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COLUMN

Finally, cooperation has arrived in Washington

New York, January 24, 2013

By Anatole Kaletsky

 

The US 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 US 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 early 1990s.
 
None of these favourable 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 favourable 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 US political dynamics that occurred the moment the votes were counted on November 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 November 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 US 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 US 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 US economy from its worst crisis since the Great Depression, and put US 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 term.
 
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 next decade.
 
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. - Reuters
 



Tags: treasury | Cooperation | Obama |

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