05/24/2011 12:40 pm ET Updated Jul 24, 2011

The Debt Threat as Economic Terrorism

Terrorists don't mind blowing themselves up as long as they get the other guy. That precisely describes the U.S. political threats not to raise the limit on national debt.

Republicans have threatened not to raise the limit on the national debt from its present $14.3 trillion unless the Democrats make certain political spending cuts. But if the limit is not raised, the U.S. will default on its debt payments here and abroad for the first time in its history. It's like missing a mortgage or credit card payment. If that happens, all sorts of bad things will follow.

First, lenders will raise interest rates, just like your credit card company increases the interest from say, 16% to 29% if you miss a payment or two. Each 1% increase in interest on $14.3 trillion in debt is $143 billion a year.

Imagine what we could buy for $143 billion a year. At $40,000 per job, $143 billion represents 3.6 million jobs, or about the same number of jobs lost in the recession. And that's just for a 1% increase in interest on the debt; the interest penalty could easily be more. What this means is that refusing to raise the debt ceiling could easily roll us back into another recession.

The entire U.S. school lunch program costs only $10 billion. Why, $143 billion is more than the annual budget of New York State! It's more than eight times the U.S. State Department's budget and twice the size of U.S. Education Department Budget. Recently, Democrats and Republicans nearly shut down the federal government over a gap of $38 billion for such things as Planned Parenthood.

Higher interest rates would ripple throughout the economy. Everything would cost more. New loans would cost more. U.S. credibility and economic leadership would drop; our ability to buy things on credit would be reduced, from TV sets to aircraft. Already, worker benefits are being cut across the country.

So why would someone make such a threat to make things a lot worse? It's like threatening the family that you will burn down the house unless you get what you want. It's extreme, divisive, destructive. And the Democrats did it when they controlled The House of Representatives too. And even if people say the threat won't be carried out, it's like pointing a gun at someone and saying you won't shoot. It's a terrible way to run a country.

Already the problems are starting. Standard & Poors recently lowered the U.S. credit rating not because of the country's underlying economics, but because of the government's failure to handle issues in a reasonable way.

So here are a number of solutions to do it differently, and better. They are based on the collaboration model of negotiation, not the traditional conflict model. The process is outlined more fully in my new book on negotiation, Getting More.

The first solution is to act differently. The conflict model of negotiation, whereby parties threaten and tough it out, actually produces only about 25% as much value as the collaboration model. Both parties have promised voters to be collaborative, working together for better solutions. And most voters would agree that we pay lawmakers to come up with the best, collaborative solutions. But threatening to blow everyone up is clearly not the best solution, and is not collaborative. The debt limit should be raised, without strings attached, to protect the country. Spending cuts are separate arguments. The well-being of the country is not negotiable.

Second, commentators, the media and lawmakers need to communicate the negative effects much more clearly, so individual citizens understand it enough to be outraged. Consumer and voter groups need to be telling lawmakers that anyone threatening the country with such economic terrorism isn't an appropriate leader. The risks of negative effects on the country are so clear that people should consider starting impeachment proceedings unless the economic threats stop. The threats are clearly anti-American, since they would so damage the country.

Third, the national debt is a big, complicated issue, one that should take months to discuss. The best solutions should be put forward after careful study and discussion. Studies show that threats and deadlines reduce creativity and information processing and do not result in the best solutions. This is a bipartisan issue that requires a calm, collaborative and creative effort.

Fourth, one should address the least controversial spending cuts first. The Government Accountability Office issues dozens of reports per year detailing billions of dollars in waste. Lawmakers should pay attention to this and start there. In addition, there are probably some cuts on which both parties can agree at the start.

Fourth, an incremental approach is best, especially when there are sharp divisions. Instead of wiping out entire programs, efforts should be made to make them more efficient. A scalpel instead of a sledgehammer.

Fifth, all of this would be helped by incentive payments to people and companies that come up with the best cost-saving ideas. This is what the Japanese companies did in the 1980s, and it gave a big lift to their economy. With 300 million people in the U.S., including tens of millions much closer to the problem than lawmakers are, it stands to reason that more ideas would be available for cost-cutting.

Sixth, the U.S. federal government is not the only country embarking on an austerity program. Other nations have faced such issues, as have state governments. We should appoint a task force to do an organized global search for the best ideas that have been used in the past.

Seventh, we should get the smartest people involved in the task of finding ways to cut spending, regardless of party: that is, if our goal is to serve the national interest.

Eighth, it almost goes without saying that one way to reduce the deficit is to increase revenue. Each of the cost-saving steps above should be used to create additional government revenues that can then be used to reduce the deficit. The country is now paying $4 per gallon for gas. If there had been $1 in taxes on gas when it was $2.50 per gallon, we would have been able to generate billions of dollars for alternative energy and energy efficiency tax credits. Export creation and import substitution need much more focus in communities across the country. Here is where both parties could provide collaborative, creative leadership instead of fighting with each other.

Ninth, after each step above is taken, political spending issues can be addressed. As seen here, such issues are not needed to reduce the deficit, nor should they be used in that context. They should be debated and decided in the normal course of business between the two parties. Things can be traded off as they usually are. Note that they are ninth on my list, not first.

Finally, and tenth, none of this is rocket science. What is needed are unemotional, focused people to address the problem in a way that keeps the goal firmly in our sights: improving the collective well-being. Today, the wrong medicine is being applied to our economic sickness. We must focus on the best solutions, not yesterday's battles, private agendas or collateral issues. The country's health depends on it.

Visit Stuart on his website. You can also connect with him on twitter -- @Stuart_Diamond -- and facebook.