The “Fiscal Cliff” Negotiations of 2012

1 AN INVENTED PROBLEM & TOO MUCH COMPROMISE

In 2012, Federal Reserve Chairman Ben Bernanke testified before the House Financial
Services Committee that “there’s going to be a massive fiscal cliff of large spending cuts and tax
increases” on December 31, 2012.1 First, taxes would automatically increase by $500 billion,2
slowing ongoing economic recovery and decreasing the gross national product (GDP).3 Second,
cuts would automatically decrease federal spending by $200 billion,4 threatening ongoing
military operations and drastically cutting benefits for millions of low-income Americans.5
Third, the Debt Ceiling would freeze federal borrowing, effectively killing any spending that
exceeded tax revenue6 and threatening the solvency of the government itself by causing the
country to default on loans.7 Combined, these “austerity policies” would massively reduce the
federal deficit but did so by imperiling millions of Americans. Thus, both parties had to reach an
agreement to patch several pieces of legislation or they risked plunging the fragile economy back
into recession.8
Democrats and Republicans that doing nothing—their best alternative to a negotiated
agreement (“BATNA”)—was something to avoid. However, Democrats were focused on
fostering economic recovery and wanted higher taxes on the wealthy while opposing spending
cuts on entitlement programs. In contrast, Republicans focused on the deficient and proposed
dramatic spending cuts to offset their refusal to back tax increases of any kind.9 For years, these
fundamental disagreements had stalled any legislative fixes and enabled the use of risky
competitive tactics as the Fiscal Cliff loomed.
An early deal was impossible for one for one fundamental reason—the Fiscal Cliff was
deliberately created by Congress, who thought that they could use the universally unpopular
consequences of going over the Fiscal Cliff to force each other to accept concessions or risk

1
Adam Sorenson, Ben Bernanke Warns Congress in Its Own Language, TIME (Feb. 29, 2012),
http://swampland.time.com/2012/02/29/ben-bernanke-warns-congress-in-its-own-language/.
2
Suzy Khimm et al., The Fiscal Cliff, WASHINGTON POST (Nov. 27, 2012),
https://www.washingtonpost.com/news/wonk/wp/2012/11/27/absolutely-everything-you-need-to-know-about-the-
fiscal-cliff-in-one-faq.
3
Id.
4
Id.
5
Id.
6
Brad Plumer, Do We Still Need to Raise the Debt Ceiling?, WASHINGTON POST (Nov. 9, 2012),
https://www.washingtonpost.com/news/wonk/wp/2012/11/09/if-the-u-s-goes-over-the-fiscal-cliff-do-we-still-need-
to-raise-the-debt-ceiling.
7
Id.
8
Khimm et al., supra note 2.
9
Id.

1
destroying the economy.10 This assumption backfired on Democrats—not only did they fail to
predict that Republicans would retake the House in 2010, they also thought that proposed
defense cuts would be enough to force their cooperation.11 Instead, the Republicans engaged in
constant obstructionism to embolden their base and block Democratic legislation, earning
historically low approval ratings12 and a new nickname: the “Party of No.”13
Republican also tactically worsened the Democrat’s BATNA by continuing to pile all
austerity policies into a single deadline. For instance: (1) in 2010, Democrats only passed vital
measures for economic recovery by allowing Republicans to pass tax cuts that would expire at
the Fiscal Cliff; (2) during President Obama’s first term, the Democratically-controlled Senate
repeatedly deadlocked under Republican filibusters and could not gain enough votes to send
legislation to prevent the Fiscal Cliff to the Democratically-controlled Congress; and (3)
Republicans regained the House in 201014 and enacted even more austerity policies to make the
consequences of going over the Fiscal Cliff less horrible for their party and more undesirable for
the Democrats.15 By 2012, both parties had ceased negotiations entirely and invested all their
efforts into the election and their hopes of winning more legislative seats.
The mutual decision to put off problem-solving until the last minute began slowing
economic growth and angering voters.16 As a result, proposals on how to fix the Fiscal Cliff and
the ballooning federal deficit dominated the election.17 The incumbent, President Obama (D),
stuck with his party’s compromising tone and proposed modest entitlement and defense cuts
while increasing revenue by raising taxes only on the top earners.18 In contrast, Governor Mitt
Romney (R) stuck with his party’s hard-bargaining tactics, proposing huge cuts to entitlement
programs to offset his refusal to create new taxes or decrease spending for defense programs and
private sector subsidies.19

