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, [although] 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.