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Good and bad news about Washington's wrangling over debt ceiling

Daniel MitchellDaniel J.B. Mitchell is professor emeritus with a dual appointment to the UCLA Anderson School of Management and the School of Public Affairs. This op-ed originally appeared July 30 in EPRN, the website for the Employment Policy Research Network, formed by a group of academic researchers from more than 30 U.S. universities who share a deep concern about the state of work and employment in the United States and around the world.
As this musing is being written (July 30), there is no resolution to the debt ceiling
negotiations that are going on in Washington. Is there anything to be learned from labor
negotiations about this political process?
Union-management negotiations have been much studied, in part because information
about them is more available than on other types of negotiations. There have been many
empirical studies trying to understand the failures of union-management negotiations to
reach “peaceful” resolutions, i.e., to understand why and when work stoppages occur.
The negotiating process in collective bargaining itself has also been the subject of public
policy; various policies have sought to encourage resolution of labor disputes. For
example, the Federal Mediation and Conciliation Service was created to offer the services
of professional mediators to union and management negotiators.
Clearly, there are many differences between the political negotiations process underway
in Washington at this writing and a typical labor negotiation. But one similarity is the
presence of a deadline. August 2 has been declared to be the date on which the debt
ceiling will be hit and, therefore, the date at which – unable to borrow – the federal
government will be short of cash to pay all its bills. This date is widely referred to in the
news media as “default” although actual nonpayment of federal debt service – interest,
etc., on Treasury securities - seems unlikely.
Interesting questions have been raised about whether August 2 is truly the date on which
cash runs out and about whether there are ways for the Treasury to get around the ceiling
limit, even if August 2 is the actual date. Nonetheless, so far the parties to the negotiation
have been treating the August 2 date as a deadline. So what do we know about deadlines
and negotiations?
It appears that deadlines must at least threaten unpleasant or potentially unpleasant
consequences to facilitate agreements. When deadlines are totally arbitrary - one thinks
about Israeli-Palestinian negotiations in which dates on which something is supposed to
be agreed come and go without any real impact – they have no effect. But in the case of
union-management negotiations, real things do happen at one critical date: the contract
expiration. The contract expiration is more than an arbitrary date on the calendar.
Most union contracts have some version of a no-strike/no-lockout clause. So when the
contract expires, so do those clauses. The parties are then free to impose economic harm
on each other. Although we don’t keep data on such things, it is often the case that
settlements are reached just as the expiration date is reached, sometimes with midnight
I used to do a 2-hour simulation in a class dealing with labor negotiations — Yes, Virginia,
there used to be classes on labor relations! — in which negotiating teams were given
points for various contract gains (from their perspectives). After one hour, however, it
was specified that the existing contract expired and a strike would immediately occur
producing point losses. There was a one-shot point loss at that moment and then a loss
for each minute of non-settlement. I won’t go into more details — the game was elaborate
with the union team, for example, split between skilled and unskilled workers with
different point gains and losses — but suffice it to say that most settlements occurred just
at the deadline. On the other hand, not all teams avoided strikes. In simulations as in real
labor negotiations, an incentive to settle is not a guarantee of settlement.
At the time of the 1947 Taft-Hartley Act, there had been a wave of post-World War II
strikes. Congress seemed to think that the strike problem reflected a need to make
available more time for negotiations. If the parties just had more time, they would be
more likely to settle peacefully rather than blunder into a work stoppage. Public policy
should insist that they have enough time to work things out. So the Act includes a 60-day
pre-notification period.
Under the Act, even though contracts have internal expiration dates, the contract could
not end until one party notified the other at least 60 days in advance. The problem with
this approach is that the parties obviously know when their contract expires — they
negotiated it after all. So the phenomenon of the midnight settlement has nothing to do
with notification and everything to do with having a deadline that has real consequences.
With the deadline approaching, there is pressure on both sides to stop bluffing and to
reveal their true negotiating positions. The imminent deadline thus facilitates a
settlement, albeit often at the last minute. That’s the Good News.
But there is Bad News, too. Obviously, there are cases in which settlements are not
reached at or before the deadline and in which work stoppages occur. In some cases,
these stoppages can turn out to be prolonged and destructive to both parties. So the fact
that deadlines, even real deadlines, don’t always bring about settlements is a part of the
Bad News.
