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The Debt Titanic

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US DEFAULT CRISIS
AP/File

It is already too late for a lasting agreement on the national debt, as the Aug. 2 default looms. Almost any agreement at a deadline is not a good one, as creativity and information processing plummet. With the parties calling each other names and key people walking out, pushing even a compromise now will leave the agreement open to months of second-guessing, rancor and rollbacks.

So Republicans and Democrats trying to reach a spending agreement are essentially rearranging deck chairs on the Titanic. What they need to do instead is focus on what should be their goal: saving the economy itself, and the incomes of millions of individuals. That means lawmakers should stop their debate over what they will cut and spend, and instead focus on two other options.

One is raising the debt ceiling before the Aug. 2 deadline on a temporary basis for some weeks or months and borrowing the shortfall to pay bills. This would enable a less pressured discussion over time. Second, failing that, President Obama should unilaterally raise the debt limit using problematic Constitutional language that prohibits the U.S. from defaulting on financial obligations. While this might well be challenged, at least it will buy time for more reason in Congress.

Listening to most of the media, to most lawmakers and to people in the street, it does not appear that the full impact of what is about to happen is widely understood. If the U.S. defaults on its borrowings Aug. 2 for the first time its history, credit rating agencies will increase interest rates just as when individuals default on credit cards or other loans. Each 1% increase in $14.3 trillion in debt costs $143 billion a year, more than the cost of all 3.6 million jobs lost in the 2008 recession.

Estimates range as high as several hundred billion dollars more a year in greater interest and ripple effects. Can the U.S. afford a 20% unemployment rate, double what it is now?

Lawmakers are proceeding exactly the wrong way in trying to solve the debt crisis -- a main reason why they are not getting anywhere. So even if they do postpone the day of reckoning, they will need to make some substantial changes in the way they approach negotiations. Otherwise, they will fritter away the extra time just as they frittered away the last year.

First, parties cannot reach effective agreements if they are sniping at each other. It's common sense that people don't want to make agreements with those who threaten or insult them, no matter what the reason. This is backed up by studies, which show that failing to make a human connection meets one's goals 16% of the time, versus 90% when a human connection is made. Democrats and Republicans need a ban on acrimony, at least until they save the economy. The notion of Democrats and Republicans writing "competing" proposals, as the media says, is completely counterproductive to getting an agreement.

Second, the emotional temperature needs to come down. When people are emotional, they don't focus on their goals and they don't listen to the other side. Anyone who is emotional should not be involved in the discussions. That means that many of the wrong people are negotiating. Lawmakers need dispassionate outsiders to make less emotion-laden suggestions. A bipartisan group should be reconstituted with dispassionate experts not directly involved in the fray.

Third, the parties should look for incremental change, starting with the easy things. Now, lawmakers are instead trying to put together multi-trillion dollar packages including big, controversial issues, whether new taxes or Medicaid cuts. It is much easier to be incremental, and with the extra time, the parties can be. For example, billions of dollars in government waste have been identified. This is not nearly as controversial as taxes and health care. Cutting the waste will give the parties a sense of accomplishment. More importantly, it will give a sense of accomplishment to the public and credit rating agencies, who are on the verge of downgrading U.S. credit, thus prompting economic disaster. Programs can be cut with a scalpel, not an ax.

Fourth, lawmakers should involve others who may have good ideas. The nation is full of smart people. Communities, companies, individuals and other groups should be incentivized to come up with good ideas. They should be rewarded with a percentage of new savings or revenues for a year or two. This works wonders in business.

Fifth, the message to the world at large should be one of collaboration, not conflict. This will encourage credit rating agencies not to drop the U.S. credit rating and investors not to abandon U.S. securities. What the markets want to see most is that the U.S. is capable of solving its debt problems, even before the problems themselves are solved.

Sixth, lawmakers should then talk to investors and credit agencies about some debt relief, such as rescheduling debt, or providing more debt. This will give the U.S. a smoother transition to the next steps, which comprise arranging a reduction in the overall debt over time.

This systematic process is dispassionate, stepped and doable. Once one lays it out, it's obvious. But it's not obvious to a lot of lawmakers, intelligent though they are, because they are too pressured, emotional and close to the fire. They need a step back, a deep breath, and a sense of community to do what they are paid by voters to do: protect the country.
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Stuart Diamond, a professor of negotiations at The Wharton Business School of the University of Pennsylvania, is the author of Getting More: How To Negotiate To Achieve Your Goals In The Real World (Random House/Crown Business, 2010). http://www.gettingmore.com. Twitter: @Stuart_Diamond.