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The Damage Has Been Done

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DEBT CEILING DEADLINE

For those who are fretting that the budget negotiations will "break down" and real damage will be done to our country, they can stop worrying. Whatever happens between now and the August 2 deadline, much of the damage from the debt ceiling debate has already been done, and we are already experiencing the ramifications.

  • The U.S. credit rating will very likely be downgraded. Any deal is likely to be small enough as to be relatively immaterial to rating agency assessments of our credit worthiness. Rating agencies have focused as much on the dysfunction of this process as the outcome. As in business, leadership dysfunction eventually catches up with a company and is sufficient reason for investors to be increasingly cautious. Observers believed the U.S. budget process would be labored and unpleasant, but I don't think, until now, they fully realized the inability of legislators and the executive branch to reach a compromise. In this situation (as in the private sector), leadership process can matter as much as actual results. Rating agencies and international observers are taking note.
  • The uncertainty is already distracting business. Look at the time wasted by businesses that are managing their liquidity and operations for a potential "tail" event. These actions include not only capital management but also slowing down or freezing potential hiring plans in the U.S.
  • Consumer sentiment is dampened by this current uncertainty as well as the spectacle of the process. It undermines confidence in the government and makes consumers think twice before spending. The upshot is that this is likely to slow GNP and raise unemployment at a time when we desperately need growth and confidence.
  • The "grand bargain" would have been painful in many ways. Clearly budget cuts and tax revenue proposals would likely have had some dampening impact on economic growth. Beyond that, however, I believe the positive psychological impact would have been quite substantial in showing businesses and consumers that the U.S. government is able to make tough decisions and reach compromise for the good of the country. This is a huge lost opportunity.

While damage is being done, I believe we can also learn from what is happening.

In the private sector, leadership is not about having all the answers; instead, it is about asking the right questions, adapting to reality and making tough decisions. Apple is an extraordinary success because it has re-invented itself a number of times and been continuously willing to ask itself the right questions in the effort to achieve its vision of superbly serving its customers.

No private sector business or non-profit leader would last very long if he or she were unalterably pledged to specific tactics and strategies regardless of the facts. Successful CEOs and other private sector leaders passionately commit to achieve a vision but remain flexible as to how to accomplish it based on the facts. Why would we not expect the same high standards of our political leaders? If in advance of taking office, a politician wants to "pledge" to take an unalterable position on taxes, spending or entitlements in hopes of getting elected or pleasing a specific interest group, voters should run the other way! A pledge like this is a pledge to ignore reality, avoid real debate and reject compromises that could lead to solving the tough problems facing this nation.

We should ask that our politicians pledge to serve the long-term interests of our country. Commitments to specific tactics or constituencies are not in the spirit of what has made this a great nation. Voters in both parties have the power to drive home this message so that we can build our country and achieve our great potential.

Robert Steven Kaplan is a Professor of Management Practice at Harvard Business School and co-chairman of Draper, Richards and Kaplan, a global venture philanthropy firm. He is the author of "What to Ask the Person in the Mirror: Critical Questions for Becoming a More Effective Leader and Reaching Your Potential" (Harvard Business Review Press).