By Anatole Kaletsky
(Reuters) - Now that the worldwide panic over U.S. monetary policy has subsided, Washington is brewing another storm in a teacup: the budget and Obamacare battle that reaches a climax next Monday, followed by the debt limit vote required to prevent a mid-October Treasury default. The ultimate outcome of these crises is a foregone conclusion. As Senator John McCain told the press this week: "We will end up not shutting down the government and not de-funding Obamacare." He could surely have added that a Treasury default is also out of the question.
But how exactly will Washington manage to dodge these bullets? As McCain added, "I don't know what all the scenes are, I've seen how this movie ends." Markets understandably fear that all the plot twists leading up to a seemingly satisfactory resolution could produce an economic horror film, crushing business and consumer confidence, damaging economic growth and triggering a major sell-off in global stock markets. That, after all, is exactly what happened when the U.S. Treasury almost defaulted in July 2011.
What, then, are the chances of similar disruption in the weeks ahead? The risks this time are much smaller than in 2011 because of four events that have transformed the dynamics of U.S. budget battles.
First and foremost, the 2012 election decisively shifted Washington's balance of power, not only by providing President Obama with a new democratic mandate, but also by transforming the political incentives for both sides. Until last November, Obama risked losing his bid for re-election if fiscal gridlock damaged the economic recovery. The Republicans, by contrast, could hope to benefit from any setbacks to economic growth. Now, the tables are turned. Obama will never again face voters and so can afford to risk a budgetary confrontation. Republican congressmen, on the other hand, stand to lose their own seats and their party's control of Congress by overplaying their hand, especially when opinion polls suggest that Republicans will be blamed if a budget breakdown damages growth or triggers a setback on Wall Street.
Secondly, the U.S. budget outlook has been transformed as deficits have melted away in the face of economic recovery. As a result, public paranoia about government borrowing has diminished, along with popular support for painful budget cuts.
Thirdly, the big spending reductions implemented since the 2011 budget crisis have left little scope for further significant reductions in discretionary spending. Fiscal conservatives now recognize that the only programs large enough to transform the budgetary outlook are Social Security, Medicare and Defense - but these programs tend to be strongly supported by elderly and conservative voters.
That, in turn, implies a fourth political transformation. The Republicans are no longer trying to extract major spending reductions in exchange for their budgetary votes. Whereas previously, Republican leadership insisted that any increase in the debt ceiling must be matched dollar for dollar by public spending cuts, this "Boehner Rule" has been quietly dropped. Instead, Republicans are now using budget votes to advance a political cause, the abolition of Obamacare, which is purely symbolic because it offers no scope for compromise with the president and therefore no chance of enactment.
If budget and debt votes were still attached to spending cuts or Medicare and Social Security reforms, these more realistic objectives would paradoxically have created a greater risk of gridlock, since Republicans could reasonably expect the president to give some ground after a period of crisis. But Obama would never abandon his most important legislative achievement, universal healthcare, regardless of any fiscal pressure the House might apply. To expect the president to trade Obamacare for a budget vote would be like demanding that he strips naked on television or launches a nuclear attack on Tehran - it is simply not going to happen. Since everyone understands this, including the vast majority of poll respondents and also Republican politicians, the budget and debt ceiling battle is best regarded as an elaborate charade. The purpose is less to extract genuine concessions from Obama than to expose the Republican moderates who, in the end, will "betray" their own party by voting with Democrats to avert fiscal disaster, just as they did in January's fiscal cliff votes.
Once these dynamics are understood, the next few weeks' events become quite predictable. A vote in the Senate will restore the funding of Obamacare to the budget resolution and this amended resolution will go back the House, where the Republican leadership will be forced to present it for a vote, since the alternative would be to accept total responsibility for a government shutdown. This resolution will be passed - like January's fiscal cliff resolution - by mainly Democrat votes, backed by some moderate Republicans and lots of Republican abstentions.
Once this part of the charade is over, a similar game will be played out with the debt ceiling resolution bouncing back and forth between the Senate and House. This time, the Republicans may attach some conditions that the Democrats could reluctantly accept, such as approval of the Keystone oil pipeline or maybe some minor Medicare and Social Security reforms.
However, the Republicans' bargaining position will be even weaker in the debt ceiling vote than in this week's budget debate. Assuming they back down next week to avert a government shutdown, Republicans will find it impossible to justify an even more damaging and painful shutdown over the debt ceiling, especially if their quarrel with the president is over the same issue, Obamacare. It seems overwhelmingly likely, therefore, that if the budget issue is resolved next week, the debt limit will pass without much trouble a few weeks later, just as it did after January's fiscal cliff vote.
In sum, the fiscal uncertainty in Washington is almost over - and once the gridlock is broken, the U.S. economy and financial markets could jump back to life like a coiled spring. Remember what happened last January after the fiscal cliff was resolved.
(Anatole Kaletsky is a Reuters columnist. The opinions expressed are his own.)