Sunday, August 07, 2011

Negotiating with Madmen

Very few deals are truly "take it or leave it." And those that are require order-takers, not deal negotiators.

But every now and then, your counterparty to a negotiation will take this nutty "my way or the highway" position. Either because they misperceive their leverage, figure there's no cost in asking for the moon, or are just plain bonkers, they'll refuse to engage in the process of compromise that lies at the heart of every successful deal.

This isn't usually a very effective negotiating tactic. Experienced people will simply take the "highway" option, pack up and walk from the negotiation. And if you didn't really mean to give the ultimatum, and have to go crawling back to get talks going again, well . . . it's pretty obvious what that does to your negotiating leverage.

In order to do so, you've got to have an alternative - another competing deal, or a willingness to simply let a bad deal go by.

And this is what bothered me so much about the "debt limit deal" worked out between the White House and Congress. Obama assumed he was dealing with responsible counterparties, when he reality he had loonies on the other side of the table. Now, maybe the GOP wasn't really ready to let the US slip into default, but they certainly gave the impression of that - and in economic matters, impressions of what a government is capable of doing matter, a lot.

The first "my way or the highway" ultimatum was the GOP insistence that no deal for deficit reduction would involve increasing revenues. This should have been met with a response along the lines of "look - if you guys aren't going to take the business of governing seriously, these negotiations are over. I'm just going to ignore the debt limit and get back to work."

Messaging like that would have sparked outrage on the right of course, but it's a valid position both from a policy perspective (the debt limit conflicts with laws authorizing expenditures) and a strategic one (forcing the Republicans to choose between negotiating in good faith and going to court to force the US into default). But most importantly, it would have clarified the issues and let us know whether a meaningful deal could really be had.

Obama may have calculated that the threat of default was enough to restrain the right, and he may been correct, to a point. The problem is, all he could wring out with that weak piece of leverage was a face-saving mess of a deal that does little to address what's wrong with our economy. And we got it for the cost of undermining confidence in the United States.

It's an object lesson in the merits of sharpening the edges of a deal early on. But to do so, you've got to be willing to walk when the other side starts talking crazy.

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