There are two ways to look at the policy fights in Washington. One is that the just-completed fiscal cliff deal is one round of four, with each side emboldened to approach the next round with new wind at their backs. The other is that the fiscal cliff deal sets the tone for the next three battles, and each, while painful and full of theater, will resolve themselves somewhat predictably.
Remember: The debt ceiling expired at the end of the year, but the Treasury can move money around until the middle of February. That's "Round Two." Round Three is the resumption of the sequester spending cuts, which are mandated by the 2011 Budget Control Act; half will come from defense, half will come from domestic spending. The budget deal delayed their implementation by two months, to March 2. Round Four is the budget for 2013; the government's blueprint for obtaining and spending money becomes moot on March 27.
Republicans would seem to have the upper hand, at least somewhat, because the first "round" had nothing to say about spending cuts, which Democrats want to avoid. All the bargaining from here on out will be about what to cut, because, by law, about $110 billion worth of deficit must eliminated budget by the end of the year. Leverage!
But it's hard to see how that works in reality. They've got some leverage, because there will be spending cuts, but not as much as it seems. First, just remember that "deficit reduction" and "spending cuts" aren't the same thing. If a magical new source of revenue is found between now and March 2, like, for example, the government discovers $110 billion worth of gold bars in a bunker somewhere, they can reduce the deficit without cutting anything. That's obviously not going to happen, but there are many, many different ways to close the mandated gap without simply cutting a lot of money from programs.
Now, Republicans are going to insist that Democrats agree to immediate discretionary and entitlement cuts above and beyond anything already budgeted, and it is fair to assume that spending cuts of a certain (and uncomfortable to Democrats) magnitude will be the line in the sand that Speaker John Boehner will draw.
Democrats and President Obama are going to insist that the sequester cuts and any subsequent cuts be accompanied by revenue-raising measures like tax increases, levies, and tax reform. (The money available is limited by deduction limits for those making above $250,000 Obama asked for as part of the first fiscal deal.)
But what Obama really has done is delayed the inevitable. He has a bunch of concessions that he knows he has to make — Medicare cuts among them — that he did not have use up to get Republicans on board with the change in marginal tax rates. One reason why Democrats balked so quickly at the Republican proposal to change the cost-of-living adjustment formula for entitlements is that they'd rather lose that fight later.
Also, Republicans have to specify how they want to cut the budget. Obama doesn't have to do that. He has already suggested a willingness to accept Medicare COLA changes, and he asked Republicans for ideas on revenue-raisers. In appearing to compromise his campaign position that taxes for people earning more than $250,000 would go up — a marker for defining the middle class, something very important to some Democratic activists — he has given Republicans the responsibility for detailing their own "ask."
Here is a thought experiment: Going over the fiscal cliff would have damaged the economy and thrown it back into a recession. Defaulting on the national debt would probably send the economy into a depression. Why would the Republicans, who, after all, were reasonable enough to vote on a tough deal to avert the fiscal cliff, refuse to make a deal on legislation to avert the debt ceiling default, which would imperil the country and anger their donor base even more?
It may be wiser for Republicans to use all of their leverage to insist on deep cuts during the sequester fight without upsetting the financial markets by holding the debt ceiling over the president's head. The president is counting on Republicans to be unreasonable, but if they aren't, then he loses some of the political leverage he has.