Congress must pass appropriation bills by late September and must raise the debt limit by about Oct. 1 to allow the government to pay its bills. Failure to do either will have substantial economic impact. Neglecting to raise the debt limit could be catastrophic, since the federal government has never defaulted before.
A solution could either be a real agreement or a mere patch–a bill that continues current spending levels for a few months and raises the debt limit enough to get us to the next short-term deal.
Since the economy seems fragile, and federal (and state) elections are a mere 16 months away, the political stakes are high. In fact, I think the negotiation over the budget and debt limit is the most important political story of the present moment.
Conventional wisdom holds that an incumbent president has more to lose from a sudden recession than members of Congress do. Thus Donald Trump is probably most at risk if there is no deal. Although most Americans disapprove of his economic policies, I still think his popularity would fall further if we entered a recession.
For their part, the Democrats must decide how hard to bargain. That is an ethically complex question, and it confronts not one actor (an imaginary, monolithic party) but many Democratic members of Congress who have disparate values and interests.
Democrats have good ethical reasons to play hardball. They have policy goals (spending, immigration, climate) that they can advance by forcing Trump to swallow compromises. By pushing hard, they risk a government shutdown or a default, but the moral responsibility for a crisis would be shared. Whatever happens, we are headed for a recession at some point, and the country may be better off if it comes in time to unseat Trump rather than late enough that we must weather the downturn during his second term.
On the other hand, Democrats shouldn’t intentionally drive Trump into an impasse because they are happy to hasten a recession. To see that that is wrong, apply Immanuel Kant’s test of publicity. It is unethical to do something unless you can admit you are doing it. That is especially true of political leaders in a republic, because it is definitive of republics that everyone must explain their actions to everyone else. I don’t think the Democrats could face the electorate saying that they had intentionally driven the economy into recession.
But there is a fine line between: (a) driving a hard bargain for good causes while not worrying overly about the collateral risk to the economy and (b) actively pushing a breakdown in order to cause a recession and win the next election. I would drive right up to the edge of (b) but not over that line.
A subtler question is what to do about raising the domestic discretionary spending limits. Democrats believe that raising these caps will truly help people. However, increasing spending without raising taxes is a fiscal stimulus. As such, it has some potential to forestall a recession. Thus raising the domestic spending limit is win/win for Trump and the congressional Democrats (although an ideological loss for congressional Republicans). The problem is that a win/win deal could get Trump re-elected. I think I would bargain hard on immigration and climate regulation and give way on domestic spending for this year.