By Anatole Kaletsky
NEW YORK Jan 23 The U.S. House of
Representatives decision to suspend the Treasury debt limit is
the most important political event in America since President
Barack Obama was first elected in 2008.
As anticipated in this column immediately after the 2012
election, Washington seems to have broken its addiction to
deadly games of economic chicken. That, in turn, should mean an
orderly resolution of all U.S. fiscal problems and perhaps even
an outbreak of bipartisan political cooperation, at least on
economic issues, of a kind not seen in Washington since the
None of these favorable outcomes is yet acknowledged as true
in Washington or Wall Street. Political analysts and market
pundits have almost unanimously described the House decision as
a diversionary tactic, simply designed to shift the high-noon
confrontation with Obama to a new battleground more favorable to
the Republican side: the March 1 date for automatic spending
cuts under the sequestration procedure, or the March 27
expiration date of current government budgets.
This cynicism will almost certainly be proved wrong. The
obvious reason is that an army in full retreat, as the
Republicans have been since the election and fiscal cliff
fiasco, finds it hard to regroup against an enemy enjoying
strong momentum. And when such a battered force does attempt a
last stand, this usually results in a rout.
In this case, however, there are more specific reasons for
the Republicans to seek peaceful coexistence instead of the
fight-to-the-death over borrowing and spending that many pundits
still predict. To see why House leaders decided to unilaterally
disarm their nuclear weapons - first the fiscal cliff and now
the debt ceiling - one has to understand the transformation in
U.S. political dynamics that occurred the moment the votes were
counted on Nov. 6.
Before the election, Republicans and their business backers
had two overriding reasons to obstruct any deals with Obama on
borrowing, spending or taxes. First, most Republicans genuinely
expected to win the presidential election and therefore had
every incentive to defer important decisions until their man was
in power. Secondly, they calculated that any collateral damage
inflicted on the economy through fiscal warfare would harm the
incumbent president, whose Achilles' heel was economic policy.
Once the election was over, this calculus completely changed.
Having failed to unseat Obama, Republicans were suddenly in
a situation where sabotaging the economy was no longer in their
interests. As I argued immediately after the election, and again
during the fiscal cliff negotiations, the GOP had few incentives
after Nov. 7 to just thwart Obama. Republicans now had to
persuade voters that their policies would promote jobs and
growth - and would do so immediately, not in some distant future
when budgets would have to balance or else the United States
would turn into Greece.
The election also changed motivations for the Republicans'
business supporters. Instead of viewing Washington gridlock as a
weapon for defeating Obama, American businesses after the
election had to accept the inevitable. They would have to live
with Obama and his policies, however much they disliked them.
For most U.S. businesses, the primary political consideration
was no longer the ideological debate over taxing and spending,
but a purely economic issue: How would the economic policies
negotiated between the White House and Congress affect business
conditions in the four years leading to 2016?
This gestalt shift implies that Republicans are unlikely to
press very hard for large-scale spending cuts, government
layoffs or fiscal tightening that could be seen as harming
economic recovery. Instead the focus should move to long-term
budget reforms, designed to take effect only after the economy
has largely recovered in 2015 or so - conveniently beyond the
next congressional elections.
The president will have strong incentives to cooperate with
such gradual fiscal consolidation, with major budget cuts
backloaded to the last years of his administration and beyond.
He would rather go down in history as the man who delivered
universal healthcare, saved the U.S. economy from its worst
crisis since the Great Depression, and put U.S. fiscal policy on
a sustainable footing than waste his entire second term haggling
over budgets - especially since achieving fiscal austerity does
not require any major cuts or austerity, except in the very long
In fact, the White House has already said it will offer some
long-term entitlement reforms as part of the bipartisan budget
deal that now looks eminently attainable. This may infuriate
left-wing Democrats, but Obama is unlikely to care much, now
that he has been reelected. In any case, grassroots Democratic
voters will probably care more about presidential efforts on gun
control, immigration and climate change than about wonkish
arguments over "chained CPI" and Medicare spending caps in the
Why then has there been little discussion of this change in
political dynamics? Probably because the media mostly see it as
their role to magnify political drama rather than to analyze how
they are likely to be resolved. The same applies to many
professional politicians. Extreme statements from both parties
will always attract the most media attention. The congressional
arithmetic, however, means that the views of radicals,
highlighted by the media, are no longer very important.
In the House, the minority Democrats can pass important
votes, such as a budget compromise, with just 20 votes from
moderate Republicans eager to compromise. The same applies in
the Senate, where the Democrats can lose several of their
left-wing caucuses but still easily pass a compromise bill. What
matters in this situation is not how most Republicans vote but
whether 20 moderates can be found to back a bill to raise taxes,
passed mainly by the Democrats. Most likely the Republican
leadership would tacitly even encourage and support this handful
of defectors, who would allow their party to foster an image of
reasonableness and compromise while forcing the Democrats to
carry the entire responsibility for higher taxes.
For this very reason, however, the leaders of both parties
who are brokering deals will have every incentive to operate
quietly in the background, keeping up the public choreography of
belligerence, to maintain discipline in each congressional
caucus and to keep radical grass-roots activists onside. So do
not expect white flags, flights of doves or armistice ceremonies
in Washington. But from this week onwards we should pay less
attention to bellicose rhetoric from politicians and focus on
their actions instead.