In the coming weeks, Congress will again debate increasing the debt limit. his is a meaningless exercise in that the debt limit has failed to constrain the growth of debt in the long term. Further, uncertainty regarding congressional approval increases the risk premium on short-term debt and increases the cost of servicing the debt.

Debate on the statutory debt limit obscures the challenge posed by the real debt limit. In high debtor countries such as ours the probability of default on the debt increases risk premiums and could ultimately close off access to bond markets. No one is suggesting the United States is Greece or that it will default on the debt in the near term. However, with total public debt in excess of GDP, America is now in a post-Keynesian era. This “debt overhang” limits the fiscal policy options of the federal government.

Prior to the Great Recession, total public debt was 60 percent of GDP, and the government had fiscal space to pursue Keynesian fiscal policies. With the American Recovery and Reinvestment Act, President Barack Obama increased federal expenditures by $831 billion, on top of increased expenditures to fund automatic stabilizers. A massive increase in the money supply enabled the government to pursue this expansionary fiscal policy without increasing interest rates. Today, the federal government has little fiscal (or monetary) space.

The government cannot pursue such expansionary fiscal policies without increasing the risk premium on public debt. CBO concludes the federal government no longer has the flexibility to respond to recessions or other fiscal emergencies. read more at:  https://www.heartland.org/news-opinion/news/our-debt-crisis-calls-for-a-new-fiscal-paradigm