Finance

Brinksmanship: Crazy Like a Fox

By Bob Bruner-

“The best swordsman in the world doesn’t need to fear the second best swordsman in the world; no, the person for him to be afraid of is some ignorant antagonist who has never had a sword in his hand before; he doesn’t do the thing he ought to do, and so the expert isn’t prepared for him; he does the thing he ought not to do; and it often catches the expert out and ends him on the spot.”

– Mark Twain, A Connecticut Yankee in King Arthur’s Court

The negotiation deadlock over the Federal debt limit will make a worthy subject for business school cases. Indeed, the scenario is not unknown to business practitioners: two sides come together to negotiate the resolution of some problem; both sides are adamant and a deadlock forms; a deadline looms after which failing to come to terms, both sides will be worse off. To aficionados of bargaining, watching this is high entertainment. It’s certainly highly instructive for students and practitioners of business.

Lesson 1: in any negotiation, there are at least three sets of discussions going on: the talks between the two sides, and then the talks within each side. Read the media closely and you will sense the pressure that the Progressive wing of the Democratic Party, and the Tea Party are bringing to bear on the negotiators. This pressure has influence because the leaders of both parties are already looking toward the 2012 elections.

Lesson 2: Deadlines have the virtue of concentrating the mind. August 2nd is a deadline, a “brink.” We’ve had no end of experts declare how awful the consequences will be if Congress does not raise the ceiling by the deadline, August 2nd. One of the most frequent questions I’m asked these days regards the consequences if Congress doesn’t raise the ceiling. It won’t be pretty, though there are some worthy arguments to the contrary. I’m less worried by the possible short-term reaction by government creditors, employees, etc. and more by the potential failure to deal with the twin problems of high unemployment and high government indebtedness—it will be hard to resolve both simultaneously.

Lesson 3: it can be rational to push the conflict to the brink. Threatening to do the irrational thing can help to budge your counterparty off of a deeply entrenched position. But it risks the worst-case outcome and produces a great deal of anxiety. Most game theorists argue that this tactic should be used sparingly. John Foster Dulles invented the term, “brinksmanship,” during the Cold War to signify a strategy of being willing to go to the brink of hot war in order for the U.S. to achieve its foreign policy objectives. John F. Kennedy practiced this with the Cuban Missile Crisis—and it worked.

Lesson 4: Know your counterparty. The debt ceiling negotiators are professional politicians; they cut deals for a living. One might assume that they could rationally reach an agreement. Less well-known are the freshmen Congressmen elected on the Tea Party tide and the Progressives on whom Obama will depend for re-election—both of these groups are really lighting up the media. This is intentional reputation-building aimed at motivating the other side to change its position. To budge the other side and to give your own negotiators a stiffer spine, it may help to have backers who seem a little bit crazy. Crazy counterparties are less willing to play by the rules and reach a conventional outcome. As Mark Twain noted, “the ignorant antagonist…doesn’t do the thing he ought to do.”

The textbook solution for dealing with stalemates is to find a way to push back the deadline, change the players, change the rules of the game and constraints, and/or change the value-added. Reading the news reports closely, one sees manifestations of all of these.

The big problem with brinksmanship is that it is easy to lose sight of what really matters: national security and financial soundness can get lost in the noise of rattling sabers or pre-election posturing. Let’s hope that today’s brinksmen and women keep their eyes on the real goals. If we cannot cut government spending at a time like this, when will we ever have the resolve to do so? On the other hand, it seems unlikely that we’ll reduce debt without higher taxes.