be part of the Federal Reserve Board since as part of the banking system, they could not be trusted with objectivity and having public interest in financial stability and regulation

To reconcile the various perspectives on the central bank plan, President Wilson sought the advice of folks in Congress, relying on Representative Carter Glass of Virginia, who became chairman of the House Committee on Banking and Finance, and the committee’s adviser, H. Parker Willis, an economics professor from Washington and Lee. In order to get a viable version of the bill out of committee, Glass and Willis actively hashed out the pros and cons of the banking proposal.

During the negotiations, President Wilson consulted his trusted economic adviser, Brandeis, for direction. Congressman Bryan and Glass had valid concerns to which Brandeis came up with a middle ground. Brandeis told the president: “The conflict between the policies of the Administration and the desires of the financiers and of big business, is an irreconcilable one”. He warned that “Concessions to the big business interests must in the end prove futile.’’ To push forward, the proposal needs to satisfy both conservative and the progressive stakeholders. However, Brandeis voiced his concern that the proposed central banking system should not be owned by private banks but public. He argued that private interests would have undue influence over the system, and government oversight would be steered to benefit the industry while undermining public interest.

On June 17, President Wilson met with Congressman Glass, Secretary of the Treasury William G. McAdoo, and Senator Robert Owen of Oklahoma, chairman of the newly created Senate Banking and Currency Committee. The stakeholders landed a final proposal. There would be 12 regional banks around the country that are owned by private banks. In DC, a centralized Federal Reserve Board would be exclusively controlled by the government. For a sustainable currency, Federal Reserve Notes would be accepted as obligations of the United States. This avoids the pitfalls of the greenback currency that was issued on a temporary basis by Abraham Lincoln’s government to finance the Civil War. This compromise between the various views on central banking gave the proposal enough momentum to become a landmark legislation.

Bibliography

Heckscher, A. (1991). Woodrow Wilson: A Biography. Charles Scribner’s Sons.

Hofstadter, R. (1955). The Age of Reform. Vintage.

Link, A. S. (1956). Wilson: The New Freedom. Princeton University Press.

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What is the President’s Brain Trust?

Do you ever wonder what the keys are to successful presidential leadership? Are you curious why past presidents like George Washington, Lincoln, and Franklin Delano Roosevelt were able to steer the country through calamities and turbulent periods? Historians might say these leaders had charisma, or an ability to manage a vast number of priorities, had a clear strategy, or perhaps they were born into the role. 

Just like any chief executive, however, the president’s success depends on a close group of advisers. From casual circles to trusted confidants, advisers are core parts of any White House to tackling an array of challenges, thinking through the fog of uncertainty, or spurring bold ideas. 

This is the very theme of my new book: The President’s Brain Trust. American presidents rely on their brain trust as a sounding board for their proposals; to get quick feedback and strategic advice when they make choices—from consequential to small. This tradition harks back to America’s founding fathers as they guided a new country that just emerged from the Revolutionary War. 

In this book, you’ll be able to see the evolution of the original cabinet from Alexander Hamilton’s grand economic plan under George Washington through Lincoln’s ambitious team who financed the civil war effort, and from FDR’s academic group of law school professors during the Great Depression to the network of intellectuals and Nobel Laureates under John F. Kennedy. 

I’ve taken copious notes of fascinating stories behind crucial periods in American history. Drawing on interviews and archival collections, I wanted to get a good look into executive leadership, the personalities and governing style of presidents, and their teams who influenced the decision-making process. 

Presidential leadership starts with the president and the team, none other than the president’s brain trust. 

A Christmas Carol – the Virtues and Vices of the Market Economy

This week in 1843 Charles Dickens published his book A Christmas Carol that would become a gift of joy and timeless tradition for society. But Dickens also imparted an incredibly powerful story of economic ideas that sheds light on severe economic problems while inspiring charity. Dickens invokes Adam Smith, the Scottish moral philosopher who is considered father of modern economics. In his landmark book, Inquiry into the Nature and Causes of the Wealth of Nations, Smith extolls the benefits of free markets as the foundation of capitalism, in which voluntary exchanges by members of society, motivated by the pursuit of individual self-interest, translates into collective good. Smith captured the economic interactions during the emerging industrial era at the time that still rings true:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.” 

