THE BLOG
12/21/2012 08:57 am ET Updated Feb 20, 2013

Cliff Dive: What the Heck Happens Now?

The House Republicans have failed to pass their benighted Plan B. But other than "Republicans are in deep disarray" what does that mean for near term fiscal policy -- should we prepare the trimmings for a Merry CLIFFmas?

In fact, once Speaker John Boehner turned away from the compromise he was hammering out with the President earlier in the week, the odds of going over the cliff significantly jumped. Plan B was nothing more than theatrics -- designed to show the world that Leader Boehner could muster his troops, even if it was for a cliff solution that was going nowhere in the Senate or White House. Unfortunately for him, that little bit of theater turned out badly, and Boehner's leadership is at risk.

Unfortunately for the rest of us, it's impossible to imagine a plausible deal being made with these House R's. If Boehner decided to go for a compromise with a bunch of D votes, he could likely get to 218 and passage. But John Boehner teaming up with Nancy Pelosi to pass a tax increase -- even on just the top few percent -- is not... um... a likely outcome.

So over the cliff we go. What happens next?

In fact -- excepting a New York minute earlier this week when I sniffed a possible compromise -- the endgame I always expected was we go over and hopefully quickly reverse the damage. That won't be good -- markets will likely tank today as they were generally pricing in a solution before New Year's. But it won't be recessionary either.

And there's a lot more ugliness to come with this route. I assume they'll quickly reverse -- in early January -- the tax increases on the broad middle class. Note the Alice-in-Wonderland politics here: post-Jan 1, once the tax rates have automatically reset, to reverse the income tax increases on 98 percent of households is a big tax cut off of current policy -- even if current policy is two days old!

The upper income increases -- above $250,000 -- will hold. Again, note that the R's may have lost their chance to take advantage of the President's offer to raise that threshold to $400,000. If I were him, I'd take the position that all the give-backs he offered in compromise -- the higher threshold, the chained CPI, the new trillion in spending cuts, the debt ceiling still in play -- are no longer on the table. That's the cost of the House R's unwillingness to deal.

So we're back to squabble land, and with the debt ceiling a few weeks out there on the other side of the cliff, along with a bunch of other stuff that's got to dealt with, including the automatic, across-the-board, boneheaded spending cuts that will go into effect Jan 1. The R's must be figuring that post cliff they've got new leverage with the debt ceiling, but as my readers know, I believe the President when he says he won't deal on that.

In other words, as long as the WH is serious about not negotiating on the debt ceiling, and they'd be crazy not to be, the House R's, by dint of their unwillingness to do the only thing that moves policy forward in contested times -- compromise -- have lost whatever leverage they had.

That leverage was there because the WH was willing to compromise in the interest of avoiding the cliff. Once we go over, it's gone. Maybe the next Congress will be less dysfunctional--hard to imagine they'd be worse. But frankly -- and sadly -- not that hard. As I said on the Rachel Maddow Show last night (and be sure to watch her brilliant, detailed intro-The Path to Dysfunction), our economy's been extremely resilient so far, but there's only so much policy abuse it can take.

This post originally appeared at Jared Bernstein's On The Economy blog.