Scenario 3: Congress and the president fail to reach any agreement, and the nation goes off the fiscal cliff.
Continued gridlock during the lame duck session remains a high probability, and budget talks will likely involve a significant amount of brinksmanship among negotiators trying to maximize their own gains -- brinksmanship that could well end in failure, preventing a deal and driving the nation off the fiscal cliff.
As noted above, the tight legislative calendar in the lame duck session and the large number of weighty issues on the docket makes it very likely negotiations on any sizable deal will continue until the last possible moment. If talks break down at that point, the time left to agree to a delay would be very short. Efforts to broker a delay agreement would probably have to be moving at the same time as efforts to agree on a grand bargain. But lawmakers looking for a deal would likely shun simultaneous efforts, lest the possibility of delay remove the time pressure needed to reach a bargain.
Although President Obama has strongly opposed sequestration as a way to reduce the deficit, it remains unclear whether he would support legislation to undo it without an agreement on new sources of revenue. In August, he told a Virginia newspaper, "If the choice is between sequester going through or tax cuts continuing for millionaires and billionaires, I think it's pretty clear what the American people would choose." But the president also clearly stated during the final presidential debate that sequestration "will not happen." Although his spokesmen walked back that language the following day, it remains unclear to what degree Obama sees sequestration as an unacceptable outcome. Republicans leaders, on the other hand, have demonstrated their equally strong opposition to new taxes.
Some legislators from both parties might see advantage in letting the nation go off the fiscal cliff and allowing the sequester cuts to take effect. According to press reports, some Republicans have promised to slow down the legislative process to ensure that there is no deal to delay the cuts. For Republicans deficit hawks, ensuring that Congress reduces government spending, whatever the consequences, is the highest priority. Grover Norquist, the influential head of Americans for Tax Reform, recently stated, "Sequestration is not the worst thing"; and Rep. Jim Jordan (R-Ohio), who chairs the conservative Republican Study Committee, has said, "The only thing worse than cutting national defense is not having any scheduled cuts at all take place." For Democrats, going off the fiscal cliff would improve their bargaining position with Republicans -- taxes would rise significantly and defense spending would be cut.
In a perverse twist of logic, both parties might benefit from the new baselines created by going off the fiscal cliff. Allowing the Bush-era tax cuts to expire would automatically raise taxes on the majority of Americans to pre-2001 levels, which would reduce the deficit by $3.7 trillion over the next decade. With sequestration in force, spending would be cut by about $1 trillion over 10 years, carved equally out of defense and non-defense discretionary accounts. Ironically, these new baselines might actually break the partisan deadlock because Republican lawmakers could then vote in favor of a tax "cut," and as revenues increase, more Democratic lawmakers may be willing to vote to "increase" spending on defense programs.