10
See, e.g., Jackie Calmes, Demystifying the Fiscal Impasse That is Vexing Washington, NEW YORK TIMES (Nov.
15, 2012), https://www.nytimes.com/2012/11/16/us/politics/the-fiscal-cliff-explained.html.
11
Id.
12
See Congress and the Public, GALLUP, http://news.gallup.com/poll/1600/congress-public.aspx (last visited June
15, 2018).
13
See, e.g., Michael Grunwald, The Party of No, Time (Aug. 23, 2012), http://swampland.time.com/2012/08/23/the-
party-of-no-new-details-on-the-gop-plot-to-obstruct-obama/; Greg Sargent, The Party of No Makes a Comeback,
WASHINGTON POST (Apr. 30, 2012), https://www.washingtonpost.com/blogs/plum-line/post/the-party-of-no-makes-
a-comeback/2012/04/30/gIQA2tVwrT_blog.html; Gary Younge, How Being the Party of No is Working for the
GOP, GUARDIAN (May 14, 2012), https://www.theguardian.com/commentisfree/cifamerica/2012/may/14/how-
being-party-of-no-working-for-gop.
14
Paul Harris & Ewen MacAskill, US Election Results Heard New Political Era as Republicans Take House,
GUARDIAN (Nov. 3, 2010), https://www.theguardian.com/world/2010/nov/03/us-midterm-election-results-tea-party.
15
Khimm et al., supra note 2.
16
See Kimberly Amadeo, Fiscal Cliff Explanations, THE BALANCE (June 11, 2018),
https://www.thebalance.com/what-is-the-fiscal-cliff-explanation-and-causes-3305766.
17
See e.g., Khimm et al., supra note 2.
18
Id.
19
Id.

2
 President Obama handily won the election on November 6.20 However, Republicans retained
control of Congress and Democrats still lacked the numbers in the Senate to stop Republican
filibusters.21 The election had prevented either party from gaining a last-minute procedural
advantage. Additionally, the fiscally-conservative “Tea Party” had picked up more Republican
seats, entrenching their voting base’s opposition to tax increases.22 President Obama thus began
new negotiations with the status quo largely intact.23

2 STRENGTH IN HARDBALL TACTICS & UNITY

With talks resumed a mere forty-five days from the Fiscal Cliff, four key players emerged:
Speaker of the House John Boehner (R), Senate Majority Leader Harry Reid (D), President
Barack Obama (D), and Senate Minority Leader Mitch McConnell (R).24 Each made sure to
create the impression that they were just as unmovable as ever: Senator Reid vowed that
Democrats would not accept any cuts to Social Security while Republicans prophesized the
economy’s doom if taxes increased.25
President Obama put the first offer on the table to strategically tilt the baseline in his favor
while making some concessions to appear fair: an additional $1.6 trillion in tax revenue, $50
billion in stimulus spending, $400 billion in reductions for entitlement programs, an extension of
payroll tax cuts, and raising the Debt Ceiling to avoid default.26 The offer did not include any tax
cuts and called for far more new taxes than Democrats had demanded before.27 Although
nakedly in the Democrats’ favor, political commentators praised President Obama for
cooperating and agreeing to cut billions from entitlement programs.28

20
US Election 2012 Results, ECONOMIST (Nov. 7, 2012), https://www.economist.com/graphic-detail/2012/11/07/us-
election-2012-results.
21
House Map, NEW YORK TIMES (Nov. 6, 2012), https://www.nytimes.com/elections/2012/results/house.html;
Senate Map, NEW YORK TIMES (Nov. 6, 2012), https://www.nytimes.com/elections/2012/results/senate.html.
22
While the Tea Party was largely a populist phenomenon, its vehement opposition to taxation is rooted in a “Tax
Pledge,” the brainchild of conservative lobbyist Grover Norquist, that nearly all Republican legislators had signed.
The pledge calls for Republicans to oppose and vote against any and all efforts to increase taxes. See, e.g., Brett
LoGiurato, The Incredible Life of Grover Norquist, BUSINESS INSIDER (Dec. 1, 2012),
http://www.businessinsider.com/who-is-grover-norquist-pledge-signers-list-fiscal-cliff-republicans-tax-2012-11.
23
See Deirdre Walsh, A Search for Common Ground, CNN (Nov. 16, 2012),
https://www.cnn.com/2012/11/16/politics/fiscal-cliff/index.html.
24
See id.
25
Bob Cusack, Timeline of the Fiscal Cliff Showdown, THE HILL (Jan. 2, 2013), http://thehill.com/blogs/blog-
briefing-room/news/275121-timeline-of-the-fiscal-cliff-showdown.
26
Zachary A. Goldfarb & Lori Montgomery, Obama to Open Fiscal Talks, WASHINGTON POST (Nov. 13, 2012),
https://www.washingtonpost.com/business/economy/obama-to-open-fiscal-talks-with-plan-to-raise-taxes-on-
wealthy/2012/11/13/9984cd78-2dc1-11e2-89d4-040c9330702a_story.html.
27
Id.
28
Mark Mardell North, Republicans Make Fiscal Cliff Counter Offer, BBC NEWS (Dec. 3, 2012),
https://www.bbc.com/news/world-us-canada-20584019.

