StrategyDriven Editorial Perspective – Here we go again… more government created uncertainty

As we enter this last week of September, America faces another looming government shutdown. The continuing resolution that currently funds the Federal government’s activities expires at 11:59 pm the evening of September 30 – the end of the last day of the government’s fiscal year. Republicans and Democrats have once again dug in to their partisan positions; creating an uncertainty regarding the operation of our government institutions, the funding of programs, and the paying of social security, veteran benefits and military salaries.

StrategyDriven has long maintained that politicians are primarily responsible for the great uncertainty hindering economic expansion and prosperity – and we believe history supports our assertion. The following video is that of a lecture made by Nobel Laureate and Economist Milton Friedman. In his discussion, Dr. Friedman reveals how the government, and in particular the Federal Reserve, was largely responsible for the Great Depression. He goes on to illustrate how Federal Reserve actions also caused the hyper inflation experienced in the late 1970s.

The purpose of this editorial is not to suggest a specific course of action. Instead it’s purpose is to suggest a need to closely monitor the government’s fiscal policies and to draw from historical perspectives how those policies may impact our economy and your business’s future.

StrategyDriven Editorial Perspective – Negotiations and the Divided Government

A Republican controlled House of Representatives, a Democrat controlled Senate and White House – a divided government. And if to make matters more complicated, the Republican Party itself is dominated by two very different groups; the first and larger being the Traditional Republicans and the second being the fiscally conservative Tea Party Republicans. Could ‘getting to yes’ be any more difficult?

The recent debt ceiling debate illustrated the vastly different philosophies of these three dominant groups within our government and revealed to us a fundamental negotiation rule – one that we often forget, one that we should be much more diligent in recognizing when negotiating ourselves. This rule: identify the other party’s best alternative to a negotiated agreement.

Let’s consider the recent debt ceiling debate…

Common among all three parties was the desire to prevent the United States government from defaulting on its debt obligations. This particular desire was clearly a moot point. The Federal Government takes in approximately $200 billion per month, an amount far greater than that needed to service its debt. The only reason a default might have occurred would have been that the President and Treasury Secretary would have chose to pay out on the government’s other monthly expenditures ahead of the debt service. This was believed to be highly unlikely. Thus, none of the three parties needed to be truly concerned about a debt default.

The second objective of all three parties was the avoidance of a credit rating downgrade. This particular outcome was a real possibility and in hindsight actually occurred. At the time (prior to the actual downgrade), the threat of a credit downgrade forced all three parties to the negotiating table. However, how to deal with the threat of a downgrade was represented a vastly different position taken by all three groups. More to come on this point in a moment…

The third common outcome desired by all the parties was for the United States Government to meet its financial obligations to military service members, veterans, and the elderly by way of making compensation, benefits, and social security payments. Once again, the United States Government receives enough monthly tax revenues to meet these and its debt service obligations making this another moot point.

The fourth belief shared by the three parties is that an expanding economy is the ultimate solution for increasing government tax revenues and more closely balancing the government’s income with its expenditures. How to achieve this economic growth is the key difference between the parties and forms the basis of the debt ceiling negotiations.

Let’s now examine those differences…

The Democrats: The Democrat Party, in general, believes that government intervention is required to grow the economy, to create jobs. Their focus is on job creation through the building of new and refurbishment of existing infrastructures. Furthermore, Democrats believe that by providing funds to the less fortunate, that these individuals will more greatly participate in the marketplace which in-turn will foster greater economic activity and growth. Democrats feel that given the depressed economy, those millionaires and billionaires – defined as individuals earning wages more than $200,000 or married couples earning more than $250,000 per year – should pay more in taxes to enable their prescribed government spending. This increase in tax revenue derived from this group would be achieved through the elimination of existing tax deductions and an increase in these individuals’ tax rate. Lastly, Democrats wish to heighten marketplace regulation to ‘protect’ their defined middle and low income wage earners.

The Republicans: The Republican Party, likewise, want to grow the economy. However, they believe that taxation and marketplace regulation should be reduced in order to lower the burdens and risks presented to business owners that will, in theory, spark increased economic activity and growth. Furthermore, Republicans believe in lower individual taxes as a mechanism for enabling citizens to retain more of their income which would then be spent within the marketplace and bolster economic activity. They believe that this reduction in government tax revenues should be offset by some modest reductions in Federally funded programs and the restructuring of others. Republicans are not calling for an immediate balancing of the Federal Government’s budget but rather believe their deficit spending will eventually be offset by the increased revenues received from a growing economy some number of years in the future.

