Only 39 percent of Obama voters are concerned that the president will compromise too much with Republicans, which gives the president more flexibility from the voters than he is getting from the interest groups that represent them in Washington. The voters got the message that compromise is essential, but in Washington, the election results are being read by many Democrats as evidence that Obama should hold firm and resist any meaningful changes to Social Security, Medicare, and Medicaid.

“There is a discussion among the progressive groups in D.C. about the meaning of the election and whether it would be a ‘betrayal’ to touch entitlements,” says Jim Kessler, senior vice president for policy at Third Way. “According to this poll, these groups do not speak for the people who elected the president.”

The expectation is that the real faceoff is between Obama and the Republicans over taxes, but the president faces an equally daunting challenge to convince liberal groups that they too will have to yield. AFSCME, SEIU, and NEA—three powerful unions—launched an ad campaign this week in several states aimed at key senators calling for “Jobs Not Cuts,” urging that Medicare, Medicaid, and federal funds for education be protected. Much of this is standard procedure whenever any government program is threatened. The difference this time is that the stakes are higher. “You’ve got all the responsible parties seeking to get a deal,” says Kessler, “and then you’ve got groups on the left and right trying to scuttle it.”

That’s where Third Way comes in as the only Democratic leaning group that is actively working toward a major deal, or grand bargain. Beginning in August, Kessler and his colleagues visited 100 congressional offices on Capitol Hill, 90 Democrats and 10 Republicans, making the case for increased tax revenue, spending cuts, and entitlement reform. The individual members are not named but on the Republican side, says Kessler, they were “the usual suspects,” the handful of lawmakers who have worked across the aisle, and their sentiment before the election was, “If Obama wins, we’re licked on taxes.”

It’s easier to think of it as coming in two main parts. The first is the expiration of the Bush tax cuts. These tax cuts brought income and investment taxes down for everyone, with some of the biggest cuts coming for high-earners. The most contentious tax cuts that Democrats want to get rid off were for income and investment income at the top. The Bush tax cuts brought down the marginal rate for the highest earners from 39.6 percent to 35 percent. The maximum tax rate for income from long-term capital gains rate was brought down to 15 percent from 20 percent, and the tax rate on dividends dropped to 15 percent.

Back when they were passed in 2001 and 2003, they included a sunset provision, meaning they would expire at the end of 2010. President Obama cut a deal with congressional Republicans to extend the tax cuts for another two years in exchange for extended unemployment benefits and ++a 2 percentage-point reduction in the payroll tax++ [http://www.thedailybeast.com/articles/2012/11/15/the-fiscal-cliff-s-first-victim.html]. That extension, along with the payroll tax reduction, is scheduled to expire at the end of the year. That’s the first big chunk of the fiscal cliff.

And the second?

The second is the so-called sequester.

Other members of the Thelma & Louise Caucus believe the cliff is desirable for reasons of justice, not of tactics. Jonathan Cohn, the longtime reporter and Ann Arbor–based health-care maven at The New Republic, is the president of the Michigan chapter of the caucus. For Cohn, the cliff solves all sorts of problems. He never liked the Bush tax cuts to begin with and says we need the money. “I always thought that we should get rid of all the Bush tax cuts,” he said. “It seems to me the Clinton-era tax rates were just fine.”

Jonathan Chait of New York magazine, who is a native of Michigan and formerly worked at The New Republic, represents the realpolitik wing of the caucus. Even before the election, he was gaming out the smart politics behind a cliff dive:

“On the morning of November 7, a reelected President Obama will do … nothing. For the next 53 days, nothing. And then, on January 1, 2013, we will all awake to a different, substantially more liberal country. The Bush tax cuts will have disappeared, restoring Clinton-era tax rates and flooding government coffers with revenue to fund its current operations for years to come. The military will be facing dire budget cuts that shake the military-industrial complex to its core.”

Going over the cliff, Chait argues, will finally allow Obama to turn the tables on the obstructionist Republicans who have made his life hell for the past four years. And he will be able to give up trying to compromise with House Speaker John Boehner because the nature of the game changes. Obama and his crew, Chait writes, “understand something important, something that has not quite sunk in with wary liberals, obstinate conservatives, or split-the-difference deficit scolds: They no longer have to.”

In fact, there seems to be a growing consensus among those who follow markets with the same ardor as they do on MSNBC that something is happening. A deal will get done, simply because it has to be done. Time is running out, and if no grand bargain is reached, bad things will happen. Wall Street, whose denizens have the most to lose from a vault over the fiscal cliff, craves a resolution. Which is one of the reasons CNBC is running its “Rise Above” campaign, which calls for Washington to eschew partisanship and make a deal to avoid the cliff.

