How Game Theory Explains Why We Have to Sanction Putin — Even If It’s Costly

“The point of sanctioning is that, if we don’t, the norm against territorial incursions will collapse. Preserving this norm — and working to prevent similar abuses in the future — is worth the cost of sanctioning. But why is norm collapse an inexorable consequence of failing to sanction? Fortunately, a bit of game theory can help us answer this question.

Let’s call this the Repeated Sanctions Game, which has two players. In each round of the game, Player 1 (i.e., an adversary such as Putin) chooses whether to transgress, then Player 2 (i.e., NATO) chooses whether to sanction. Transgressing benefits Player 1 (Putin would like to annex Ukraine) but costs Player 2 (NATO would prefer that Ukraine be free). As in real life, sanctioning is costly not just to Player 1 but also to Player 2, who might prefer not to, for example, suffer higher prices or lose revenue from Player 1’s products and businesses as a result. Then Player 2 plays the game again and again — perhaps with the same Player 1, perhaps with another (Putin now, maybe Xi next time).

For Player 2 to deter future transgressions in this game, she would have to threaten to sanction Player 1 whenever he transgresses. This threat has to be credible, otherwise Player 1 will simply call Player 2’s bluff. Player 2 must, if called upon, reliably follow through on her threat.

How can this be worth it for Player 2, given that, as already acknowledged, sanctioning is costly? To see, we must factor future expectations into the cost-benefit calculation. When a transgression isn’t met with sanctions, everyone would reasonably expect that future transgressions may also go unpunished. This is the norm collapsing. So long as Player 2 cares enough about the costs of all those future transgressions, she’ll prefer the collateral costs of punishing the transgressor today to increasing the likelihood of future transgressions. It’s not preventing or stopping the current transgression that’s motivating Player 2 to sanction, it’s the fact that without sanctions as a response, there will inevitably be more transgressions.”

“what the international community is really trying to avoid is other, more rational actors, such as Putin’s eventual successor or Xi, inferring that future invasions will not be punished.”

“So, yes, it’s true that sanctions will hurt our economy, and it’s true that they may even push Putin to further escalate Russia’s aggression against Ukraine. That’s all really bad, but it’s not as bad as a future where national sovereignty is not respected. For the norm against territorial incursion to survive, everyone must forever know that we are willing to pay the cost to sanction.”

Was Russia’s decision to cut off natural gas exports a mistake?

“Despite Western powers’ broad condemnation of and efforts to isolate Russia, the country has managed to maintain ties and partnerships elsewhere around the world. In April, the UN General Assembly voted on a resolution to suspend Russia from the Human Rights Council over its invasion of Ukraine. The resolution succeeded after it received a two-thirds majority of votes from member states with 93 nations voting in favor of Russia’s suspension from the body. But 24 of the body’s members voted against the action while 58 members abstained from the vote altogether.

Results of the UN vote signify the complexities of real-world diplomacy even in the face of war. Countries in Africa, South America, and Asia have increasingly sought to resist taking sides as the Russia-Ukraine war threatens to shape the world into political factions. But the West’s waning influence in other parts of the globe, combined with economic and political interests at stake, has resulted in many nations opting to maintain their independence when it comes to relations with Russia.

In Asia, where growing vigilance over China’s increasing influence is shared across borders, nations in the southeast and the south of the continent have expressed their intentions to remain on good terms with Russia in spite of the situation with Ukraine. Among Russia’s most loyal partners is India, with whom it has maintained a strong relationship since the Soviet Union’s backing of India during the 1971 war with Pakistan, even as India remained officially non-aligned during the Cold War.

Another factor behind their continued friendship is India’s reliance on Russia as a military arms supplier — from the 1950s to now the country has received an estimated 65 percent of firearms exports from the Soviet Union or Russia, according to the Stockholm International Peace Research Institute. India’s border disputes in the Himalayas with China, which triggered a bloody clash in 2020, is another motivating factor for India as Russia has functioned as an important mediator in the conflict with China.

China, another key Russian partner, has refrained from condemning Russia outright, instead asking for the warring countries to reach a peaceful resolution. In a March virtual meeting with France and Germany, President Xi Jinping called for “maximum restraint” on the issue and expressed concerns over the broader impact of sanctions on Russia. But some, like Herrera, doubt how far China will continue to toe the line if the situation worsens.

“China has not said they would not abide by the sanctions and they are so far going along with the sanctions against Russia,” Herrera said. A potential turning point, she said, could be Europe’s next sanctions, particularly any secondary sanctions it puts out, which will be “a big crossroads for China to decide whether to participate with those.”

But its ties with Russia could still end up serving China economically. President Vladimir Putin has stated Russia will “redirect” its energy exports to “rapidly growing markets” elsewhere to help buttress against sanctions, perhaps an effort to maintain support from its key ally.”

Elizabeth Warren’s plan to break up Big Everything

“mergers don’t just affect consumers: “The world has changed for those workers,” Warren said.”

“Studies have shown that as markets become more concentrated, wages stagnate.”

