Implications of “I am not a member of an organized political party. I am a Republican.” (with apologies to Will Rogers)
The collapse of Speaker Boehner’s Plan B has been interpreted as signaling that the Speaker never had the votes from his caucus for any deal with the President.  If this interpretation is correct, then we should prepare for something like the following trajectory of GDP:
Figure 1: Log GDP (blue), log forecast GDP under current law, from August 2012 (red), and GDP if all Bush tax cuts extended plus AMT fix (green square). NBER defined recession dates shaded dark gray; implied informal recession dates shaded light gray. Source: BEA, 2012Q3 3rd release; 2012Q4 assumes 1% growth SAAR (from MacroAdvisers (12/20/2012); CBO, Budget and Economic Outlook: An Update (August 2012), CBO, Economic Effects of Policies Contributing to Fiscal Tightening in 2013 (November 2012), NBER, and author’s calculations.
I included a 2013Q4 projection of GDP assuming tax increases for income less than $250K are eventually eliminated (green square). In light of this evening’s events, I think this seems a bit optimistic –- it is not clear that the right wing of the Republican Party would allow a partial tax cut; all or nothing seems to be the current stance. In any case, this estimate is based upon the August 2012 CBO projection. To the extent that one believes the current-law trajectory of GDP is lower, the implied level of 2013Q4 GDP is commensurately lower.
As CBPP’s Chad Stone has pointed out, the CBO projection assumes immediate implementation of the provisions. Some could be delayed until some agreement could be made, thereby possibly avoiding a downturn (e.g., the green square in my optimistic scenario). One can only hope.
Update, 11:25am Pacific: Noam Scheiber/TNR says we go over the cliff temporarily, and then:
Well, at that point, the world starts to look pretty good for the Democrats and the White House. First, as Jonathan Chait and Ezra Klein have pointed out, because all the Bush tax cuts will have expired, the $1.2 trillion in tax increases Obama is seeking suddenly become a $3.8 trillion tax cut. (The expiration of the Bush tax cuts would produce about $5 trillion in revenue over 10 years; $5 trillion minus the $1.2 trillion Obama in revenue wants will leave $3.8 trillion for taxpayers to pocket.)
Better yet, polls overwhelmingly show that the public will blame Republicans for pushing us over the cliff. As things stand today, House Republicans can tell themselves voters are on their side. Many won re-election with upward of 60 percent of the vote. In their minds, Obama has no more of a mandate than they do. It’s only the arbitrary coincidence of the Bush tax cuts expiring and the automatic spending cuts kicking in next year that gives him leverage. If we go over the cliff, on the other hand, that self-delusion will get harder to maintain by the hour. The public backlash will be intense. The media coverage will amplify it to the nth degree. Conservative pundits will turn on them, as will Senate Republicans (whose leader, Mitch McConnell, was conspicuously silent after Boehner’s Plan B went down in flames). The House will be completely isolated and will see that it’s not Obama who’s trying to pull one over on them, it’s voters who are demanding that they act. It will play out in much the same way as their surrender on the payroll tax cut last year, with House Republicans completely intransigent until they were abruptly squashed by public opinion and abandoned by their own party. So the middle class tax cuts will be extended and the upper income cuts will mostly expire.