Friday, 8 March 2013

Budget Negotiations and the Rhetoric of Leverage

In his The Republic, Cicero considered highest "knowledge of those arts which can make us useful to the State; for I consider this the noblest function of wisdom, and the highest duty of virtue as well as the best proof of its possession" (57). Of greatest importance he saw arts which can answer the question "why, in one State, we have almost reached the point where there are two senates and two separate peoples" (55). In a new year which has already seen vicious political battles on taxes and sequestration, one may well ask the same question about the United States of America, wondering whether the name has become a contradiction in terms.

I will attempt to answer the question about the divisiveness in the country in a later post, but right now I would like to share some insights I have gained recently that have helped me make sense out of the somewhat comical display going on right now about the sequester. It is my hope that this may be knowledge useful to the citizens of any democratic state.

First of all, a lot of political pundits have been scratching their head recently about the odd goings-on in DC. In the first three months of the year Republicans have conceded to raise taxes on the wealthiest in America (which has confused and angered many conservative pundits), sequestration, which Obama claimed would never happen, has happened, and there have been more speeches given almost than during the height of the 2012 campaigns. Also, even The Washington Post have been perplexed at some of the distortions and half-truths floating around about the sequestration, as shown below

and there have been some interesting choices for where a .5% cut in the government's spending has been aimed (tours of The White House cancelled, etc). To make things more confusing, an internal government email sent within the USDA instructed a civil servant: “We have gone on record with a notification to Congress and whoever else that ‘APHIS would eliminate assistance to producers in 24 states in managing wildlife damage to the aquaculture industry, unless they provide funding to cover the costs.’ So . . . you need to make sure you are not contradicting what we said the impact would be.” Pretty much instructing government officials to inflict damage in order to make sure the government's words are verified. To any rational human being, such behavior seems counter-intuitive, but after my Essentials of Negotiation class this semester, they actually make sense.

The book I read for the class was Gain the Edge: Negotiating to Get What You Want by Martin E. Latz. He was a negotiator for the Clinton administration, and he knew many of the people currently advising the Obama administration on their negotiation strategy, including Jack Lew who negotiated the sequester and is the current Secretary of the Treasury. According to Latz, "Leverage, above all else, will improve my ability to get what I want" (68). Leverage trumps fair and objective standards and all logic external to the negotiation itself. Leverage is the determining force that will make or break just about any deal for you.

There are two main elements which determine leverage in any given situation: Needs and BATNA (Best Alternative to a Negotiated Agreement). The party which needs a deal most and has a bad alternative to striking a deal will almost always get a worse deal if the other party is aware of this difference. And the awareness or perception is what makes leverage rhetorical. As Latz writes, leverage is not set in stone, it is fluid, "Leverage is not static. Everyone's level of need likely will change during the negotiation. At the least, one party's perception of its level of need may change. This changes its leverage" (75). So how are the different parties in the legislative and executive using and manipulating leverage to shape the current events?

First, the main parties in the negotiation are the President and the Senate Democrats versus the Republican House of Representatives. By controlling the Presidency and the Senate, the Democrats have control of the most powerful policy-making bodies of government. However, as the main guardians of public expenditure, the Republican House have the ability to control funding. So the Senate can legislate all they want, but without funding all their initiatives would pretty much vanish. The Presidency is another question entirely, because of the power of the executive orders, which therefore have been used extensively, but even this branch is vulnerable to the budget control of the House, The executive needs money to run its operations.

Now we come to the Negotiation, and it has really only been one long negotiation with different stages. It started when the government expenditure exceeded their debt ceiling on May 16, 2011 requiring the Treasury to ask Congress to lift the debt ceiling. This was the first time the recently elected Republican Majority in the House had some real leverage on their side. President Obama urgently needed the increase (high need=loss of leverage) to avoid either government shutdown or massive cuts in government expenditure (bad BATNAs=low leverage). However, leverage is relative. Your leverage is only bad if the other party has little need and a good BATNA. What were the options for the House? They needed spending cuts to fulfill their promises to their electorate, but if the government defaults on its debt or there is a government shutdown the effects could be disastrous for the economy, and if the perception is that they are to blame then  it will also be bad for their reelection chances. Hence, Obama made it a priority to pin this on the House Republicans with a grand nationwide tour speaking against them and how they were "holding the nation hostage" (Biden went as far as to calling them "terrorists").

