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A Thousand Little Pieces

Recently I had the opportunity to speak to the CEO of a large corporation based in the Western United States. The CEO’s company is considering undertaking a major project in accordance with its normal line of business — which, if executed, could result in employment (albeit temporary employment) for hundreds and perhaps more than a thousand individuals. The project would bring in substantial revenues to the company — but would also entail substantial costs, substantial risks, and might or might not make a profit. Consumers are willing to pay for the company’s product — but they are not willing to pay what they were a year ago, and the company is having difficulty negotiating with its distributors on appropriate prices. Nevertheless the Company, which remains highly solvent, is willing to take the risk — if it can contain its costs to what it perceives to be reasonable levels.

The rub is that the project depends on the participation of a Key Individual. Key Individual is himself quite wealthy, and has worked on many similar projects with the Company. But this time around, the Company and Key Individual cannot agree on a price for Key Individual’s services. You see, Key Individual is simply not willing to accept compensation less than what he is used to for the project — even though it is reasonably clear that the project is worth less than it might have been under better economic circumstances.

Each side is convinced that the other one will blink. The Company assumes that Key Individual will eventually look at the prevailing economic conditions and concede to a pay cut. In fact, because the Company is worried about deflation, it’s a little bit worried that it’s cutting Key Individual too good a deal. Key Individual, meanwhile, assumes that the Company will relent and determine to pay him what it once did for his services — or that sooner or later the economy will improve, boosting demand for the Company’s products and rendering the problem moot.

But so far, nobody has blinked — and rather than steering toward a resolution, the Company and Key Individual seem to be drifting further apart. Therefore, the project probably will not be executed for several weeks or several months, if it is executed at all. In turn, the hundreds of people who might otherwise be employed by the project will sit idle. And as a result of that, the hundreds of idled workers will in turn have less money to spend on consumer products — including products like the one that the Company produces.

All of this might not be so important if it were an isolated incident. But the CEO has heard of dozens of such stories in his industry. And he’s pretty well convinced that if there are dozens of such stories in dozens of other industries. Business is not getting done.

Now imagine, for the moment, that the Company decided to pay Key Individual what he wants. From the Company’s point of view, this would be a poor decision — the project would probably lose money. But what if dozens of CEOs at dozens of companies, each of whom are locked in their own parallel universe negotiations with persons like Key Individual, all simultaneously decided to accede to his demands? Then economic activity would pick up significantly — and ironically, Key Individual’s services would no longer be overpriced, because the increase in activity would (theoretically) flow through to the consumer and increase demand for the Company’s products.

This is not, technically speaking, a prisoner’s dilemma. If other firms increase their production, than it will probably become in the Company’s interest to increase theirs. It’s more like a game of chicken. Uncertainty makes negotiations like the ones between the Company and Key Individual harder to complete; right now there’s a lot of uncertainty. Uncertainty combined with deflationary expectations makes negotiations especially hard to complete, and right now we have those too in a lot of industries.

The silver lining is that if business and consumer confidence increase, there is liable to be substantial backflow of projects which get undertaken in relatively short order. But right now nobody is blinking.

Nate Silver is the founder and editor in chief of FiveThirtyEight.