Some time ago, the students in my Finance class were given a model of the economy and told to manage the budget. To get the debt down, they raised taxes and slashed spending. The economy promptly dove into the red, sending the debt to higher levels than before. The political lesson was that politicians would never get re-elected on such as platform and you may do more harm than good.
This is the nasty mathematics of today’s public finances. Recession and aggressive fiscal stimulus have conspired to dramatically balloon the federal deficit. Stimulus spending was essential to cushion the shock of a collapse in private demand. But in spite of that, the economy has barely emerged from recession and unemployment is still not responding to the vast injections of cash, stoking speculation that more stimulus spending may be needed. At the same time, voters are growing alarmed at the tide of red ink, and it is only a matter of time before markets follow suit. The implications for the September election are obvious.