3
 The measure passed in the Senate, but Congressional Republicans, unmoved by opening
concessions, called it a “la-la land” offer and refused to allow it to go up for a vote.29 Rank-and-
file Republicans perceived their BATNA to better than compromise for two reasons: (1) if they
reneged on their pledge to oppose tax increases, they risked losing their seats; and (2) if they
went over the Fiscal Cliff, some tax cuts would expire and they could enact new cuts, even if
they were lower than the old cuts, without technically increasing taxes.30 In short, Republicans
wanted to show Democrats that their resistance point (“RP”) was accepting any tax increases
whatsoever. By refusing to negotiate, they thought they could soften Democratic opposition and
eventually force unilateral concessions.
However, Democrats refused to offer more concessions until Republicans offered some in
return. This impasse lasted until the end of November, when Representatives like Tom Cole (R)
and Orrin Hatch (R), broke rank and opposed holding the American economy hostage to secure
larger tax breaks for the wealthy.31 They wanted other Republicans to take the deal as-is,
avoiding the Fiscal Cliff for now and saving additional tax cuts for later.32 Although most
Republicans remained firm, wavering rogue representatives inspired President Obama to promise
that if more Republicans expressed a willingness to trade concessions, Democrats would
reciprocate until a deal was made.33
President Obama’s promises eroded Republican unity, persuading Republican leaders to
make a counter-offer before rogue representatives would offer more than they wanted to
concede. Namely, Republican leadership offered to slash benefits, cut spending by $2.2 trillion,
and somehow raise revenues by $800 billion without increasing taxes.34 The Democrats
immediately rejected the offer, criticizing Republicans for making it in bad faith because it
offered no concessions, only vague promises of revenue increases that ultimately amounted to
“magic beans and fairy dust.”35 Leaks from the White House revealed that Democrats preferred
going over the Fiscal Cliff to making any more concessions without getting some in return.36
Left without a bargaining zone because both parties seemed to have reached their resistance
points, efforts to force concessions turned to psychological ploys. In particular, Senator
McConnell (R) attempted to break up Democratic unity by forcing a vote on a bill that
Republicans uniformly opposed and many Democrats had already rejected.37 The bill would

29
North, supra note 29.
30
See Kimberly Amadeo, US Fiscal Cliff 2012, THE BALANCE (Oct. 27, 2016), https://www.thebalance.com/us-
fiscal-cliff-2012-timeline-and-causes-3305776.
31
Ashley Killough, Cole Defends Position on Tax Compromise, CNN (Nov. 28, 2012),
http://politicalticker.blogs.cnn.com/2012/11/28/cole-defends-position-on-tax-compromise-in-fiscal-cliff-battle/.
32
Id.
33
See Cusack, supra note 25.
34
North, supra note 29.
35
Id.
36
Id.
37
David Grant, Debt Ceiling Debate Twist, CHRISTIAN SCIENCE MONITOR (Dec. 6, 2012),
https://www.csmonitor.com/USA/Politics/Decoder/2012/1206/Debt-ceiling-debate-twist-Sen.-Mitch-McConnell-
filibusters-himself.

4
raise the Debt Ceiling and save the country from default, but Republicans thought Democrats
would defeat the bill because neither party wanted it.38 The gambit backfired—Senator Reid
successfully persuaded his party to vote for it even though they did not want it to pass,
embarrassing Senator McConnell and forcing to embarrassingly filibuster his own bill.39 The
Democrats demonstrated strength in unity, but both the Fiscal Cliff and the Debt Ceiling
remained a threat.
Facing the risk of more Republicans breaking rank and offering concessions while
Democrats stood unified and ready to go over the Fiscal Cliff, Representative Boehner (R)
decided it was time to meet with President Obama (D) to control which concessions his party
made.40 In the second week of December, he walked back his promises to oppose all tax
increases, revealing that it was not the RP of at least some Republicans, and agreed to increase
taxes on only a fraction of the top 1% of earners in return for additional cuts to Social Security.41
President Obama took the deal and Representative Boehner promised to pass “Plan B” through
the House by December 20.42 However, he could not deliver—enough Republicans actually had
a reservation point of passing any tax increase that the vote failed.43
On December 26, Congress reconvened after the Christmas recess.44 Party leaders agreed to
meet at the White House again, but both sides insisted that the stalemate was the other’s fault.45
Cooperation seemed impossible, as Senator Reid (D) demanded that Representative Boehner (R)
stop blocking Congress’s vote on President Obama’s original proposal, which the Senate had
passed weeks prior.46 Republicans refused, so talks focused on revising the “Plan B” that failed
in the House before the recess.47 Two days before the Fiscal Cliff, Representative Boehner again
deadlocked with President Obama because President Obama refused to allow drastic Social
Security cuts. In short, Representative Boehner knew that he had no power to force his party to
accept a deal outside their RPs of accepting no new taxes if he could not deliver significant
Democratic concessions.48
By New Year’s Eve, it was apparent that no deal was possible with the current negotiators.
It was up to Vice President Joe Biden (D) and Senator McConnell (R)—Senate colleagues for