On Sunday night, Goldman Sachs—the firm believed by many to control Washington, D.C.—sent out an optimistic note, suggesting that the hostage would be released in a few weeks: “We believe the ‘fiscal cliff’ ultimately will be avoided, but precedent suggests any resolution will not happen until mid- to late-December.”

Monday morning, Ben White, Politico’s sharp New York–based watcher of the calamitous intersection of Wall Street and Pennsylvania Avenue, declared it all over except from the shouting. “There seems little chance the cliff battle will go near or past the Dec. 31 deadline,” White wrote. “Nearly every signal from Republicans suggests they understand they have lost the war over taxes going up on the wealthiest Americans” and are figuring out how to cut their losses. “So while talks will continue and the public kabuki will play out for a few more weeks, we are really just waiting on a final score.”

That’s possible. But let’s take a step back. Just because the White House and congressional Republicans told us their meetings Friday were fruitful, it doesn’t mean they were. Hell, Neville Chamberlain thought his September 1938 meeting in Munich with the Germans was fruitful. To admit that a meeting was not fruitful is to admit that you wasted your own time, and, worse, the time of the media that staked out the meeting to get the anodyne post-meeting quote.

That fact empowers President Obama. There’s a saying, often attributed to Al Capone: “You get more with a kind word and a gun than with a kind word alone.” The president has a gun in his hand. Avoiding a tumble over the fiscal cliff will require new rules signed by the president. If he doesn’t sign, over we go.

The president has announced the price of his signature: Republicans must agree to tax increases on the wealthiest Americans. The reading eye tends to focus on the second half of that sentence: tax increases on the wealthiest Americans. It is, however, the first half of the sentence that carries the most potent political implications: Republicans must agree.

The president’s most basic goal in these fiscal negotiations is not to extract more revenue from upper--income Americans, although obviously he’d like to do that too. His most basic goal is to force Republicans to forswear their famous no-new-taxes pledge.

That pledge is the tie that binds Republicans in Congress and Republicans in the country. Compel Republicans to recant that commitment and Republican unity suddenly dissolves. The discipline of their congressional caucus will break. Their base will rebel. Their leaders will quarrel with each other.

The defeated Republican presidential candidate, meanwhile, eagerly signed the ATR pledge, but Norquist—whose relationship with politicians seems entirely transactional—has little use for him now. “I don’t think we take political advice from a guy who kicked away the presidency,” he says in response to Romney’s recent musings that Obama owes his victory to the generous dispensing of “gifts” to various interest groups in the Democratic base.

As for flying off the fiscal cliff, Norquist sounds untroubled. “I would rather that the sequester take effect than it be delayed or eliminated,” he tells me, referring to the harsh 8 percent across-the-board reductions in the discretionary budget, including a 9 percent cut in defense spending, which by law are scheduled to occur Jan. 1 if Congress and the White House can’t agree on a fiscal plan.

“I’m for the spending cuts,” Norquist says. “Just let them take effect. My first preference, like most Republicans in the House, is the Ryan budget [the draconian handiwork of Romney’s running-mate, House Budget Committee Chairman Paul Ryan, which passed the Republican-led House in March and quickly died in the Democrat-led Senate] … It lowers the tax rate, saves the same amount of money, and doesn’t hit the defense budget as hard. The only thing worse than the sequester would be not reducing spending.”

The payroll tax cut—or tax holiday—was not part of the Bush-era tax cuts. Rather, it was a post-stimulus effort to goose the economy in 2011 and 2012. As Mitt Romney and his allies have famously pointed out, 47 percent of Americans don’t pay any income tax. But pretty much everybody with a job pays payroll taxes—the regressive 6.2 percent tax levied on the first $100,000 or so of income that funds Social Security and Medicare.

In late 2010, as President Obama suggested, Congress approved a temporary one-year payroll tax cut that reduced the rate from 6.2 percent to 4.2 percent. This was part of a larger package in which Congress extended the Bush tax cuts for two more years and threw in extended unemployment insurance. Since many people pay more in payroll taxes than they do in income taxes, the cut was quite meaningful. Somebody with a salary of $50,000 would see an extra $1,000 in her paychecks over the course of the year. And since such middle-income earners are likely to spend—rather than save—these tax cuts, it was a pretty effective form of stimulus. The estimated cost for 2011 was $112 billion.

Now, the beauty of a temporary tax cut is that you can always accuse the other side of wanting to increase taxes if they simply want to let the temporary measure expire as it was designed to do. That’s the tactic Republicans have been using against Democrats and Obama with the Bush tax cuts for the past several years. Obama briefly turned the tables on the Republicans over the payroll tax in late 2011. And so, at the end of 2011 with the economy growing slowly and concerns about the ability of consumers to sustain the recovery, Congress and the White House struck another deal to extend the 4.2 percent payroll tax rate through 2012. Another 12 months, another $100-billion-plus into the consumer economy.