In the early scenes before his ghostly hauntings, Mr. Scrooge declined to donate to a charity cause. He even criticized for the overpopulation problem that resulted in people who take more from public resources than they contribute. In the Christmas Carol Scrooge in his callous way, said that: “If they would rather die, they had better do it, and decrease the surplus population.”

What Scrooge describes follows the lines of the population theory advanced by the economist Thomas Malthus. He used statistics to theorize that a growing population over time would drop off when society cannot supply sufficient food and basic necessities. Within time war, famine and natural disasters will flatten out population growth. This dire prediction gave economics its name as the dismal science. Personally Dickens grew up in a large family of eight children. Due to unfortunate circumstances, Dickens dropped out of school to start working to support his family.

In Dickens’ Christmas story, Mr. Scrooge is a cold workaholic banker. Yet, there’s little moral judgement on his profession nor does Dickens calls for the downfall of capitalism. Rather he calls out the greed and excesses of society, via the miserly, lonely banker, Mr. Scrooge. Like Adam Smith, Dickens notices a glimmer of hope in capitalism based on the virtues and sympathy that people have for one another.

Dickens has always been sensitive to the plight if the poor. An earlier event affected him deeply, According to reporting by the NY Times, in the fall of 1843, Dickens visited Samuel Starey’s Field Lane Ragged School, a school that provided education for slum children. When his father’s bankruptcy sent him to debtors’ prison, the twelve year old Dickens resorted to working long hours at a boot-blacking factory for no more than six shillings a week. Though he did help make ends meet for his family, he was scarred by the working conditions of the ragged children and men working warehouses and factories.

Dickens became a vocal critic of the widening wealth gap in Victorian England era, with a particular cry for the poor children who had to work at an early age. The tens of thousands of homeless children languished on the streets; life was brutish. Compared to his American counterparts, Dickens is slightly ahead in his progressive thinking, equivalent of a muckraker, a movement in America in the dawn of the 20th century that involved writers and journalists who published outrageous working conditions and economic injustices. Upton Sinclair, a novelist and journalist, wrote a harrowing account in The Jungle about labor conditions in the meat packing industry and slum urban dwellings with large immigrant demographics. Like Dickens in Britain, the American muckrakers shed light on deplorable economic issues which led to public policy changes and industry reforms. President Theodore Roosevelt and his White House team would take up the cause of economic justice during the Progressive era.  

The letters inscribed on his tomb reads: “He was a sympathiser to the poor, the suffering, and the oppressed; and by his death, one of England’s greatest writers is lost to the world.”

In honor of this holiday classic, here are a few of my favorite excerpts from A Christmas Carol: 

“Reflect upon your present blessings—of which every man has many—not on your past misfortunes, of which all men have some.”

″‘Business!’ cried the Ghost, wringing its hands again. ‘Mankind was my business. The common welfare was my business; charity, mercy, forbearance, and benevolence, were, all, my business. The dealings of my trade were but a drop of water in the comprehensive ocean of my business!‘”

“‘There are many things from which I might have derived good, by which I have not profited, I dare say,’ returned the nephew. ‘Christmas among the rest. . . . And therefore, uncle, though it has never put a scrap of gold or silver in my pocket, I believe that it has done me good, and will do me good; and I say, God bless it!‘”

Bibliography

Dickens, C. (1843). A Christmas Carol. In Prose. Being a Ghost Story of Christmas. Chapman & Hall.

Malthus, T. (1798). Principle of Population.

Mortimer, J. (1993, December 24). Poorhouses, Pamphlets and Marley’s Ghost. The New York Times. https://archive.nytimes.com/www.nytimes.com/books/99/03/28/specials/mortimer-poorhouses.html

Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations.

America’s Crisis, First of Many

This is an excerpt of the prologue to the book that I’m writing, which chronicles financial panics and crises in America that stretches from the modern era back to the nation’s founding…..


It was a fateful dinner. The young American Republic is no more than a decade old but already staring at its first crisis. Thomas Jefferson, the U.S. Secretary of State, brokered a dinner meeting between US Treasury Secretary Alexander Hamilton and Virginian leader James Madison. The trio were in a heated battle over the proper role of national government in resolving  fundamental issues in the fledgling economy. Congressional lawmakers formed coalitions based on their view of what would be the optimal structure for America’s economic foundation. 

