Wednesday, January 2, 2013

One more time on leverage

I see that some of the "hair-on-fire" liberals are coming around to say that the deal on the so-called "fiscal cliff" might not be so bad in and of itself, but it gave up all of President Obama's leverage going into the negotiations over the sequester cuts and the chaos the Republicans plan to instigate over the debt ceiling.

But I'd like us to get clear about what constitutes leverage in negotiations. To do that, I'll once again quote professional negotiator and blogger Joe Markowitz.
This is basic Negotiation 101. If you MUST make a deal, you are going to have to compromise, because the other side knows you must make a deal. And therefore you probably won't get your best deal, but you will get something accomplished. On the other hand, if you can afford to walk away from a deal, you can also afford to be uncompromising, because you win either way. Either you make the deal you want, or you blame the other side for the failure to conclude the negotiation.
What he's saying is that it is the one who can walk away from the table without a deal that has the leverage.

So lets take a look at these upcoming situations from that angle. What happens if there is no deal on an alternative to the sequestered cuts? First of all, unlike the fiscal cliff, regular voters won't be impacted immediately in any real way. So there won't be as much pressure from the public to get a deal.

Secondly, the way these cuts were set up will have a much more serious impact on Republican constituencies (half of the cuts are from defense) than Democratic constituencies (Social Security, Medicaid, programs for low income people were exempted from cuts and Medicare is limited to a 2% cut to providers).

Overall, neither side is going to want to walk away from a deal. But the Republicans will be less inclined to do so.

If the Republicans really do decide to take the debt ceiling hostage once again, that's not a negotiation. Its a game of chicken. Neither side can let the hostage die. Its simply a matter of who blinks first. President Obama has said over and over again that he's not going to play that game. So it appears as though we'll have to wait and see how long the Republicans can to hold out before they blink.

The other thing that will come into play is Joe's last line about who can afford to walk away without getting blamed. President Obama has spent 4 years building up his own capital as someone who is reasonable in being willing to compromise. The Republicans were running out of that kind of capital prior to this whole fiscal cliff fiasco. But I'd say that except for in the reddest part of Redistan, they're running in the below zero range these days. They have absolutely NO leverage when it comes to being able to withstand another stunt like we saw over the last couple of days.

So cool your jets on the "he gave away all his leverage" folks. Or, as we Obamabots like to put it...


  1. On my piece on TPV, someone commented that Krugman is losing his shit again.

    Now, I'm not one to disparage expertise like those on the Right are. I'm more than willing to take him seriously on economic matters. But on politics? He knows no more than I do, and I'm starting to suspect quite a bit less.

    What the screechers on the Left can't abide is that this President didn't turn to them as consiglieri. They expected to have the run of the White House, and have never been able to get over the fact that this administration doesn't need them. Petulant children screaming that Daddy isn't paying them attention.

    1. I'm totally with you on your analysis about Krugman as well as the "screechers on the left."

    2. Excellent post. With all the loons on the left, it's sometimes hard to keep one's head clear. Fortunately, you do.

      Per Krugman -- totally agree with you. He lives in an ivory tower. The man railed against Obama because he didn't ask for $1.2 trillion for the stimulus bill, which would have been impossible to get. Then again, Krugman did do a cameo in "Get Him to the Greek" in a scene where Jonah Hill has vomit on his face and clothes. What other Nobel Prize winner in economics would show such dignity in public?

  2. Thanks again for the shout out, Smartypants. Krugman is a great economist, but he should really try to avoid commenting on politics or negotiation. These are not his fields.

    But I want to add to what you quoted me as saying above. It's not even all just about leverage. What might be more important at this stage is just the fact of getting Republicans off of their complete intransigence on taxing and spending issues. They can try to get all the cover from Grover Norquist that they want, but the fact is that they broke their pledge on allowing tax rates to increase. Previously they said they would never vote to allow only the rates on the middle class to remain low. Remember when the Senate actually filibustered a bill in 2010 that would have allowed middle class tax rates to stay low? They would only vote for that if all the Bush tax cuts stayed in place. And now they have broken that pledge. And they also let capital gains tax rates go up to 20% which is huge, huge, huge. Do you know how much that will cost Mitt Romney alone? The answer is approximately $1 million per year.