38
Id.
39
Id.
40
See Cusack, supra note 25.
41
Id.
42
Id.
43
Johnathan Weisman, Boehner Cancels Tax Vote, NEW YORK TIMES (Dec. 20, 2012),
https://www.nytimes.com/2012/12/21/us/politics/house-moves-toward-vote-on-boehners-backup-plan.html.
44
Party Images, GALLUP, http://news.gallup.com/poll/24655/party-images.aspx (last visited June 15, 2018); Cusack,
supra note 25.
45
Dana Bash & Tom Cohen, Obama, Congress Leaders to Discuss Impending Fiscal Cliff, CNN (Dec. 28, 2012),
https://www.cnn.com/2012/12/27/politics/fiscal-cliff/index.html
46
Id.
47
Id.
48
Cusack, supra note 25.

5
nearly three decades—to reach a last-minute agreement over the phone.49 The evening of
December 31, they struck a deal: tax cuts for everyone but the top 1% of income-earners, an
increase of the Debt Ceiling, and no entitlement cuts.50 Working into the night, the Senate
overwhelmingly voted to pass the American Taxpayer Relief Act of 2012 at 2am on New Year’s
Day while an unenthusiastic Congress narrowly passed it with the support of only eighty-five
Republicans.51 Although the feared recession was averted, the parties had technically failed to
prevent the United States from going over the Fiscal Cliff for the two days it took to pass and
sign the bill into law.52

3 A SHORT-TERM SUBSTANTIVE WIN

The fifty-nine-page bill contained the following terms: (1) permanent tax increases on
capital gains, retirement accounts, estates, payroll, and top income rates; (2) elimination of tax
credits and deductions for top earners; (3) temporary income tax breaks for the middle and lower
classes; (4) no significant cuts to entitlement programs, private sector subsidizes, or defense
spending; and (5) an increase in the Debt Ceiling.53 In summary, the bill included $600 billion of
new tax revenue assessed almost entirely on the wealthy while avoiding both the entitlement cuts
Democrats opposed and the defense and private sector cuts Republicans opposed. While the bill
avoided economic recession, it would nonetheless add $4.5 trillion more to the national deficit
than the Fiscal Cliff’s austerity policies.54
Substantively, the Fiscal Cliff negotiation was a resounding success for Democrats. While
they only gained approximately 38% of the new tax revenue they initially proposed and could
not cut defense or private sector subsidizes, they avoided entitlement cuts. Meanwhile, the
Republicans substantively lost on nearly all fronts: they had to commit to tax increases, did not
gain any entitlement cuts, and added trillions to the deficit.

4 A LONG-TERM PROCEDURAL LOSS

There are three conclusions to be drawn from the Fiscal Cliff negotiations of 2012: (1) to
reach a bargain before a deadline, stubborn cooperation can be key; and (B) for the most gains
against a competitive and uncompromising opponent, beat them at their own game; but (C) be

49
David A. Fahrenthold & Ed O’Keefe, Fiscal Cliff Resolution Falls to Biden and McConnell, WASHINGTON POST
(Dec. 31, 2012), https://www.washingtonpost.com/politics/fiscal-cliff-resolution-falls-to-biden-and-mcconnell-
longtime-senate-colleagues/2012/12/31/c0e11a72-5380-11e2-8e84-e933f677fe68_story.html.
50
Cusack, supra note 25.
51
Id.
52
See Mandel Ngan, Obama Signs Fiscal Cliff Bill into Law, CBS NEWS (Jan. 3, 2013),
https://www.cbsnews.com/news/obama-signs-fiscal-cliff-bill-into-law/; Rachelle Younglai & Thomas Ferraro,
House Republicans Balk at Deal, REUTERS (Jan. 1, 2013), https://www.reuters.com/article/us-usa-fiscal/house-
republicans-balk-at-fiscal-cliff-deal-idUSBRE8A80WV2013010.
53
126 Stat. 2313 (2013).
54
The Fiscal Cliff Deal, CONGRESSIONAL BUDGET OFFICE (Jan. 4, 2013), https://www.cbo.gov/publication/43835.