Even at its founding, America is characterized by compromise, conflict, and crisis. The Republic was in a chaotic state coming out of the Revolutionary War. It was more like a loose collection of sovereign states, much less a perfect union. States were divided geographically and economically.  The country had a $80 million debt, with a mix of foreign, domestic and state debts. Absent a credible repayment plan, the United States runs the risk of destroying its ability to borrow from creditors and undermining its obligation to pay the Continental Army. Yet, the national government was ill equipped to deal with the crisis. 

The predecessor to the Constitution was The Articles of Confederation, an agreement among the 13 states, written against the backdrop of wartime urgency. There was a valid fear against a central government coming out of the War for Independence. The post-war document outlined America’s first government, but the temporary framework was missing a president and a court system. The only branch was the Continental Congress which wielded little power. Absent a federal government and a coherent national economic strategy, the thirteen states organized themselves around their own economic interests. They freely imposed tariffs on imports and exports to and from other states. 

Making matters worse, economic security was inextricably linked with national security. During the War for Independence, Union troops starved and faced backlogs of unpaid compensation for their services. In December 1777, 11,000 Continental Army Troops made camp at Valley Forge. Washington’s troops were in a desolate situation, cold and starving. Washington petitioned the Congress for food, clothes and fresh supplies. Congress failed to act. Compounded by diseases like influenza and typhoid, 2,000 troops died. 

Hamilton served as a Captain of the New York Independent Artillery Company during the first two years of the War. Washington enlisted Hamilton to his staff as a lieutenant-colonel thanks to his fine writing skills. This skill was tested in Valley Forge, as Hamilton joined other aides-de-camp to pen letters to governors and members of Congress, seeking help. On February 13th, 1778, Hamilton wrote to New York Governor George Clinton: “…exert yourself upon this occasion, our distress in infinite…Desertions have been immense and strong features of mutiny begin to show themselves…” (Chernow 2004)

To fund supplies for the Continental Army and national operations, the country scraped money from the states. With good reason, states were skeptical of sending funds to a dubious central authority. In an ill-attempt to fix financial woes, Congress printed money which rendered currency in the colonies near worthless and undermined public confidence in the currency and the government’s ability to respond. 

Congress didn’t have the authority to raise revenue through taxation to fund a federal government. It was actually the preference of influential players such as Thomas Jefferson who believed in the vision of a pastoral America with individual liberty, land ownership, unfettered by government. Alexander Hamilton, then a New York delegate to the Continental Congress,  held the opposite view. He saw the dangers of states pursuing their disparate interests that counteract national goals. He even warned George Washington and his superiors about this lack of unity but failed several times. At one point he asked to resign from his state public office to retreat into private life but Washington talked him out of it. 

Valley Forge was a pivotal moment that solidified Alexander Hamilton’s view that without real political reform, the country would not have the institutions to foster economic stability. Without necessary reforms, the country could disintegrate into factioning states. 

Hamilton’s fear would escalate a few years later. States were cash strapped from Revolutionary war debt. On June 17, 1783, while meeting at the Pennsylvania State House, Congress received a message from soldiers of the Continental Army stationed in Philadelphia that they are demanding backlog pay for their service during the War. Congress balked.  In the next several days, soldiers from Lancaster, Pennsylvania, abandoned their posts to join with brothers in arm from the city barracks. United with 400 strong, they surrounded the State House and refused to let the Delegates leave without getting addressing their demands. Soldiers forged an insurgency to trap Congressional delegates in the halls of Philadelphia, including Hamilton. This became known as the Philadelphia Mutiny.

Hamilton would draw the hard lessons learned from the Philadelphia Mutiny to his duties as Treasury Secretary. He did not want the new country to start off on shaky foundations. He would formalized this proposal into a grand plan that everyone now knows as the Hamiltonian economics program. Approving this package is not an easy feat. A different post will cover the fateful dinner that drove the grand bargain of 1789.

Bibliography

Chernow, Ron. Alexander Hamilton. New York: Penguin, 2004. Print.

