There is No Upside to a Default

Can anyone explain to me slowly what exactly congressional Republicans are doing on the debt ceiling?

Yes, I perfectly understand the need to restrain borrowing (relative to GDP), since increasing debt means increasing interest payments, that means an increase in overall spending, and that in turn forces the government to borrow even more. This vicious circle has to be broken sooner or later lest the country eventually goes bankrupt.

But would a refusal to raise the debt ceiling really restrain government borrowing? Yes, but only in a very narrow technical sense that the principal would stop increasing. However the default would cause the interest rates to increase, and that would increase the cost of the debt service – just as if trillions of dollars were added to the national debt! There are two important differences though: when we increase the national debt by deficit spending, 1) we buy something useful and 2) all that spending stimulates the economy. The default has no upsides whatsoever.

Furthermore, the default would raise interest costs not only for the government, but also for businesses and individuals. Essentially, it would have the same dampening effect on the economy as a tax increase would. Again, with an important difference: at least an actual tax increase would also reduce the deficit and therefore government borrowing. The default has no upsides whatsoever.

So the Republican negotiating position vis-à-vis Democrats seems to be “Unless you abandon your plans to increase spending and hike taxes, we will do the rough equivalent of these things, only with all the pain and absolutely no gain.” Why did Republicans start a high stakes fight over the debt ceiling when the extreme weakness of their position was obvious from the start? It’s not like nobody ever warned them.