The House of Representatives decision to suspend the US 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