For the past several months, both sides have pretty much assumed that the payroll tax cut would fade away at the end of the year—regardless of who won the election. Why? Republicans never really liked it; in theory, the tax cuts undermined Social Security and Medicare, which is vital to their geezer constituents. What’s more, it’s a tax cut on wages of typical workers. And for ideological and personal reasons, Republicans much prefer cutting taxes on high earners, and on investment and estates. That’s where the real money is.

Now, America’s CEOs are getting involved. This evening, President Obama will meet with a group of top bosses at the White House to discuss the fiscal cliff and other economic issues. Among those attending: Pepsi CEO Indra Nooyi and GE CEO Jeff Immelt. To the extent corporate America got involved in the 2012 election, it was generally on the side of Mitt Romney. Lobbying organizations like the Chamber of Commerce funded huge anti-Obama advertising campaigns, while lots of CEOs contributed to anti-Obama Super PACs.

In effect, CEOs, especially Wall Street CEOs, went all in on a Romney victory. But as pragmatists, they have come around rather quickly. Many CEOs are genuinely freaked out at the prospect of the fiscal cliff. “At a Wall Street Journal CEO conference in Washington, 73 percent of participants said their primary concern was the so-called fiscal cliff,” the Journal reported Wednesday. But the bosses seem to be more worried about the impact of a slowdown on their companies’ bottom lines than on their own. An informal show of hands at the conference showed many of the CEOs were personally willing to pay higher taxes to reduce the deficit. In the precincts of the rich, there is rising acceptance that their personal tax rates will be higher next year.

Goldman Sachs CEO Lloyd Blankfein took to the op-ed page of The Wall Street Journal to offer an olive branch of sorts. Expressing concern that the fiscal cliff would “derail the fragile recovery,” he urged Congress to act. He accepted the premise that revenues must be part of the deal. “A number of CEOs and companies agree and support principles that call for a comprehensive and balanced solution to the debt problem—increased tax revenues and decreased spending,” he wrote. Blankfein also seemed to accept that tax rates on personal income would have to go up. “Broadening the personal income-tax base by closing loopholes will generate substantial additional revenue while minimizing increases in marginal tax rates [my italics] that could stifle risk-taking and robust growth.” Notice the small but important change here: increases in tax rates on personal income should be minimized, not ruled out. In other words, Blankfein’s position is quite closely aligned with Geithner’s.

Now, Blankfein doesn’t speak for the Republican Party any more than Robert Rubin speaks for the Democrats. But to have the CEO of one of America’s most powerful investment banks publicly make the case that it is OK for marginal tax rates to rise is significant. It’s amazing the difference a week makes.

So as the debt mounted, and as Congress and the White House refused to make a deal, investors proved willing to buy more and more U.S. debt—despite the sharply lower interest payments they receive. Just after the downgrade Warren Buffett, the world’s most famous (and successful) investor, told Bloomberg Television that the U.S. deserves a “quadruple A” rating.

The U.S. is now, once again, staring into the fiscal abyss. If Congress and the White House can’t cut a deal by Jan. 1, about $600 billion of spending cuts and tax hikes will go into full effect for 2013. Should this happen, the stock market could take a big dip. And if the cuts and tax hikes are maintained throughout the year, the economy could be dragged back into recession, according to the Congressional Budget Office.

One major ratings agency, Fitch, strangely believes that this lurch toward deficit reduction will make U.S. government bonds less attractive. It has warned that it will lower the U.S. credit rating from AAA if no deal is reached come Jan. 1. Fitch specifically acknowledges that it might counterintuitively lower its outlook for U.S. debt in response to the deficit being slashed. But Fitch apparently seems to be grading on style points. It argues that “a credible deficit-reduction plan [is] necessary to underpin economic recovery and confidence in the full faith and credit of the U.S.” Merely going over the cliff, said Fitch in its warning released last week, “would not fully address the longer-term drivers of higher public spending and the relatively narrow and volatile tax base.”

But if one of the major ratings agencies says the U.S. is no longer AAA and a recession looms, what will happen to the U.S. debt? In all likelihood, investors won’t be able to get enough of it. “I think you’ll probably see a replay of what you saw in summer in 2011, a big sell-off in equity markets into the safety of U.S Treasuries,” says Paul Edelstein, director of financial economics at IHS Global Insight.

You know you’re winning a negotiation when the opposite side keeps inching closer to your position while you continue to stake out a more maximalist approach. And that process continued on Tuesday.

