STUDENTS at National Defence University in Washington, DC, were recently given a model of the economy and told to fix the budget. To get the federal debt down, they jacked up taxes and slashed spending. The economy promptly tanked, sending the debt to higher levels than before. The lesson: “You’ll never get re-elected and you may do more harm than good,” concluded Eric Bee, an air-force colonel who took part in the exercise.
This is the ugly arithmetic of America’s public finances. Recession and aggressive fiscal stimulus have hugely swollen the federal deficit. Stimulus was essential to cushion a collapse in private demand. In spite of that, the economy has barely emerged from recession and unemployment is still rising, feeding speculation that more stimulus is needed. Yet at the same time voters are growing alarmed at the tide of red ink, and it may be only a matter of time before markets do, too.
On current policies the federal deficit, which hit a post-war high of 10% of GDP in the fiscal year that has just ended, will fall to 4.2% by 2014 and will then head steadily higher. Aides to Barack Obama know this is unacceptable. With a new budget due in February, government departments are said to be preparing to tighten their belts. Meanwhile an advisory committee, chaired by Paul Volcker, who used to head the Federal Reserve, will report to the president in early December on options for tweaking the tax system, though not how to raise much more revenue from it.
It is clearly unlikely that the K-12 world will see significant amounts of new funds, beyond the 5%+ annual growth experienced over the past twenty years, if that.