With American Economy shrinking (as per the first reading, it will be revised later to reflect exact numbers) in the last quarter of 2012, shocks of 'austerity cuts' are vibrating through politics. Already few on Right are licking their lips that, finally Right is getting what they have been wanting so long - another recession during Obama Term so that they can blame Barack Obama. Too bad, it came a quarter late else Mitt Romney would have been the president! (No he would not; since Latinos, LGBTs and many other components of Obama vote bank would have still stuck with him; the 'hate' sprouted by GOP and Mitt was too much for large parts of American Society to swallow anyways.)
With 'sequester' about to happen; more Defense Cuts are in works and that much impact will be on Economy too. May be President Obama has to 'make the call' that it is much better to pay the price of 'economic impact of defense cuts' now, else we are never going to get an opportunity to reduce Defense spending orderly. Shocks to Economy when Defense Cuts happen, it is nothing new. It happened when Cold War ended, but then America reaped the 'peace dividend' too. In any case, even after sequester, America would be still spending more than average what it did during the Cold War.
The issue is other half of 'sequester' which falls on many relevant social and future investment programs. Paul Ryan and Gang is waiting for 'call uncle cry from Democrats' to get what they want - unrelated entitlement cuts.
That debate - entitlement cuts - is wrong because how GOP is positioning its arguments: to get our fiscal house in order, not to encourage culture of 'dependency' and variations on Romney's 47% takers argument. The real argument GOP needs to make is:
- Debt in itself is not bad. We do that all the time during Wars as well when we do investments for future.
- What is wrong with entitlement spending is we are loading on Fed Credit Card for reasons which are hardly going to help us in future. We are not loading our credit cards to do investments in our infrastructure or tomorrow's workers. We are doing that to take care of Grandma's health when her entire life time's contribution to Medicare has been around one third of what it costs.
It may be good politics to thunder in an inauguration speech that we do not have to make choices between 'investments for future' and 'taking care of our old people'. But it is wrong because the real question is 'how can we take care of our older people in fiscally responsible way' so that we do not crowd out 'what is needed to invest in future'.
Neither GOP talks about 'debt for future investments' nor ' they want to address moral obligation of taking care of old people in fiscally responsible way'.
With Obama win and his fierce articulation of entitlement defense in recent days; Democrats almost feel that they can get away without any changes in Medicare and health care entitlements. But that is not a smart 'debt' to accumulate nor Paul Krugman is right to argue that we leave those programs unchanged until we face insolvency of Medicare in 2030. Solvency is besides the point. Point is to ask the question - every dollar which we borrow right now, we borrow it for what purposes - taking care of Grandma or future investments to grow our Economy?