The battles lines are forming over the supercommittee, tasked with finding $1.8 trillion in deficit reduction or triggering huge cuts to defense and health care. The divide isn't exactly that Republicans won't agree to higher revenue and Democrats won't agree to cut entitlements. It's that Democrats will agree to cut entitlements only in exchange for higher revenue, and Republicans won't agree to higher revenue no matter what. Liberals are disappointed in the refusal of Democratic leaders to draw clear lines in the sand, but I don't see any scenario in which Democrats cross the line Obama refused to cross when negotiating with Republicans: either entitlements for taxes, or nothing for nothing.
So, if Republicans refuse to take the deal, what happens next? Well, the Obama administration hopes that the trigger forces them to act. Republicans can't abide the severe defense cuts that the trigger would provoke. It's possibly this threat will force Republicans to bargain. But the more likely scenario is that they let the trigger go off, and then quickly undo it. National Review's editorial, I think points the way for the GOP strategy:
Republicans should make public a serious first step toward entitlement reform without blinking on tax increases.
But the supercommittee is almost guaranteed to fail in agreeing to any large deficit reduction, for the same reasons that months of wrangling did not lead to a grand bargain: The parties’ positions are too far apart. We should assume, then, that the automatic cuts are likely to become law.
That does not mean that they will happen. Future Congresses will have their say, and it is hard to believe that they will accept a ten-year budget path set now. This bill will, however, establish the default settings for federal spending. Liberals who want more domestic discretionary spending will have to get legislation through both chambers of Congress and past the president’s desk. So too for conservatives who want to restore defense spending.
If the automatic cuts become law, restoring defense spending is exactly what we hope Republicans try to do.
That's the answer, I think. Now, you could say that this would make the supercommittee a failure. From the perspective of deficit reduction, you'd be correct. But the supercommittee wasn't really created in order to reduce the deficit. It was created in order to lift the debt ceiling.
Republicans needed a way to approve the debt ceiling without backing down from their avowed goal of reducing the deficit by a dollar for every dollar they hiked the debt ceiling. The supercommittee was supposed to lock in the lion's share of that deficit reduction. Now, suppose the parties can't agree on a fiscal adjustment -- that is, Democrats insist on a balanced deal and Republicans insist on a cuts-only deal. Then we trigger some painful cuts neither party wants, and Congress then goes ahead and cancels them out. End result: we increased the debt ceiling by $2.4 trillion, and only cut half as much from the budget. By the time this is clear, conservatives have long since turned their attention to other matters, and Boehner gets to keep his Speakership.
Meanwhile the ratings agencies think we've taken a step toward constraining the long-term deficit, and we actually impose a solution in 2013 when the Bush tax cuts face renewal, which also happens to be the sensible time to do the fiscal adjustment. That sounds like a win to me.