GO
Loading...

Don't Forget the HOW of the 'Fiscal Cliff': El-Erian

Joel Carillet | E+ | Getty Images

As we count down to the fiscal cliff deadline - just over three weeks away now - the media's entire focus is on what it will take to for Democrats and Republicans to agree on a "deal" that averts another painful recession.

But good analysis should not be limited to that.

How the deal is reached is as important as if it is reached, and what it contains.

Avoiding the fiscal cliff is just one of the many decisions that Congress must take if America is to grow robustly, create plentiful jobs and return to a more sensible distribution of income, wealth and opportunities. (Read More: Sandy and 'Cliff' Play Havoc With Jobs Numbers)

Using Game Theory jargon, politicians are engaged in a "repeated game" (also known as a multi-round game) where methods of interaction matter greatly.

Why? Because how you negotiate materially influences the probability of subsequent success in future negotiations.

It is pretty obvious if you think about it.

Consider your own interactions. Dynamics of one-time negotiations with strangers differ from repeated ones with work colleagues and family. Importantly, the latter is where trade-offs play out over time. It is also where bouts of bitterness can contaminate subsequent interactions.

I would venture further, and with full recognition that I am neither a sociologist nor a psychologist.

Judging from many observations, what often distinguishes functioning families from dysfunctional ones is not income, wealth or educational attainment. Rather, it is the degree of mutual trust; and it is the willingness for individuals to compromise in order to serve the greater good.

This translates to today's political interactions in at least two immediate ways - especially when trust is as elusive as it is between Democrats and Republicans.

First, confidence building becomes even more critical in multi-round negotiations. Second, success is also highly dependent on both sides sharing a common vision of the ultimate destination.

Both elements are lacking in Washington these days. As such, even if our politicians manage to avert the fiscal cliff, as we think (and hope) is likely, the outcome will not be a solid stepping stone for what needs to come next. (Read More: Geithner: Ready to Go Over 'Cliff' If Taxes Don't Rise)

If anything, the way the fiscal cliff negotiations are being conducted will complicate politicians' ability to reach subsequent agreement.

What Washington desperately needs is a strategic reset anchored by a common vision for a much better economic future for the country - one that is both desirable and attainable. The election was supposed to provide this. Judging from Congress's recent behavior, it has not as yet.

Absent such a reset, America's unmatched entrepreneurship, innovation and talent will continue to be undermined by repeated congressional dysfunction; and this regardless of the outcome of the fiscal cliff drama.

Featured