Growth and Deficits

As the European financial crisis continues, Chancellor Angela Merkel is leading Germany towards spending cuts that will help to reduce the current budget deficit. Other European nations, including Greece, Portugal, Spain and Italy have also begun implementing budget cuts. This is in contrast to the American preference for more stimulus spending to restart the economy and cut the budget deficit through economic growth.

The Bloomberg news service quotes Germany's Finance Minister Wolfgang Shaueble as saying that perhaps the U.S. could use "accelerating growth" to reduce its deficits, but Europe can't count on growth alone to solve its fiscal problems. But Schaeuble was also reported to say that "reducing deficits and strengthening growth" are not mutually exclusive.

Although President Obama has said the United States cannot continue these large deficits for long, there is no indication that an effort to balance the budget has begun. Presumably, the deficit will be addressed after the stimulus has done its job and the economy has recovered. But what if the economy doesn't recover? To say it must recover will not make it happen. Europe, and Germany in particular, seem to have taken the position that creating more debt is not the way to pay off your old debt, later.

In the past the United States has resolved deficits and recessions through "growth," where growth essentially meant producing, selling and taxing more goods and services. This growth came externally by finding foreign markets and internally through a growing population and, more recently, through more borrowing. But now the supply of untapped foreign markets has ended. Rather, those foreign nations are now producing goods to sell to us. Internally, our population growth is slowing and the populace doesn't want any more debt. Isn't it now time to follow the German example and stop trying to borrow prosperity?