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Deficits: Lessons (re-) Learned

From even the worst disasters we can learn lessons. Here are a few:

1. Successful negotiations require an understanding/acceptance of your opponent’s bottom line, clarity about your own minimum objectives, a search for common ground between those boundaries, and an ability to deliver on your commitments.

-  To the end the President did not accept the Republicans’ “no tax” requirement. Boehner eventually understood that the Democrats were split, having three requirements – the Left insisted on no change to entitlement programs; some like Bernie Sanders insisted on the virtue of taxing the rich; and Obama primarily wanted to get past the next election with no problems.

-  When President Obama was close to an agreement with Speaker Boehner on the big deal he could not deliver his Party – in part because he had excluded them; in part because he persuades by public speeches, not by private negotiation.  Conversely, it is not clear that Boehner could have delivered on his tentative acceptance of $800 billion in “revenue increases” even if Obama had not “moved the goal post”.

- An important rule of negotiation is the “Principle of Least Interest” – the party most willing to walk away has the most leverage. For principle rather than tactics, the Tea Party Republicans provided great leverage. They won on the “no new taxes” and “cuts exceeding limit increases” principles, even if the math is fuzzy. The direction of the national discussion has been shifted.

- In business it is rare for negotiators to highlight their opponent’s shortcomings – your own stature is enhanced if the opponent is enhanced. Both President Obama and Majority Leader Cantor became personal while denigrating the other’s supporters and motivations.

2. Politics is the art of the possible. Republicans will not accept tax increases; Democrats will not accept meaningful entitlement reforms. Without either (and with honest accounting)  it is not possible to cut spending enough to get through 2012. We will muddle through the next election – quite likely with a rating downgrade and higher interest rates even before inflation takes off.

3. The real issue is a disagreement about the size of government. In the last decade we have increased from an historic 19-20% of GDP to 24-25%. Part of that was President Bush’s agreements with Teddy Kennedy to increase federal education spending (No Child Left Behind) and a Medicare prescription drug benefit as well as the wars in Iraq and Afghanistan. The Democrats have brought a quantum increase from there with a disdain for any budgets.  There is no middle ground.

4. Big changes take a couple of election cycles. The Pelosi-Reid-Obama tide had huge electoral successes in 2006 and 2008 and with that they could just barely muscle through their top priority – Obamacare.  With 23 Democrats and 10 Republicans up for election in the Senate in 2012,  it is likely that the Republicans’ 2010 wave will be followed by a takeover of the Senate next year.  With 9% unemployment it is likely that they will also take the presidency, allowing a rollback toward the 20% spending level.

5. It is easy to get distracted. As important as the deficit is long term, today’s economic and political problem is jobs. With increased deficit spending off the table (tax cuts; another stimulus) there are few actionable employment  ideas in Washington and no Democratic relenting on regulation – EPA; NLRB; financial sector; Obamacare.   Recovery, if there is to be one before 2013,  will be up to the private sector.

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This week’s video is a concise but impactful explanation of the growing cost of interest on our national debt.

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