The Art of the Deal

When George Washington became president, one of the most pressing issues was the nation’s crippling fiscal crisis. States racked up a great deal of debt from financing the war. Washington needed someone with the wits, political acumen, and deep knowledge of public finance. Hamilton was the man of the hour.  After winning a landslide election, Washington rode to New York. On his way, Washington stopped in Philadelphia to see Robert Morriss, who was the superintendent of finance for the Continental Congress.  In a concerned state, Washington asked Morriss: “What are we to do with this heavy debt?” Morriss responded: “There is but one man in the United States who can tell you; that is, Alexander Hamilton.” 

On September 11, 1789, Washington appointed Hamilton Secretary of the U.S. Treasury after months of fighting with Congress on whether the nation’s finances should be in the hands of a

single person in the executive branch. It didn’t help that the Constitution doesn’t specify how the executive branch or departments ought to be organized. Hamilton was charged with coming up with a national economic plan in 120 days. Hamilton got to work knowing full well deep seated opposition from those who feared a strong government. There is an economic rationale for their skepticism.  

Some states like Virginia have managed to pay off the debt early while other states have not. Alexander Hamilton wanted the new country to start off with a strong economic footing so he wanted the national government to help the states that had outstanding debt balance. There is Congressional gridlock on how to move forward. 

Though Hamilton was an immigrant from the Caribbeans, he had adopted the U.S. as his country and is a war hero. As General Washington’s aides-de-camp, Hamilton was put in charge of New York and Connecticut regiments, responsible for attacking the British forts in the siege of Yorktown. This was arguable the grand finale of the Revolutionary War. With the War behind them, Hamilton wanted the country to start on a strong economic footing. And that meant resolving the crushing burden of post-war debt. But he had broader ambitions than the debt situation. He wanted to build a foundation for the financial system. 

As the first Secretary of the Treasury, one would think Hamilton was staring into the abyss without guidance or plan. But he drew on a remarkable depth and breadth of experience, including his role as a politician, legal scholar, military commander, lawyer, banker, and economist, with extensive networks in New York and elite circles. Most importantly, he took practical lessons from England with a rich history of business and finance. But Hamilton does something that becomes part of America’s DNA, adapt old finance principles to spur financial innovations and new foster new markets. 

Hamilton had fierce critics, the most prominent being Thomas Jefferson, a worldly statesman, who practically opposed Hamilton on very major policy issue. On this particular economic agenda, Jefferson paired up with Madison, another founding Father who served as a member of the Virginia House of Delegates, Member of the U.S. House of Representatives from Virginia organized America’s first political party. The trio were in a battle over power. These men were on opposing ends in several political and economic issues. Hamilton wanted the Federal Government to hold the bulk of the political and economic power while Madison and Jefferson, Republicans, wanted that power to remain with the states. 

Hamilton used everything in his toolbox in a belief that the country could not go forward without political and economic reform, hand in hand. He articulates his vision:  “‘Tis by introducing order into our finances–by restoring public credit-not by gaining battles, that we are finally to gain our object.” 

In Hamilton’s first public credit report to Congress, he lays out an ambitious package in three prongs:  (1) funding the national debt at par; (2) federal government assumption of state debt; (3) consolidation of state debt (Hamilton 1790)

The plan called for the federal government to shoulder the burden of state debts by issuing federal bonds at par, which would be backed by the full faith and credit of the United States with a rational schedule of revenue sources. Hamilton’s package was met with mounting opposition though not the level of criticisms varied by issue. The House of Representatives approved funding the national debt at par with a vote of 36 to 13. But that vote was a breeze compared to the assumption of state debt proposal. Hamilton just didn’t have the votes on that measure. James Madison was a leading critic of state debt consolidation. That is a 180-degree turn since just a few years earlier, Madison co-authored with Hamilton the Federalist, a series of pamphlets that provided an intellectual defense of a strong national government. 

The policy disagreement may be traced to the men’s origins and backgrounds. Congress had been at a standstill over the location of the permanent capital. Hamilton favored a capital close to the major commercial centers of the Northeast, while Washington was a Virginia native. Similarly, Jefferson and Madison wanted it located to the south (on the banks of the Potomac River), fearing loss of influence for their states.

