Yes, You Can Have Growth and Bigger Deficits

You can hardly open your Google Reader these days without someone sounding the alarm about how deficit spending is going to make it impossible to grow (especially in the last few months, these arguments are often based on a tendentious reading of the Reinhardt-Rogoff paper ). As I pointed out last week , deficit hawks are particularly in love with the austerity program recently announced by the German government, a major goal of which is to reduce that country’s deficit.

Well, guess what? The German government released data yesterday about its deficit, and … it’s up. Way up, actually. As Der Spiegel puts it : “The Federal Statistical Office on Tuesday announced that the deficit rose sharply to 3.5 percent of GDP in the first half of 2010, putting it on track to break the European Union’s budget rules. Net borrowing came in at €42.8 billion ($54.4 billion)—more than double the €18.7 billion ($23.6 billion) for the first half of 2009.”

But remember, during that same period, Germany has also experienced its strongest growth in 20 years. Deficit hawks, how can this be? Is it just possible that Germany’s increased social spending and labor market subsidies actually helped the economy grow? 

Seriously, it’s clear that America cannot and should not have huge, growing budget deficits every year. But the next time you hear someone argue that growing deficits can’t coexist with growth, remind them about Germany.