Last week, Glenn Hubbard, dean of the Columbia Business School, was a key Romney adviser and a potential Federal Reserve chairman in waiting. This week, not so much. So this morning, Hubbard took to the Financial Times to offer his solution. And in a sign of how quickly things have changed, his first suggestion was to soak the rich. In his op-ed, Hubbard stuck to the current Republican position that we don’t need to raise marginal tax rates. Rather, he said, the U.S. can raise average tax rates by getting rid of the deductions that the rich use to such great effect. Such changes should be coupled with spending cut to take place over 10 years and long-term entitlement reforms.

At first blush, there’s not much new here. But you have to read between the lines to detect the nuance. To me, it is significant that Hubbard, perhaps the leading establishment GOP economic thinker, led with tax increases. (Typically, when they concede the need for more revenues, they do so only after describing the cuts necessary to bring the budget into balance.) Second, look at the way he talks about enhanced revenues. Not too long ago, GOP orthodoxy held that the problem with the tax code was that the poor and middle class didn’t pay enough taxes, and that the wealthy already paid too much. That’s out the window. “The first step is to raise average (not marginal) tax rates on upper-income taxpayers,” [my italics] Hubbard wrote. “This means closing loopholes.” He then cites with approval proposals to limit certain deductions for “upper-income households” and proposals to cap “the amount of deductions relative to a taxpayer’s income.”

Both the position and the rhetoric mark a significant shift from where Hubbard was a week ago.

Preelection, the Republican line on taxes was something like this: Bush tax cuts on capital, income, and estates should exist in their current form forever—no ifs, ands, or buts. Also, existing loopholes and deductions were generally fine. Any deficit reduction should be accomplished through spending cuts alone. In a primary debate, when asked if they would accept a deficit reduction deal that had $10 in every cut for every $1 in new taxes, every GOP candidate said that would be unacceptable. By presenting a united front during debt-ceiling negotiations, Republicans generally got what they wanted from President Obama during his first term. In August 2011, John Boehner crowed “I got 98 percent of what I wanted.”

That’s not likely to happen this time around. Sure, there was a certain amount of defiance from the likes of Senate Minority Leader Mitch McConnell. But a new talking point quickly emerged among the GOP. Maybe it is OK to have more revenues as part of a deficit-reduction deal—just as long as tax rates don’t rise. Instead, let’s curtail some deductions that rich people use to great effect. That was Boehner’s opening gambit earlier in the week. And it has been repeated by other Republican worthies.

Of course, this is a nonstarter for a host of reasons. This was Romney’s (losing) pitch during the campaign. And like Romney, the Republicans who advocate limiting deductions and closing loopholes in principle are not willing or able to list them in reality. Why? The big-ticket ones, like the deduction for charitable donations, or the deduction for home mortgage interest, are immensely popular and have powerful lobbying organizations behind them. Still, this is a significant step. Before entering negotiations, Republicans have conceded that more revenues are needed, and that they will have to come from having the wealthy pay more taxes than they do now.

A second breakdown in the façade came from Lindsey Graham, the Republican senator from South Carolina. On Sunday, Graham endorsed the Bowles-Simpson deficit-reduction framework and urged President Obama to do the same. Now, the Republican budget establishment had generally not approved of Bowles-Simpson plan when it was released. Rep. Paul Ryan, who on the commission, voted against it. Why? Ryan said it was because it didn’t cut spending on health care deeply enough. But the plan also foresaw the expiration of the Bush tax cuts and further tax reforms. Combined, as Suzy Khimm reported in The Washington Post, they would basically make Bowles-Simpson a deal in which every dollar in reduced spending was met by a dollar in increased revenue. Again, that is now Graham’s opening bid.

Cook just listened to the 26 CDs comprising Robert Caro’s Passage to Power, the fourth volume of the epic biography of Johnson, a legendary dealmaker. He was struck by the contrast between the two presidents in engaging with congressional power brokers.

Obama “has to change the way he operates,” argues Cook. “The White House motto seems to be ‘No New Friends,’” his allusion to the small and tight group of mostly Chicago chums with whom the president and Michelle Obama socialize.

But even longtime Washington hands are unclear how the system will resolve what a prominent Republican lobbyist calls a “three-ring policy circus” of huge automatic spending cuts due to kick in on Jan. 1; a decision on whether to extend Bush-era tax cuts; and a decision next year on raising the debt ceiling. A longer recession and higher unemployment could be in the offing if there’s no resolution.

And it may be equally unclear whether a more overtly engaged Obama would alter the bargaining landscape, given underlying political frictions in both parties—and changes in the capital’s own political and social culture.