In Hamilton’s mind, without approving the economic package in entirety, it would not address the multi-faceted problems facing the country. The country was desperate for a grand bargain and a way forward. Enters Thomas Jefferson, the first Secretary of State,  who has been appointed by President George Washington after being the Minister to France for about 5 years. He was also the second Governor of Virginia and represented as a delegate from Virginia in several different positions.

Jefferson brokered a meeting between Treasury Secretary Hamilton and James Madison. Of the limited first hand account we have, it was documented from Jefferson’s perspective. According to Jefferson, Hamilton looked “somb[er], haggard, and dejected beyond comparison” when he ran into Hamilton that June outside Washington’s New York office (Jefferson 1792). Jefferson then offered to host a dinner that would bring Hamilton and Madison together to break the impasse.

The dinner took place on an evening mid-June, 1790, at Jefferson’s residence in New York, at 57 Maiden Lane, which is in today’s Financial District near Wall Street.

Jefferson rented the house for 106 pounds per year. Since Jefferson didn’t care much for the urban New York lifestyle, he didn’t spend much time at the residence other than to set up operations for the new department to deal with foreign affairs (Tao 2014). Jefferson had moved into permanent quarters at 57 Maiden Lane only four days before the dinner (Norman K. Risjord, 1976).

Dinner Bargain painting by Italian American artist Constantino Brumidi

With the backing of Madison and Jefferson, Hamilton had what he needed for a grand bargain to push forward the economic package. It should be noted that, negotiations for the compromise had been going on before June 20 as a number of meetings had been held between various interested parties.

With this economic plan, the national government would absorb state debts and pay it off. This became known as the Residence Act of 1790, which established Washington, DC as the new permanent national capital along the Potomac River, just outside Virginia, a big win for the state. During this tumultuous period, the federal government was operating out of New York City. The temporary capital during the transition period would be in Philadelphia until the permanent capital is ready.

There’s a larger theme coming out of this negotiation process. Decades later, Tim Geithner, the 75th U.S. Secretary of Treasury, framed that dinner bargain as a struggle over ‘power’ (Geithner 2018). Each person came to the table with different perspectives on the issue. They came with  their own interests and beliefs. Hamilton wanted to improve the national financial reputation, bolster the nation’s stock of capital, and enhance the financial power of the federal government.

For Madison and the people from other southern states which had been aggressive in paying off their war debts like Georgia, North Carolina, Virginia, and Maryland, it seemed unfair to carry all the debt of states which had been sluggish in paying off theirs. For Jefferson, besides concerns

over the cost of assumption, Hamilton’s political intentions and possible threats to the Republic with the centralizing financial power was what worried him.

However, in that context, all of them must understand that, if neither side gives in or steps back a little bit, it would threaten the very survival of the young nation. Therefore, by agreeing to some tradeoffs, each side achieved its goals and all benefited from the compromise.

This is one of the earliest examples of legislative “logrolling”, or voting trading in Congress. With this event, the methods of hosting social engagements to discuss political matters to resolve partisan issues became a practice. In particular, Madison agreed not to block assumption of state debt and convince enough southern members to support it. In exchange, Hamilton would use his influence to pass a bill that would locate the capital city along the Potomac River, bordered by Virginia and Maryland, after a 10-year temporary move to Philadelphia. Virginia benefited from the deal by lowering its tax obligations on the debt under the assumption plan. To abate fear of the government centralizing finance, Hamilton downsized the total cost of the assumption plan. 

To get Pennsylvania’s support, the deal would designate the city as the temporary capital for 10 years before setting up Washington DC as the permanent capital. Robert Morris negotiated this piece out of the concern that they could not push it through Congress by reassigning the country’s capital in a desolate wetland. Interestingly, Philadelphia harbors bad memories where troops trapped the doors of Independence Hall demanding unpaid salary for their service. Hamilton persuaded troops to let Congressional members go to Princeton to forget a deal for repaying troops. He even tried to get Pennsylvania’s state troops to counteract against federal troops but no to avail. 

