The key to human advancement is our ability to build on the achievements of the past. The people who are bringing us cures to diseases and exploring the outermost reaches of space and the fundamental nature of matter would be swinging clubs and digging for edible roots if they didn't have access to everything people have done before.
Similar development happens in all areas of human endeavor. A modern chess Grandmaster with a time machine would make short work of past world champions, manufacturing experts have a structurally superior understanding of their processes (not just better machines) and modern negotiators are far more effective at getting good results than their predecessors.
Unfortunately, advances in a field are not always captured by people for whom that field isn't a core competence. Government in particular seems vulnerable to falling behind the advances of the business world and our current debt limit negotiations are a potentially disastrous example.
I'm going to do a post soon exploring how the current negotiating strategies by both parties could prove effective but today I'm going to look at what I think is the more likely scenario -- that they are inefficient, likely to lead to missed opportunities and have a very real potential to do us great harm.
The basic strategy taken by the Republican party has been maximalism backed up by ultimatum. They have demanded massive reductions in spending and declared as a matter of principle that absolutely no tax increases can be part of the deficit reduction package. If their terms aren't met they will not authorize an increase in the debt ceiling, which presumably would cause the United States to default on their debt.
To illustrate the weaknesses of this approach I want to explore it using a simpler example -- a company that makes customized heavy equipment negotiating a deal with a customer. Both sides have a general sense that the deal is worth about $10 million, and in fact the seller knows that the deal is attractive at any price of $8 million or more while the buyer knows it's attractive for them at any price of $12 million or less.
A maximalist approach would see the buyer offer $3 million for the equipment, while the seller insists that they need $20 million. Then the dance begins, with each offering concessions until finally they (hopefully!) complete the deal somewhere within the ZOPA. Even if they do make a deal, their approach is costly in many ways:
1. It's inefficient. Negotiations are often time-consuming affairs. At best, a maximalist approach still involves a much longer dance of mutual concessions until the parties reach the ZOPA.
Think how many months, how many high-level meetings and how many hours of staff time have been spent on the debt ceiling negotiations so far, with both sides still largely sticking to their maximalist positions. Think of the wasted energy at the Treasury department as they buy time for negotiations (we theoretically hit the debt ceiling a while back; the August 2 deadline is when Geitner's maneuvers can no longer prevent a default on some of our obligations). Only the most anti-government zealot would see this as a good thing, and it's certainly not something we'd like to emulate in our own negotiations.
2. It erodes trust. If you offer me $3 million and I counter with $20, how has the negotiation affected our relationship by the time we agree on $10 million? An unreasonable demand -- especially when both parties know it's unreasonable -- is also inherently a dishonest one. This is compounded when we back up our offers with statements like, "We'll lose money if we sell it for less than $15 million," or "I'd be violating my duty to shareholders if I paid you more than $7 million."
3. It's a reinforcing trap. Suppose you're buying something from me and I claim I can't sell it for less than $100 but eventually agree to $40. The next time you (or anyone familiar with that negotiation) deals with me, they're going to discount my initial claim by 60%. If I decide I've had enough with maximalism and make a reasonable initial offer to sell for $50 I'm going to find myself facing a client who is unwilling to pay above $20. Like a vendor in a market where extreme offers and heavy haggling are commonplace, I lose the option to negotiate more reasonably.
4. It destroys opportunities to create value. Suppose you're the buyer in our heavy equipment example. The factory that is going to use the equipment is ahead of schedule, so you really want to complete the deal in a timely fashion. Every month that you spend in negotiations will cost you $2 million in lost profit. What you don't know is that the seller could speed up manufacture of your equipment at a cost of $500,000.
For modern negotiators this is easy money. They will quickly identify that accelerating delivery is worth more to the customer than it costs the vendor and adjust the contract accordingly. A maximalist is much less likely to find opportunities like this both because they are wasting effort on unreasonable demands but also because less information tends to be shared when trust is lower.
Identifying value creating opportunities is certainly possible for maximalists -- it's just harder. Going back to the debt ceiling negotiations, for example, I think it's extremely unlikely that there are absolutely no tradeoffs involving tax increases that both parties would consider preferable. Republicans have virtually taken those possibilities off the table -- or at the very least, made it politically costly to enact them, which may amount to the same thing.
5. It can kill a good deal. We like to assume that people are generally rational and that given the opportunity to make money or burn it we'll choose to make it every time. Reality does not always bear this out. Negotiation history shows many examples where deals like our hypothetical heavy equipment contract failed because each side became trapped by their own statements or demands.
I think the odds strongly favor a deal being done to increase our debt ceiling but I don't for a moment consider it a foregone conclusion. Democrats and Republicans have made very public statements about what they can possibly accept and those statements have no ZOPA. As the rhetoric heats up, each party adds to the political cost of giving in to the other's demands and, from a psychological standpoint, increases the risk that they succumb to a number of cognitive biases. As one observer pointed out, a game of chicken can end tragically even if both parties are willing to swerve; in Rebel Without a Cause, the decision to bail out was "trumped" by a jacket getting stuck to a car door.
In this case we're all in the car with them. For my part, I wish we were playing a more constructive game than chicken.