    The point is that once Republicans have gotten in the habit of compromising their principles for the good of the country, there is no telling what they might do next. They might get rid of some more tax loopholes if they can get defense cuts restored, for example.

    The point is that the Democrats still have plenty of leverage with the defense sequester. And the Democrats have something even more important than leverage. They have gotten the Republicans a little bit pregnant. They got them to agree with Democrats on something. And guess what? The sky did not fall in. In fact, people seem to like it. Congress's favorability rating will probably go up. And the Dow went up 300 points today! In other words, Republicans went along with the Democratic program a little bit, and were rewarded for it. That means they will do it again.

    1. Thanks for this analysis - seems like the _political_ consequences of this financial deal might be even bigger than the straight financial ones: the Hastert rule was broken for the first time in forever, Norquist has had to turn himself inside out to continue keeping his pledge relevant.

      And cap gains & estate tax rates rise. Did not see those coming. That's a huge deal, even more so considering House support for Ryan's budget proposals.

      But I think these comments are being a little harsh on Krugman. He's picking up, as he does so often, on the gap between what is required to solve a problem, and what gets passed legislatively - which is then proclaimed by politicians to have solved the problem.

      Take the stimulus as a major example. He was saying at the time - correctly, as far as I can tell - that the amount _requested_ was not enough. The point of friction is not that the Administration were justifying this by saying 'this is as good as we think we can get', but rather 'this is as much as we require.'

      Now, they may have actually believed the latter while political exigencies demanded that they say the former. But unless there is some effort put in to demonstrate this belief to people like Krugman, who are pointing out this gap, those concerns will continue to resonate.

      I don't think, at root, his problem is that the Administration is compromising. It's that they are not giving him confidence that they're starting from an accurate assessment of the problem.

      Given Krugman's excellent recent track record - he's been arguing for years that the Fed should be doing what it has in fact recently decided to do - this should be attended to if possible: he's not a poutrager.

    2. sib,

      I can't speak for others who commented here about Krugman, but I would agree completely with your analysis. That's why I "dittoed" what LL said about him having expertise on economics but being completely tone dear when it comes to politics. If he'd stick to his area - he could do immeasurable good. But he doesn't. He clouds all that by weighing in on the politics and negates much of the positive impact he could have.

    3. Well, I'm not sure it's actually possible to stick to economics and ignore politics. Economics is inherently political. And while the Administration really is doing a good job on the political negotiation side of things, Krugman's repeated point is that they are neglecting the political ramifications of their economic statements.

      That is, by making statements which misrepresent the economic facts on the ground they undermine their credibility among those who care about such facts.

      I imagine the administration has made a judgement call that this is what's necessary in order to get what's possible, done. After all, it's not the 'economic facts' crowd they have to bring to the floor for a vote.

      But that doesn't mean that Krugman's critique of, say, the chained CPI offer isn't perfectly valid from an economic point of view. And it's unavoidable that by explaining the economic ramifications of such a change, he's making a political statement.

      Anyway - a happy new year to you all!

    4. sib

      I wasn't talking about the political ramifications of economics. I was talking about Krugman's constant need to discuss the negotiation process (from a rather lopsided view at that).

      I get what you're saying about the importance of saying the stimulus wasn't enough. But that's not what I'm talking about. He also regularly comments about things like the president being a weak negotiator - things that have zero to do with economics. In that sense - he takes absolutely zero account of the opposition the president is dealing with. He could just as easily restrain himself to talking about the negative economic impact of what is under consideration.

    5. Yeah, fair enough on the negotiation part - I've been eliding that too much. Something that seems a little hard for many to grasp - myself included. Complaining is easy.

      I do occasionally wonder whether the Administration is deliberately trolling the more nervous segment of their base with their negotiations: 'they're offering WHAT now?' - only for it to emerge after the deal that the 'WHAT' is no part of it, and in fact something else good got shaken loose in the process...

      Game theorists and negotiators are going to have an absolute goldmine with the papers of the this administration.


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