Raising Debt Ceiling before fixing Economy

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Debt ceiling is an artifact of pre-second World war fiscal policy. It is the total amount of money which a Govt. is authorised to borrow to meet its legal obligations. Debt is not necessarily indicator of weak economy. Almost every year, Govt. spends more than it collects in taxes, that is deficit. To make up the difference, it borrrows money, which accumulates overtime. That's the Debt. It has generally been an unpopular concept in the country's politics. 

Deficit spending and the national debt go back to the founding of Republic. Big increases in recent years have come besides spending to combat COVID and on wars presently on between the countries but also to cover rising medical cost of aging population and to fund all other social services provided by the Govt. from highway construction, providing free ration, gas, electricity houses etc.The major contributor to debt is, of course, interest on debt with almost 75% of debt is owned by foreign or domestic investors. 

Rising debt reduces business investments and slows ecoonmic growth. It increases expectations of higher rates of inflation and erosion of confidence in currency. It also leads to fall in GDP and loss of jobs. Any Govt. spending that increases demand without directly or indirectly increasing supply by the same amount creates an imbalance that must be resolved by implicit or explicit transfers. These transfers must reduce purchasing power of one or more sectors of the economy by enough so that the gap between demand and supply is reduced to Zero. 

There are many mechanisms that resolves gap between and supply. Understanding this is important to know some of the ways in which excessive debt can undermine the economy.The four effects of rising debt are- transfers, financial distress, creation of fictional wealth, and addiitonal spillover adjustment costs. Rising debt can also be the result of formal or informal pressure on banks to lend into nonproductive investment, because of the soft budget restrictions are not written down for many years. 

People have always systematically underestimated the positive impact on economic activity  of rising debt and negative impact on economic activity. There is little reason to believe that future will be different.. 

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