In exchange for relocating the permanent capital to the Potomac region outside Maryland and Virginia, Madison committed to garnering enough swing votes to pass Hamilton’s bill for assumption of state debt. Madison convinced four Congressional men, two from Virginia and two from Maryland to shift their votes. With a few other votes in the affirmative, that reversed the vote to 32-to-29 in favor of the bill, in April 1790 (it was previously 32-to-29 against). On August 4, 1790, Congress enacted into law the funding and assumption law.

Bibliography

Jefferson’s Account of the Bargain on the Assumption and Residence Bills, [1792?],” Founders Online, National Archives, accessed September 29, 2019, https://founders.archives.gov/documents/Jefferson/01-17-02-0018-0012. [Original source: The Papers of Thomas Jefferson, vol. 17, 6 July–3 November 1790, ed. Julian P. Boyd. Princeton: Princeton University Press, 1965, pp. 205–208.]

Geithner, Timothy. “Bernanke, Geithner and Paulson the 2008 Crisis.” Interview by Andrew Ross Sorkin. CNBC, 12 Sept. 2018. https://www.cnbc.com/2018/09/12/watch-ben-bernanke-tim-geithner-and-hank-paulson-discuss-the-financial-crisis-10-years-later.html

Hamilton, Alexander 1778-1804; 1790; [Jan. 9]. Alexander Hamilton Papers: Speeches and Writings File, “Report Relative to a Provision for the Support of Public Credit”

Tao, Mary. “Historical Echoes: Thomas Jefferson Slept Here on Maiden Lane/The Compromise of 1790.” Liberty Street Economics (blog). Federal Reserve Bank of New York, February 21, 2014. https://libertystreeteconomics.newyorkfed.org/2014/02/historical-echoes-thomas-jefferson-slept-here-on-maiden-lanethe-compromise-of-1790.html

Game Theory of Political Negotiation

This is a more analytical approach to my post on the Dinner Bargain of 1790 that depicted the drama between Secretary of Treasury Hamilton and his political rivals over proposals to resolve state war debts and set up a national bank. Check out that post for a refresher on the story!

This piece will look at the bargaining process between the Federalists, led by Alexander Hamilton, and anti-Federalist coalition, from a game theory perspective. There are several aspects to consider:

Game Design

Human conflict is very complex to predict but game theory can be a useful tool to glean insights into the thought process of the Founding Fathers as they went through the negotiation process. It’s a high impact game and the course of the young republic were tied to the outcome. Game theory applies math to think through how the situation evolves based on strategic interactions between the players.

On one side, there’s Hamilton who is the standard-bearer for Federalists, advocating for the federal government to exert a strong influence on economics and politics. On the other end, Madison and Jefferson represent the coalition of anti-federalists and the Southern bloc who believe power resides with states. Jefferson, a wealthy land-owner who believes in a pastoral America, wants to delay government intervention even facing a fiscal crisis.

Chicken Game

The Chicken dilemma game is one type of game that illustrates the showdown between Hamilton and his opposition. It’s like a modern-day version of political logrolling or horse trade. In Chicken, each player has two strategies: swerve or go straight. Each play does not have a dominating strategy, unlike a prisoner’s dilemma game. Each player adopts a counter-coordination strategy against the opponent. If the Player 2 swerves, then Player 1 would go straight. If Player 2 goes straight, then Player 1 would swerve. Each player is testing each other’s patience and stays resolve until the other player gives up and back out.

When each player enacts their optimal strategy given the strategy taken by the other player, this is referred to as a Nash equilibrium. In the chicken game, there are two pure strategy Nash equilibria:

  1. Player 1 goes straight and P2 swerves. The payoff matrix results in +1 for Player 1 since she stayed strong and -1 for Player 2 since he backs out. 
  2. Player 2 goes straight and Player 1 swerves. There’s an incentive for a player to continue straight while the other player swerves. In a mirror outcome, the payoff matrix results in +1 for Player 2 since he stayed strong and -1 for Player 1 since she could not stomach it.  

But suppose the two scenarios above don’t happen, then it’s possible both players would swerve. If both don’t swerve, then both continue straight and ultimately collide. The worst payoff results from the two players running straight at each other. 

