US debt deal: Five golden rules
For weeks, US politicians have been locked into discussions about reducing the country's deficit, with the two sides unable to agree a tax and spending package as the possibility of a debt default looms. So what are the golden rules in such a situation?
US debt deals on the table
The grand compromise:
- $4tn of cuts over 10 years
- reform of social security, Medicare and new taxes
- backed by Obama and, initially, Boehner
The 'Gang of Six' plan:
- $3.7tn cuts, new taxes
- proposed by six Senators from both parties
The McConnell fall-back:
- complex mechanism raises ceiling quickly but registers Republican disapproval
- proposed by Republican Mitch McConnell
The short/medium term deals:
- one plan raises ceiling by enough to get through next few months, another to election in 2012
- Obama deeply opposed to short-term fixes
The cut, cap and balance:
- raises ceiling but writes future spending caps into constitution
- backed by Republicans but destined to fall this week in Senate
The stakes could not be higher.
As the clock ticks and time marches towards 2 August, the possibility of the US defaulting on its debt grows.
To avoid the government running out of money on that day - and the economic catastrophe some analysts have predicted could happen as a consequence - the country must raise its debt limit above its current $14.3tn (£8.9tn), so it can borrow more.
Usually, raising the debt ceiling is a formality, although with some political posturing. But this time, the Republicans, who control the House of Representatives, have insisted there should be spending cuts to address the ballooning deficit, in exchange for increasing the debt limit.
All eyes have been on the Cabinet Room of the White House, where President Barack Obama and senior Democrats and Republicans have been unable to find common ground during a week of discussions. There have been reports of walkouts from both sides.
On a much smaller scale, negotiations like this make up a fundamental part of commercial life.
So what are the golden rules in getting the deal you want? And can any lessons be drawn from the deadlock in Washington? Two experts give their views.
1. Have a list of tradable items
Keeping a list of issues you are willing to negotiate, and ranked in order of importance, is a fundamental requirement, says David Oliver, author of How To Negotiate Effectively.
"If you could move on anything, what are, say, the 20 things you could move on and what's the most desirable one? You don't want the other side to know what the 20 things are."
End Quote David Oliver Negotiation coach
You must know what your bottom line is, what your aspiration is and what you could move on, before you start”
Having this list helps immeasurably when you sense the talks moving towards deadlock.
"You can say 'I can't possibly do that but let me tell you what we could explore. If you move here, then I could move here...'"
The word "explore" is critical because it doesn't commit you to anything, says Mr Oliver, and this kind of offer diffuses the general sense of intransigence that deadlock causes.
In the US there has been some evidence of movement. Mr Obama has put benefit cuts on the table, while the Republican House Speaker John Boehner was reportedly considering the same "grand compromise" package that included an element of tax-raising.
But ceding ground comes at a cost and both men took flak from within their own parties.
"You must know what your bottom line is, what your aspiration is and what you could move on, before you start," says Mr Oliver. "That gives you the best chance in this theatre of the unknown."
2. Think how much to reveal and when
In planning your strategy, you carefully determine what and when you're going to communicate to your counterpart, says Mr Oliver, who founded Insight Marketing which trains UK companies in negotiating techniques.
Are the British poor negotiators?
"Generally speaking, the British hate negotiating because they sometimes don't know whether they've been ripped off. I don't know if Americans do it better but they are less intimidated by it. You watch the average Brit trying to bargain at the holiday bazaar and they don't know if they're reducing a poor beggar to rags or being conned."
If you reveal your "red lines" - what you won't budge on - early, you're showing them "where the crown jewels are" and an effective negotiator in the other team could target that, he says.
In the debt talks, Republicans have said from the outset that any deal that includes new tax revenue will not work. So was this an error?
Not at all, says Michael Watkins, former professor at Harvard Business School, who believes the Republican stance on tax has strengthened their bargaining position.
"Sometimes sticking with a hard position can let you claim a lot of value. That initial commitment has probably carried them a long way in the negotiations."
3. Avoid brinkmanship
Both sides in Washington have been accused of deliberately escalating the stakes in order to strengthen their hand - Mr Obama by saying he can't guarantee social security cheques will be paid next month, and some Republicans who say they won't vote to raise the debt ceiling under any circumstances.
Brinkmanship should be outlawed before negotiations begin, says Mr Oliver.
"Agree to a set of rules that you play by, explaining what you think brinkmanship is and what the agreed process should be.
"You should negotiate it away, by saying you don't think it serves the national interest. Both sides could have earned brownie points with the electorate if they had done that."
Identifying brinkmanship can be a subjective exercise, he says, because people can always argue they are speaking sincerely or just stating a fact.
"But the danger with brinkmanship is that if the only possible alternative to the 'brinkmanship statement' is failure or a climb down, it becomes increasingly difficult to have effective negotiations."
The Cuban Missile Crisis was a classic way to deal with brinkmanship, says Mr Watkins, chairman of Genesis Advisers and author of Breakthrough Business Negotiation.
What President John F Kennedy did in response to the build-up of Soviet missiles in Cuba was to offer Soviet premier Nikita Khrushchev an escape route, he says, by ordering a blockade rather than an attack. It probably averted war.
4. Take your team with you
Both sides in the debt talks are loose groupings of warring tribes, says Mr Watkins, which presents considerable problems for the negotiating teams.
What happens if US defaults?
Uncharted territory but two scenarios emerge
- Higher interest rates on mortgages, credit cards and loans
- Government unable to pay wages to staff, including military
- Social security cheques stopped
- Turmoil on international markets
- Default could be avoided by paying creditors, at expense of slashing spending
Sources: Associated Press, CBS, ABC
John Boehner probably got ahead of his constituency by actively considering Mr Obama's "grand compromise" package of measures that included new taxes, he says, while his number two Eric Cantor strongly rejected it.
"You have to ask: 'How far can you keep people in your own negotiations as a critical mass?' If you go too far, you get cut off at the knees like this and you have to recover ground.
"Political theatre and signalling always play a role in this. It's a two-level game."
Mr Boehner has to both project power outward to Mr Obama and the Democrats but also keep the coalition of diverging interests in his own party on side.
"Therefore there is a dance between internal politics and external negotiations."
Mr Obama has also felt the heat from liberals in his party for saying he will consider cutting benefits like Medicare, which is paid to the elderly.
5. Force things to happen
"Negotiation is always a momentum game and that requires action-forcing events," says Mr Watkins. "Like deadlines, things to keep the thing moving forward.
"Without action-forcing events, people are facing hard choices. The equilibrium is to do nothing."
Who owns the $14.3tn debt?
- US Government owes itself $4.6tn
- Remaining $9.7tn owed to investors
- They include banks, pension funds, individual investors, and state/local/foreign governments
- China: $1.16tn, Japan: $0.91tn, UK: $0.35tn
- Deficit is annual difference between spending and revenue, $1.29tn in 2010
Source: US Treasury, May 2011
It could be a so-called exploding offer, which is an offer made with a time limit attached, because it forces you to make a choice. Or it could be simply calling a meeting.
Several times, Mr Obama has laid down deadlines in an effort to make things happen.
But Mr Watkins believes he has waited too long before entering the debate, and therefore allowed the Republicans to frame the terms of the debate - spending cuts, deficit reduction and no new revenue.
"He's more recently got aggressive in negotiations but it could be too late."