A deal with some reductions to future spending was finally reached on July 31st (reflecting the leverage advantage of the Republicans). Both parties took a blow in opinion polls, and the US lost its AAA credit rating with S&P. Everyone recognized that the deal was a half-measure, and it was a ticking bomb since a sequester (kind of working as a safety clause) was suggested by The White House and included in the deal as a mechanism to force agreement on spending and revenue before January 2013. By then, both were hoping the situation would be different. The Democrats hoped they would have taken back the House, and the Republicans hoped they would have taken back the Senate and/or Presidency.

Fast forward to January 2013, Obama has triumphed in the election and Republicans have gained no seats in either of the chambers. They decide to split the negotiations into two issues: taxes (fiscal cliff) and spending (sequestration), pushing the sequestration battle more than a month down the road. Now Obama holds the upper hand, since this is the expiration of the Bush tax cuts. The default is that the taxes for all Americans goes up. Republicans have promised not to raise taxes and need to keep them down for their constituencies (high need=bad leverage) and the alternative to a deal with President Obama is that the Bush tax cuts expire and everyone pays higher taxes (bad BATNA=bad leverage). The President also wants a deal, since increased taxes for everyone may harm his party in 2014, but the default of having taxes go back to pre-Bush levels is a very acceptable alternative for Democrats since it means more government revenue for social programs (good BATNA=strong leverage). Besides, the President can use the power of the presidency to blame the Republicans and turn it into a political victory. They strike a deal with increased taxes for those earning over 400,000 and reinstatement of the normal payroll tax for everyone, reflecting the President's superior leverage. Jack Lew is given credit by many media outlets for setting up the framework for this negotiation victory already in 2011. Republicans are reviled by their conservative constituencies and may will face hard reelections to the House.

But not so fast, what about the spending? With sequestration looming ahead, Obama needs a deal (high need=weak leverage) to avoid cuts in social programs and government spending (bad BATNA=weak leverage). The default will bring automatic cuts, which would be a defeat for his chosen policies. The original intention was that higher automatic cuts in defense spending would make the BATNA equally bad for the Republicans, but the Republicans have reevaluated their situation. With a Democratic Senate and President Obama still in office, this may be their only chance of getting any real spending cuts before Congressional elections in 2014. Traditionally, they dislike spending cuts in the military, but the newer generation of Congressmen from the 2010 elections do not share the same priorities. In any case, they are much more worried about debt than they are of a weak military in the immediate future. Thus, they have little need (low need=strong leverage) and they can live with spending cuts to military as long as other areas are cut too (good BATNA=strong leverage).

The White House soon realized that they could win the battle but lose the war, and so a rather frenzied media campaign was initiated to scare the electorate of the "catastrophical" results a 0.5% cut in federal spending could lead to. They calculated the worst possible results that could come from the cuts in strategic areas of government work and publicly decried the Republicans for holding Americans hostage and being irresponsible. Even The Washington Post found their claims overstated, and there was little impact with the Republicans. Obama knew that his only hope for a good deal was to destroy the BATNA for the Republicans, make the sequester so poisonous to the public that anyone and anything related with accepting it as an option would be tainted. Obama himself had promised in the 2012 debates that the sequester would not happen, and The White House had suggested to have it as part of the deal struck in 2011.

It didn't stick in the short term. Republicans would not settle for a deal that brought them less benefit than the sequester, and Obama saw that his leverage was too weak to get a good deal for his party. The deadline came . . . and went. Both parties walked away from the negotiation. No deal. The sequester set in. The market, in general, responded positively.

So where does that leave the parties? The President, having power over the executive, refused to accept powers voted for him by the House Republicans to give him flexibility to choose which specific programs to cut. Bad enough to have to cut spending without also having to explain to different constituencies why he didn't prioritize them. All he can do now is to pin this on Republicans, and make it hurt. He has all the reason in the world to make these cuts as visible and painful as possible, or at least as painful as he said they would be if only to save face. Thus, on the 8th of March they announced that they will be suspending the tuition assistance program for US troops, The White House cancels all tours, the USDA is told to make sure the cuts have the consequences which The White House projected. This is not just pouting, this is setting a rhetorical precedent for the future. If cuts do not equal pain then the public is more likely to accept the Republican mantra of "smaller government," proving implicitly "wow, if they could cut that much without us noticing I wonder how much more wasted money there is in there." If the cuts hurt, then the impression will be that government is already as small and ill funded as it can be, and "smaller government" will make people wince and make Republicans seem out of touch with reality. The Republicans, if they can get away with it, will have effectively gained at least one victory in one of their major political goals. It will all depend on whether the public believes the short term pain is less dangerous than the long term debt, like this clip argues

Of course, this is only an interlude until the next budget ceiling crisis looming when the US government runs out of money on May 19th 2013. So, plenty to look forward to :(