The fundamental problem is that most Republicans do not support any tax increases and most Democrats do not support significant cuts to government services. What's more, even if Congress were inclined to compromise, the logistics of passing a grand bargain are daunting. There are only seven weeks until this congressional session ends. Some time will be taken up preparing for the 113th Congress, and many departing members will focus on making arrangements for their post-Congress lives rather than legislating. In that context, Congress would have to draft legislation; debate and pass it in committees; debate and pass it in both houses; come up with a compromise agreement between the two chambers; redraft the compromise; and then pass the conference report. Then the president would have to sign that bill into law.
Barring an unforeseen change, the cumulative effect of partisan gridlock and a lack of time should squelch expectations for a grand bargain in the lame duck.
Scenario 2: Congress
and the president agree to delay all or parts of the fiscal cliff, possibly including
If Congress and the president fail to strike a comprehensive deal, they will face substantial pressure to delay some or all of the fiscal cliff provisions, including sequestration, before they take effect on January 2. A delay would have many of the same short-term positive effects for the economy as a grand bargain. It would also defer deep cuts to defense and domestic programs.
The bargaining over a possible delay could resemble a scaled-down version of trying to reach a grand bargain. The lack of comity between the two parties on the Hill suggests that even a scaled-down agreement would face a difficult and contentious, if not impossible, path. Any deal to delay some or all of the fiscal cliff issues would occur only at the last minute, after lesser agreements had failed, and in a "clean" bill stripped of any other legislative measures.
However, the effects of a delay would differ from those of a grand bargain in one significant regard: the potential market reaction. Financial markets may react poorly if the deficit reduction measures enacted in the Budget Control Act of 2011 are delayed without having reached a bigger deal, because it would signal that Washington lacks the political will to solve its fiscal problems. Both Fitch Ratings and Moody's Investor Services have warned of a credit downgrade if Congress and the president do not reach an agreement that prevents the country from going off the fiscal cliff, increases the U.S. debt ceiling, and creates a plan for reducing the budget deficit and stabilizing the federal debt. As former Senators Sam Nunn and Pete Domenici wrote in October, "Absent more constructive action, simply postponing when we go over the cliff could hurt business confidence, worry investors and lead to another disruptive debate over raising the debt ceiling."
Republicans have strong incentives to press for a delay, since that would avoid substantial tax increases and cuts to defense spending in the short term. In early 2013, Republicans will also gain new leverage as the nation once again reaches its debt ceiling, which will require Congress to authorize additional government borrowing. This is an immensely powerful bargaining chip, as was amply demonstrated in the summer of 2011 when Republican deficit hawks withheld their support for raising the debt ceiling until they received concessions on deficit reduction. They may use those hardball tactics again in 2013, possibly in the midst of negotiations to reach a larger bargain on spending and revenues. Delaying sequestration for several months could thus hand congressional deficit hawks yet another source of negotiating leverage.
Conversely, the president and many congressional Democrats would lose a lot of bargaining power by agreeing to a delay. Unless Democrats concluded that the public would blame them -- and them alone -- for going off the fiscal cliff, there is little incentive for them to postpone the day of reckoning.