But there is another Bad-News feature of intense negotiations (which become more
intense as the deadline/expiration date approaches). When a settlement is reached, the
parties can suffer from an illusion about how the outcome should be evaluated. There is
a distinction between reaching a deal — a narrow definition of success — and the quality of
that deal.
It is easy for parties to negotiations who have had a really tough time reaching an accord
to feel that they have been successful simply because they did reach a settlement and it
was so difficult to get there. In the late 1970s, I examined the union sector in a
Brookings book and noted that there seemed to be a bubble-like phenomenon occurring
at that time in the union-nonunion pay differential. A continuous rise of that differential
had to be ultimately unsustainable and yet, in each individual contract negotiation, the
parties undoubtedly felt that they had reached the best deal possible. After all, the
economic background of the 1970s was difficult. In the end, however, the process of the
widening pay differential reversed with a wave of concession bargaining in the 1980s and
substantial job loss and market-share loss in the union sector.
More recently, I have followed California budgetary policy and the negotiations in the
state legislature and with the governor that produced eventual budget deals. The state
constitution specifies that the legislature is supposed to enact a budget by June 15, i.e.,
two weeks before the start of the new fiscal year on July 1. Presumably, this advance
date exists to give the governor time to decide whether to veto the budget, sign it as
passed, or sign it with line-item vetoes. However, until recently, there was no
consequence if a budget was not passed by June 15 since there were no penalties for the
legislature if that deadline passed without a budget. State fiscal affairs between June 15
and June 30 continued normally under the terms of the yet-to-expire fiscal year; nothing
was disrupted.
However, at one time the expiration of the California fiscal year on June 30 was similar
to a contract expiration in the union sector. If there was no new budget enacted by July 1,
state bills could not be legally paid until a deal was reached. So although under the state
constitution the governor proposes a new budget in early January, the heavy negotiations
in the legislature did not typically start until the June 30 deadline approached, almost six
months later.
But sometimes — as in labor negotiations — a deal was not reached in time and there was
no budget on July 1. When such episodes occurred, courts began stepping in, requiring
that the state pay certain bills despite absence of a budget. The consequences of missing
the June 30 deadline were thus progressively reduced since the government continued
functioning in most respects. The June 30 deadline, in short, had less and less meaning
as court interventions accumulated. Having a deadline on paper became less and less
effective in incentivizing an on-time deal. Budgets were chronically enacted late.
Last November, however, California voters approved various budget-related ballot
initiatives. Among them was a provision that members of the legislature would forfeit
their pay for each day beyond the constitutional June 15 deadline that a deal with a
“balanced” budget was not reached. It was not clear how this proviso would work in
practice. But there was a clear rush in the legislature just before June 15 to pass
something. The resulting budget was ruled to be unbalanced and legislators’ pay began
to be forfeited. A new deal was quickly reached. So the effect of the deadline was
evident — the Good News. However, the quality of the deal (how the enacted 2011-12
California budget will work out as the current fiscal year unfolds) is not so evident — the
Bad News. The budget was “balanced” in significant part on paper by making optimistic
economic assumptions that might not be realized.
The difference between political negotiations — whether at the state or federal levels — and
labor negotiations is that in the latter case, processes have evolved involving third parties 
— mediators, arbitrators — who can help the parties resolve their problem. In the case of
political negotiations, such as those surrounding the federal debt ceiling, there seem to be
no external facilitators available. Indeed, there are many centrifugal forces that have
come into play.
So, as this musing is being written, what lessons do we draw? The August 2 deadline for
the debt ceiling negotiations does seem to matter. The various parties seem to be taking
it seriously and assuming that bad things could happen thereafter.
However, if the deadline turns out to matter enough to bring about a House-Senate-
President accord, the contents of that deal need to be evaluated separately from the
negotiations process. The fact that it was tough to get there does not mean that the
outcome is inherently desirable. As in the case of labor negotiations in the 1970s, the
consequences of tough bargaining were not immediately apparent to the negotiators.
They undoubtedly felt that just reaching a deal was an accomplishment. But in the longer
term the consequences were unfortunate.
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