Democrats finally used the leverage they had (by benefit of holding the presidency and a majority in the Senate) and waited for Republicans to realize they wouldn't cave to their ridiculous demands. For future reference, Democrats, that is how it's done. Please repeat as necessary. And sadly, I think it will be necessary sooner rather than later. A fairly short term continuing resolution was passed during the last big shutdown in 95. A deal wasn't worked out and there was another shutdown. It was only the second time when Clinton refused to give into all of Newt Gingrich and the GOP's demands that they came to an agreement. I think we're likely to see the same thing happen.
Let's start with what Republicans want, because they are clear about it. They want to cut as much spending from just about everything (maybe not defense, but even then I'm not sure since they seem to be accepting the sequester cuts). If they could do anything they wanted, they would at the very least enact something similar to Paul Ryan's budget proposals. Those proposals include such things as ending Medicare by giving people vouchers to buy health insurance on their own and cutting Social Security benefits, among many other ridiculous things. More than any of that, Republicans want to cut taxes on rich people and corporations.
I'm less sure about the specifics of what Democrats want. But they obviously don't want to cut taxes on the rich. If anything they want to raise their taxes, or at least keep them at current levels. There's always talk about "closing tax loopholes" from both sides. But there's no way Republicans will endorse whatever that looks like in actual policy if it raises taxes on the rich at all. At best, it will involve some technicality that just moves money around but doesn't actually raise any more revenue. At worst, Democrats will cave and give the rich more defined benefits through the tax code.
Some Democrats say they don't want to cut Social Security and other entitlements. But others, such as Obama, seem very open to "entitlement reform", which is just code for cutting benefits. Democrats already cut Medicare spending in one of the few places that wasn't a direct benefit cut (payments to doctors). And Republicans screamed bloody murder when they did it. So I doubt Medicare will be part of "entitlement reform". That probably leaves Social Security and chained CPI, which amounts to a benefits cut. There's just no way Republicans will agree to anything but cuts. And for some reason, Democrats seem open to this. Unless something changes and Democrats decide to make a stand on not cutting entitlements, I think a deal is likely to lead to chained CPI. And unless Republicans rediscover their love for defense spending, I think the current spending levels will remain in tact. We'll get a bare bones budget that drags us and the economy along until the 2014 elections.
Is there any way to avoid that scenario? Well, Democrats will continue to have leverage in the fact that nothing can pass the Senate and be signed by the president without their approval. But they will have less leverage than they did these last few weeks because Republicans probably won't be asking for something ridiculous like defunding Obamacare, thus fewer people will blame a shutdown or debt limit breach on them. But I think if Democrats can negotiate effectively, they can minimize the damage Republicans can do. The first thing I think they need to do is ask for a lot of stuff initially; stuff like infrastructure spending, a reverse of the sequester cuts, a 3% increase in income taxes on incomes $250k and up, and the complete elimination of the debt ceiling.
They won't get any of that. But if you ask for that and gradually back off some of those demands it makes it look like you're negotiating and conceding things to Republicans. I don't really know if I'd raise taxes on those incomes if I could because I don't care about the short term deficit. But starting at a 3% raise, backing down to 1.5%, and then making a "huge" concession by saying you'll abandon the tax increase completely in favor of something like not doing chained CPI is worth trying. I'm not very confident this will happen. Obama in particular seems to have a negotiating strategy that involves starting with the minimum of what you want and conceding from there, offering to do accept things you don't want, thus making Republicans ask for more. If that happens like it did in 2011 this deal will end up being pretty bad, assuming we get a deal at all.