‘Fiscal cliff’ talks will boil down to one obscure acronym: Batna

There is one word that a person needs to understand in order to grasp what will happen in the standoff over the “fiscal cliff,” the high-stakes standoff between Congress and President Obama to avert steep tax increases and spending cuts on Jan. 1.

That word is “Batna.”

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It comes from negotiation theory, and is an acronym for “best alternative to negotiated agreement.” It is, for each side, what happens if there is no deal. Understanding what the batna is, for Obama and Congressional Republicans (along with other relevant groups, like Senate Democrats and tea party House Republicans) is crucial to predicting how things will shake out.

Think of it this way. In a negotiation over buying a car, it would seem simple to assess what happens for each side if there is no deal. The salesman’s batna is not having the commission income from a successful sale, and the buyer’s batna is having to drive their old car for a bit longer, or keep taking the bus.

But imagine if the salesman has been told he will be fired if he doesn’t get his sales numbers up. Suddenly, his batna is a lot worse; if he doesn’t close the sale, he could lose his job. The buyer doesn’t know that, but the salesman will naturally be more accommodating in the talks, likely resulting in a lower sales price. Or imagine if the buyer is just starting a new job, needs a car to get to work Monday morning, and doesn’t have any time to do comparison shopping; the buyer has a worse batna than it might seem, and will probably be less able to negotiate aggressively and will likely end up with a higher price.

Usually in a negotiation, you don’t know the true batna of the other side, and they have every incentive to keep it a secret; unless the car salesman above is a terrible negotiator, he won’t let the buyer know how desperately he needs the sale. But that typically doesn’t matter too much; each side will negotiate as aggressively as it can given its own understanding of the alternatives, and whichever one has a better batna has the edge.

The fiscal cliff negotiations are an infinitely more complex set of negotiations with infinitely higher stakes. But the same principles apply. President Obama and Speaker John A. Boehner (R-Ohio) each have a batna, even if they don’t use that term — a sense of what the world would look like if there were no deal. They also have no incentive to tell anyone what it is outside their very inner circle. But we can try to read between the lines of their public statements and look at the economics of the cliff and draw some conclusions.

If the nation goes off the fiscal cliff — the Bush tax cuts go away in their entirety, pushing up rates for essentially everyone, and there are steep cuts to a range of government programs, including defense — there would likely be a recession in the first half of 2013, according to numbers from the Congressional Budget Office, as government austerity of about 4 percent of U.S. GDP drives a contraction in economic growth.

So for President Obama, the batna is a nasty recession to start his second term,which is not what any president wants. On the other hand, he has won reelection and will never have to face voters again. He and his team view the present-day Republican Party as intransigent and unwilling to be a responsible party in governing. If Obama sticks to his guns with the politically popular idea of ending tax cuts for households making over $250,000 while keeping them for everyone else, and Republicans refuse to go along, going over the cliff may be the only way to force more accommodation from members of the House. It is a simple negotiating position: Either pass a bill that keeps tax increases for the affluent, or I will stand by and let taxes go up on everybody, even if it means a recession.

In this arena, he has a few luxuries: Obama will never run for office again, his position on taxes for the affluent is popular, and he has four more years for the economy to recover from its fiscal-cliff-driven downturn and help secure his legacy.

There is a caveat to this. The nation’s legal debt ceiling will be hit around the end of the year, and by perhaps February or March the Treasury will run out of accounting gimmicks it can use to keep the debt underneath that cap. Obama might be willing to accept a normal, run-of-the-mill recession to get his way on policy. But his batna gets worse when he needs Congress to raise the debt ceiling; there, the risk is the U.S. government defaulting on its debt obligations, which could cause a global financial panic and lasting damage to the nation’s credibility. If there is no deal by that point, Obama will have greater incentive to strike one.

The batna for Boehner and the rest of Republican leadership in the House depends on their perceptions of the politics of the whole thing. If they feel they can successfully cast blame on Obama for intransigence in a post-cliff economic downturn, they might feel comfortable digging in their heels. But there is reason to think that isn’t the case; polls showed voters blaming mainly Congressional Republicans for the standoff over the debt ceiling in August 2011 (which set the stage for the current cliff). And Republicans will face intense pressure from some of their own supporters in the business community to agree to a deal.

Perhaps reflecting that a simplistic negotiation over tax rates does not play to Republicans’ favor, Boehner’s much-discussed speech Wednesday suggested an effort to broaden the contours of the negotiation, to put a wider-ranging tax reform effort at the center of the debate.

“For purposes of forging a bipartisan agreement that begins to solve the problem, we’re willing to accept new revenue, under the right conditions,” Boehner said. “What matters is where the increased revenue comes from, and what type of reform comes with it. Does the increased revenue come from government taking a larger share of what the American people earn through higher tax rates? Or does it come as the byproduct of a growing economy, energized by a simpler, cleaner, fairer tax code, with fewer loopholes and lower rates for all?”

With those comments, Boehner didn’t cede any major substantive ground, but he did show his strategy of shifting the debate away from whether income over $250,000 will be taxed at 35 percent or 39.6 percent and toward a more complex, multifaceted negotiation that may leave him more room to maneuver and, ideally, leave the country with better tax policy.

That is the ultimate mark of a successful negotiation: Both parties end up better off. The nation has to hope that this series of talks fits that mold.

 
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