“Under Warren’s new bill, mergers over a certain size or that consolidate the market too much are forbidden. And consummated mergers that have harmed competition, workers, consumers, or competitors can be broken up.”

Are sanctions against Russia working?

“The United States and its allies imposed unprecedented economic sanctions on Russia in the wake of its full-scale invasion of Ukraine. The swiftness and intensity of the penalties crashed the ruble, forced the Russian stock market to close, and sent Russians to line up at ATMs to withdraw dollars from their bank accounts.

The Russian economy was in free fall. Until it wasn’t, exactly.

The country’s central bank responded by sharply hiking interest rates to 20 percent and imposing strict capital controls. Those interventions, along with Russia’s still-intact ability to sell its oil and gas abroad, helped create a buffer against the economic chaos after the initial sanctions shock. The measures were “straight out of the country’s economic crisis playbook,” said Adam Smith, a partner at Gibson, Dunn & Crutcher, who worked on sanctions during the Obama administration.

The economic crisis playbook did its job, and calmed the immediate crisis. The ruble stabilized. That allowed Russia to declare victory over the sanctions onslaught. “The strategy of the economic blitz has failed,” Russian President Vladimir Putin said in April.

At least, that is what Russia would like to claim. Russia’s efforts to shore up its currency mask the profound economic disruptions and transformations that sanctions are unleashing within Russia right now. The West’s sanctions are isolating Russia, cutting it off from key imports that it needs for commercial goods and its own manufacturing to make its economy work. That means high-tech imports like microchips, to develop advanced weaponry. But it also means buttons for shirts.

Right now, there is “this false sense of stability,” said Maria Shagina, a visiting fellow at the Finnish Institute of International Affairs.

Russia is facing a deep recession, one the Bank of Russia says will be “of a transformational, structural nature.” The Finance Ministry has predicted the Russian GDP will shrink by about 8.8 percent in 2022. Inflation is expected to clock in as high as 23 percent this year. Russia is looking at a looming debt default. All of this will mean hardship for ordinary Russians, who are already seeing their real incomes shrink. Some tens of thousands have tried to flee, especially those in tech, prompting a potential “brain drain.” And these are the things we know; Russia will cease publishing a lot of economic data, a tactic, experts said, Moscow has used before to obscure the effects of sanctions.

These sanctions, said Yakov Feygin, a political economy expert at the Berggruen Institute, are pushing Russia — a modern economy, integrated around the globe — back decades and decades.

“They’ve stabilized it, they’ve taken emergency measures. That was to be expected. But that’s not going to help them in the long run,” Feygin said of Russia. “You’re not going to see people queuing for food for quite a bit. But with the current course of things, it’s still very possible.”

The US and European allies have continued to pile on more penalties, refining and sharpening the sanctions, all in an effort to ratchet up the pressure on Moscow. The EU has proposed a phase-out of Russian oil products, and depending on the final details, that might further erode the Kremlin’s lifeline. And the US could take additional steps, like threatening secondary sanctions that go after countries like China or India, to deter them from buying cheap Russian energy. That comes at a cost, and not just for Russia.

Even without more escalation, the sanctions regime against Russia is one of the most aggressive in history, untested on an economy of Russia’s size and as entangled in the global financial system.

Whether the sanctions are “working,” then, depends on what they are intended to achieve. One thing is clear: Over time, these sanctions will likely make it harder for Russia to rebuild its tanks, manufacture cruise missiles, and finance a war. It will also make it harder to produce food and make cars. And it still may not stop Russia from pursuing its campaign against Ukraine, all with unpredictable consequences for the rest of the world.”

Blame Insane Government Spending for Inflation

“Over the course of the pandemic, the Treasury Department issued roughly $6 trillion, $2.7 trillion of which was monetized by the Federal Reserve. Americans were sent $5.1 trillion through various programs, including individual checks and unemployment bonuses. Overall federal debt has since risen by about $6 trillion.

This response assumes the 2020 recession was sparked by a demand shock leading to a fall in aggregate demand, rather than the strangling of aggregate supply caused by the pandemic and lockdowns. Under these circumstances, sending people and companies money was never likely to impact output. Instead, it greatly inflated demand for the durable goods still being produced.

Even by the Keynesian economic standards that prompt this sort of fiscal response, COVID-19 relief was larger than any “output gap”—the difference between what the economy is producing and the most it could produce. In March 2020, the gap was $2.3 trillion, and that year alone, the government spent $3 trillion through several relief bills.

In March 2021, Democrats passed the over-the-top $1.9 trillion American Rescue Plan. At the time, the projected output gap was $700 billion through 2023—the period when most of the spending would take place. As such, the bill was two or three times too big, especially considering the economy was mostly reopened and growing, with unemployment dropping fast from 14.8 percent the year before to 6 percent.”

“Today, several new studies confirm that this bout of inflation is rooted in demand, not supply. That’s not to say supply-chain chokepoints, originally resulting from the global shutdown imposed by governments and a sudden shift away from services toward goods, played no role.

However, we wouldn’t have such large-scale supply-chain problems without the shutdowns followed by the aforementioned government-fueled increase in demand for durable goods. According to Robert Koopman at the World Trade Organization, artificially inflated demand accounted for as much as two-thirds of supply shortages.

