Here is the fiscal Gordian knot:

Congressional Republicans will only agree to sequester relief if offset by mandatory spending cuts, but President Obama and Congressional Democrats will only agree to mandatory spending cuts if taxes are also increased, and Republicans won’t raise taxes.

This fiscal Gordian knot caused the Super Committee to break down in late 2011. There was no agreement to replace the automatic discretionary spending cuts (aka the sequester) that President Obama proposed and signed into law in the Budget Control Act of 2011. He made a fundamental miscalculation when negotiating that law: he mistakenly assumed that Republican defense hawks would squawk so loudly at the disproportionate defense cuts imposed by the sequester that some Republicans would be willing to support tax increases in exchange for higher defense and non-defense discretionary spending.

The sequester replacement negotiations earlier this year were a second attempt by the President to untie the knot. That time he used political force, trying to bludgeon Republicans into agreeing to tax increases. Again he failed.

As the Republican demand to defund ObamaCare dissolved last week, the President and Leader Reid once again erred. Unsatisfied with a straight extension of current law spending and the debt limit and a political victory over Republicans, they increased their demands. They shifted from a sure-win defensive posture to an aggressive but risky offensive posture, demanding higher spending offset in part by tax increases.

House Budget Committee Chairman Ryan floated a sound and predictable Republican alternative: substituting mandatory spending cuts (specifically, changes to entitlement programs proposed by the President in his budget) to offset higher discretionary spending for defense and (I think) non-defense. This formed the core of Speaker Boehner’s recent offer to the President. The President rejected this offer because House Republicans were unwilling to also raise taxes. For a third time the President failed to untie the fiscal Gordian knot.

The negotiation now lies with Senate Leaders Reid and McConnell. (VP Biden, the only member of the President’s team with a proven track record of closing deals with Republicans, has apparently been locked away at Leader Reid’s insistence.) While the form of the Reid-McConnell negotiation is about the timing for when short-term extensions of the continuing resolution and the debt limit would next expire, the underlying substance of the negotiation is this fiscal Gordian knot. Both leaders are trying to structure both this negotiation and the next to maximize their leverage to achieve […]