A strategy where both players go straight, both players have an incentive to change strategy given it’s the worst outcome for both players. If collectively choose to keep going, one would switch strategy by swerving, for example player 2 swerve because 0 is better than negative utility if gone straight. Player 1 has an incentive to change strategy to swerve. Keep going and Keep going will not be played strategy in a pure strategy Nash equilibrium. If P1 goes straight and P2 swerves, P2 doesn’t have an incentive to change strategy by going straight because it would yield a negative utility of -5.

What exactly is a Nash Equilibrium then? For a player, this entails a set of strategies such that the player has no incentive to change strategy given what the other players are doing. Although we know someone will swerve, but we may not know which one will serve in a Chicken Game. However, in reality, we know Hamilton had more interests in cooperating or making bargains in order to get his economic proposals approved by Congress.

Just like in the standard Chicken design, there are two pure strategy Nash equilibria in this game:

(1) Federalist swerve and Anti-federalist goes straight; 

(2) Anti-federalist goes swerve while Federalists go straight. It’s an anti-coordination game.

Mutual defects by both parties would be disastrous for America already in shaky conditions. Since Founding Fathers were statesmen who believe in moving the country forward,  it’s better for a player to swerve (i.e. cooperate) rather than all players defect. Applying chicken to the debate among our Founding Fathers, it’s a classic Congressional gridlock.  It’s mutually beneficial for the Federalists and anti-Federalists to adopt different strategies. Federalists wanted a strong government and preemptive federal assumption of state government debt. Anti-federalists rather the federal government disappear from the picture even amidst the crisis. Madison led the Southern state coalition, wanted to pass the Permanent Residence Bill to establish permanent Federal Government and national capital outside of Virginia. Hamilton, “Federalist coalition”, wanted to pass the Funding bill allowing the federal government to assume state debt. 

This is a repeated game since policy debates and negotiations are ongoing even before the 1790 Bargain. Each side has reputational incentive to win/lose. The ultimate loser is the U.S. economy and possibly its ability to forge ahead as a new country under acute fragile economic conditions and fractured leadership. Breaking the gridlock was Secretary of State Jefferson who set up a dinner between Madison and Hamilton to knock out a bargain. 

The game of chicken has played out over the course of history between presidents and Congress. In recent history, to force the other side to accept a downsized government budget, President Reagan ordered the suspension of government services which impacted 800,000 federal employees. That same day the U.S. Congress resolved the situation by approving funding of the government.

Decades later in 1995, President Bill Clinton and his Treasury Secretary Robert Rubin had a record showdown against Congressional Republicans. Congressional leaders opposed the President’s offer to keep the government open during the negotiation. During President Barack Obama’s showdown with Republican leaders in Congress, the government also temporarily laid off 800,000 federal employees.

Prisoner’s Dilemma

Rather than the Chicken Game, we can dissect the political negotiation process using a slightly different game design known as the Prisoner’s Dilemma (PD). Suppose two criminals from Al Capone’s gang are caught. Each are seated in a separate room. This is a single game with no communication between the two players. The FBI offers each a choice: either rat out the gang or stay silent. By design, this is a non-cooperative game with dominant strategies where each player has a preferred strategy. The dominant strategy for each player is to defect since it gives the highest payoff regardless of what the other player does. 

Player 1’s preferred strategy is to defect, ratting out the gang first since he wants a reduced sentence, thinking that the other guy will likely rat out the gang anyways. Player 2’s preferred strategy is to defect. When both guys rat out the gang, they indict the entire gang. So both players’s default strategy is to defect given what the other player is doing in the holding room. The expected outcome of Prisoner’s Dilemma is defect-defect or otherwise known as the Nash Equilibrium. However, it’s a Pareto suboptimal outcome–not an ideal result. The optimal outcome would be both players cooperating by staying silent so the police can’t indict anyone. Collectively that would be an efficient result but individual preferred strategy leads them astray.

Whether it’s the Chicken Game or the Prisoner’s Dilemma, there is a broader takeaway for U.S. economic policy. We already saw the dynamics between Hamilton and Madison are similar to modern fiscal showdowns in Congress with the decision of whether to approve the budget to keep the government open or shutdown government services. It’s clear that by Constitutional design, separation of power between the Executive Branch and Congress, as well as checks and balances between political parties, can lead to brinkmanship. This phenomenon is secular to the party in power or political affiliation of the US President.