The Tea Party: The Tea Party, in principle, shares economic philosophy of the Republicans. The difference, however, is that Tea Party members believe that the government should live within its means now, not many years into the future. Subsequently, the Tea Party wants to cut government spending, primarily through institutional downsizing, to a far greater extent than Traditional Republicans. They believe economic growth is best achieved through a balanced government budget in the immediate-term, not with the promise of a balanced budget some years out.

Considering the desired results of the three parties negotiating over the debt ceiling increase, we can see that there is, in fact, a lot these groups have in common. The negotiations, therefore, center on the approach to achieving these goals.

Now, let’s examine the best alternative to a negotiated settlement. If the parties did not come together on a compromise position that would garner enough votes to pass in both the House and the Senate as well as receiving the President’s signature, the Federal Government would hit its debt ceiling and have its spending limited to that equal to its monthly tax revenues. This would force the government to prioritize its spending and essentially achieve a balanced budget. Additionally, we find that the government could cover all of the commonly desired program funding, namely the service of debt, payment of military salaries, provision of veterans’ benefits, and issuing of Social Security checks. Therefore, all of the commonly desired could be met leaving only the approach to be negotiated.

Considering the desired approach of the three negotiating parties, we find that the Tea Party’s demands in this area would have also been satisfied with Traditional Republicans being partially satisfied and Democrats receiving none of what they desired. Thus, the best alternative to a negotiated solution met the Tea Party members’ demands enabling them to firmly resist any solution not in line with their wishes. This made the Tea Party the most powerful, if not the smallest in number, negotiator at the table. Likewise, Traditional Republicans, the second smallest group, was in a more powerful position than the Democrats who held the greatest control over the Federal Government.

StrategyDriven Recommended Practices

This best alternative to a negotiated solution example highlights the power held by each party and helps explain why the negotiations ended as they did… with no tax increases and an equal value in budget cuts to the amount of debt ceiling increase. It also illustrates several practices StrategyDriven leaders should take when negotiating with other parties:

  1. Define your best alternative to a negotiated solution and its acceptance to your organization.
  2. Identify the best alternative to a negotiated solution of those you are negotiating with including the acceptance of that solution to their organization.
  3. Outside of the negotiations, work to improve your best alternative to a negotiated solution.
  4. Outside of the negotiations, identify those factors that may worsen your counterpart’s best alternative to a negotiated solution and consider taking ethical action to worsen their position.
  5. Reasonably and aggressively negotiate with your counterparts while leveraging this best alternative to a negotiated solution information.

Additional Information

For additional information on determining the best alternative to a negotiated solution and other negotiation best practices, StrategyDriven Contributors recommend Getting to Yes: Negotiating Agreement Without Giving In by Roger Fisher, William L. Ury, and Bruce Patton.

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Inside Job – Unveiling Economists’ Ties to the Financial Sector

America and the world are still recovering from the global economic crisis of 2008. And with unemployment rates above 9 percent, many wonder if the market turmoil will ever end.

PBS NewsHour Economics Correspondent Paul Solman talks to Charles Ferguson, director of Academy Award winning documentary, Inside Job, a film that raises red flags about the world of finance. Paul examines how the film – which raises concerns about conflicts of interest for economists in academics – is influencing some leading economic thinkers.

The Alfred P. Sloan Foundation provided funding for this project.

The Great Stagnation: Why Hasn’t Recent Technology Created More Jobs?

Why is it that the American economic recovery is moving so slowly and new job creation is low? PBS NewsHour Economics Correspondent Paul Solman takes a critical look at whether America is experiencing an innovation lull, as George Mason University economist Tyler Cowen claims in his new book, The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will(Eventually) Feel Better. Solman spoke with Cowen and to those who say he couldn’t be more wrong – that the nation is brimming with new innovations that will advance our quality of life.

Cowen claims we’ve picked all the ‘low-hanging fruit’ and that current innovations do not produce the same kind of new jobs, advancements and efficiencies in our everyday lives as, say, the washing machine or stove. “This is our central economic problem today,” he said.

Not so, counters MIT’s Andrew McAfee, Erik Brynjolfsson and others, who insist that the advancements in innovation and technology are making big contributions to markets, businesses, and job functions. “If anything, the rate of change is not slowing down,” Brynjolfsson told Solman. “It’s increasing.”

Economists’ Ties to the Financial Sector

The Financial Crisis of 2008 shook the very foundations of the global economy. In this PBS Newshour video, Business and Economics Correspondent Paul Solman talks to Charles Ferguson, director of the Academy Award winning documentary, Inside Job, a film that raises concerns about conflicts of interest for economists in academics and their work within the financial sector. Solman goes on to explore how this film is influencing some leading economic thinkers today.

Click here to access a full transcript and mp3 audio file of this video.