Second, global supply chains are, obviously, global. If inflation were truly the product of supply-chain issues, we would witness roughly the same rates of inflation throughout the industrialized world. But we don’t. Most industrialized countries have lower levels of inflation than the United States. These other countries also implemented significantly lower amounts of COVID-19 spending.”

“Today, all prices are rising, including wages (though for now at a lower rate), and the inflation is persistent. This is because of overblown fiscal and monetary policies. Tackling the problem requires strong Fed actions and significant fiscal restraint by Congress. Short of both, inflation will persist for much longer, inflicting disproportionate harm on the most economically vulnerable.

This also means that the recent calls to offset inflation with subsidies for gas, housing, child care, and more will require borrowed money. Since fiscal largesse is the source of the problem, and since these efforts make the affected markets more inefficient, the approach raises the risk of a great stagnation spiral.”

California’s Terrible Price-Gouging Law Puts Markets at Mercy of Ambitious Prosecutors

“Value grocery chain Smart & Final has agreed to pay California $175,000 because, between March and June 2020, it increased the price of four different types of eggs during a period in which stores were struggling to keep their shelves stocked.

This was in the early days of the pandemic, when Democratic Gov. Gavin Newsom declared a state of emergency. That declaration triggered California’s “price-gouging” law, which says that businesses cannot raise prices by more than 10 percent during state emergencies unless they can prove the price increase is due to increased production or labor costs. According to Attorney General Rob Bonta, Smart & Final raised prices for some eggs by as much as 25 percent.

The Los Angeles Times notes that Smart & Final did have a reason for raising the prices—suppliers were also jacking up prices of eggs. But apparently Smart & Final acknowledged that suppliers were raising the prices of “standard” eggs, and that the chain commensurately raised the price of “premium” eggs.

Laws against price-gouging are bad, wrong, and counter-productive, and Bonta’s own observations about this case, quoted by the Times, explain why. He notes that, “When California first went into lockdown at the beginning of the pandemic, there was a run on essential supplies, and unfortunately, some businesses saw this as an opportunity to pad their bottom line.”

“While these were premium products, remember that during this time, shelves were often bare, there weren’t a lot of choices. Consumers had few, if any options.”

This is an economically illiterate grasp of why stores jack up prices in a crisis situation. The “run on essential supplies” caused absurd amounts of hoarding and over-purchasing, which many customers were able to do largely because stores were prohibited from raising prices. That sharp increase in demand travels up the supply chain, ultimately leading to some combination of empty shelves and higher prices as suppliers ramp up production.

Price-gouging laws simply attempt to legislate away basic economics at the retail point, and the end result is reasonable prices for goods that are seldom or never available. It doesn’t matter how much eggs cost when a supermarket doesn’t have any in stock. If people actually had to pay more for goods in an emergency situation, they’d be more careful about what they bought and we wouldn’t have had people pushing entire carts of toilet paper out of the grocery stores (and then attempting to resell them online).

The way Bonta describes the store’s situation is that people were buying the more expensive premium eggs due to shortages of the standard eggs. The same demand issues were most certainly going to come into play if people continued to purchase the premium eggs at the same rate they purchased the standard eggs.”

Local governments have billions in federal Covid cash and no workers to pay

“State and local governments are struggling to hire and retain workers amid a tight labor market, even as private-sector employment is reaching pre-pandemic levels.

Despite an influx of federal cash they received in response to Covid-19 — much of which remains unspent — and their own booming revenues, governments are having a hard time competing for workers as salaries at private companies rise.

Economists and unions warn that if public-sector employers can’t reverse the trend, it will erode the quality of services like education and slow the overall economic recovery. ”

“Altogether, the public sector has gained back 53 percent of the jobs lost since February 2020, a ZipRecruiter analysis of Bureau of Labor Statistics data found. The private sector has won back 93 percent.”

“Economists cite a historically tight labor market as one driver of the discrepancy. Employers in every industry are struggling to attract and retain talent, which has put upward pressure on pay and perks such as remote work that governments thus far have been unable to match.

There were a record 11.3 million job openings in January, the most recent month for which data is available — about 5 million more than there are employed workers. At the same time, average hourly earnings have surpassed $31 — a more than 5 percent increase from the previous year.

The year-over-year growth rate for hourly private-sector salaries and wages in each of the past four quarters has exceeded that for state and local governments by the largest margin on record, according to a Pew analysis of Labor Department data.

“Really across the board, many governments are often facing intense competition for workers,” Mike Maciag, who studies the government sector at The Pew Charitable Trusts, said. “Slower [public-sector] wage growth is playing a major role in hindering efforts by a lot of governments to fill openings and retain workers.”

Maciag points to a recent report from Arkansas’ Office of Personnel Management that found competing offers from Walmart, McDonald’s, Amazon and the like were impeding that state’s efforts to fill some positions. All paid significantly more than the state for entry-level jobs — despite the fact that the “complexity and responsibility” of the government roles “far exceeded” that of the private-sector ones, according to the report.”