6
wary of the long-term costs of holding oneself to higher standards and never forcing opponents
to pay the consequences for their competitive tactics.
While it is true that Democrats largely gained the most concessions and made Republicans
break their promise to never raise taxes, that win came at the cost of years of deadlocking and
squandered Democratic majorities in both the Senate and the House. Democrats did not press
their numerical advantage to break Republican filibusters and compromised too early by
mistakenly trusting Republicans to reciprocate concessions. This is what created the Fiscal Cliff
in the first place: the Democrats trusted their opponents to abide by the same procedural rules
that they did but failed to create enough incentives to force Republicans to actually cooperate or
face the consequences. Democrats thought that Republicans had incentives to cooperate to avoid
defense cuts, but they failed to realize that Republicans had made it so that the majority of the
costs of the Fiscal Cliff—huge entitlement cuts, throwing the economy back into a recession, and
massive tax increases—would fall on the Democratic president. On the contrary, all the costs of
not going over the Fiscal Cliff fell on Republicans—it was better for them enact unpopular
austerity policies than to break promises to never increase taxes.
However, Democrats gained concessions through remaining stubbornly cooperative in the
face of Republican intransigence. In a closed negotiation between two people with the same
costs as these parties, this tactic would have failed. But the Fiscal Cliff negotiations involved
hundreds of lawmakers and the popular opinion of millions of Americans. Chiefly, cooperative
Democratic leadership gained a reputation for fair play that inspired their party to trust them,
allowing Democrats to act in unison. In contrast, Republicans leadership gained a reputation for
playing hardball that inspired no trust in their party, revealing large weaknesses when
Republican leaders tried to bluff by counting on their entire party to walk to the BATNA.
Knowing that they could count on some Republicans to break ranks, the Democrats overcame
Republican obstructionism by exploiting divisions within the party and calling bluffs with a
unified front.
Nonetheless, because they faced very little repercussions for the strong-arm tactics they
exhibited during the crisis, Republicans did not decide to cooperate with Democrats and abandon
obstructionism after 2012. In fact, the Democrats’ greatest victory—making Republicans look
foolish for failing to cooperate and negotiate with procedural fairness—became their downfall.
Republicans won subsequent elections on promises to not negotiate with Democrats at all,
eliminating elements in their party that had broken ranks and offered compromises.55 Meanwhile,
voters punished Democratic candidates for granting concessions to an opposition party that
offered none in return and faced no consequences for refusing to negotiate fairly. Conversely, if

55
See, e.g., Michael Grunwald, The Victory of No, POLITICO (Dec. 4, 2016),
https://www.politico.com/magazine/story/2016/12/republican-party-obstructionism-victory-trump-214498.

7
Democrats played hardball, their reputation for fair play backfired and cost them votes for
walking back promises to meet the higher standard that their base expected.56
By gaining substantive concessions by being the more principled party, Democrats trapped
themselves to abide by lofty goals of procedural fairness or risk the disapproval of their base.
This only worked because Republicans exploited this weakness—breaking up the opposition’s
unity through spreading rumors that particular Democrats were engaging in unethical behavior.
Democrats could not reciprocate in rumor-mongering for two reasons: (1) it alienated voters that
held them to higher standards and (2) was utterly ineffective against a party that was elected by
voters that admired the hard-bargaining tactics Democratic voters thought were unethical.
Republicans thus went into every negotiation with massive procedural advantage: they had the
approval of their base to break the rules, whereas the Democrats did not. Distracted by trying to
counter flagrantly aggressive Republican tactics, kill rumors, and hold the approval of their base,
Democrats had no time to build incentives to discourage the intransigence that Republican voters
rewarded. This resulted in lopsided negotiations for the next five years, ultimately handing
Republicans the White House and control of the Supreme Court.57
Thus, the Fiscal Cliff negotiations allowed Democrats to prevent a catastrophe, earning
short-term gains. But the Democrats failed to consider the cost of holding each other to higher
standards while never punishing Republicans for failing to meet them. Thus, while Democrats
gained a substantive victory and protected entitlement spending, they lost a long-term procedural
war by ceding the low ground and allowing the opposition party to craft strong incentives to
wallow in it indefinitely.

56
Id.
57
Id.