is done, the nation’s fiscal course can be corrected in ways that avoid the worst pain.


Although waiting is a normal reaction to any difficult problem, in this case it is especially risky. Consider two possibilities and their potential consequences: (1) that the fiscal problem proves to be overblown or self-correcting or (2) that the problem is as serious as the committee (and most analysts) argue. Even if these two outcomes were equally likely, it is probable that the costs of acting too late or ineffectively would be much greater than the costs of acting too soon and too precipitously.1

Consider first the costs of acting to address what proves—contrary to all current evidence—to be an exaggerated fiscal challenge. Some people point to the risk of having taken large and difficult choices that raise taxes or reduce the government’s ability to address many urgent needs but that later prove to have been unnecessary. A too stringent fiscal policy could slow the growth of the U.S. economy or even tip the economy into another downturn. This would, in turn, require a corrective policy response—either easing fiscal policy or relaxing monetary policy or both. Yet the probability is high that the political system would adjust without difficulty. As at the end of the 1990s, the problem of projected endless surpluses tends to be self-correcting.

Now consider the costs of failing to act in the face of a serious fiscal challenge. The first risk is that of having to take bigger and much more difficult steps later to put the budget on a sustainable course. At the same time, the risks of a disruptive financial crisis would continue to grow. As detailed in earlier chapters, such a crisis could take the form of higher interest rates on U.S. Treasury debt that would complicate corrective action by draining resources for government programs; or it could take a more disruptive form. The risk would be compounded if, for instance, standard population projections underestimate growth of the elderly population.2 After a tipping point that is inevitable but impossible to pinpoint, there will be no simple fiscal strategy to bring revenues and spending into alignment. If that point were reached, the social and economic costs of delay would explode.

So, there are two possible ways to err. One kind of error—overreacting—is readily reversible; the other—underreacting—may not be. That is, the committee has concluded that the risks of error in dealing with the fiscal challenge are asymmetric. Even in the face of great uncertainty, the safer course is to take decisive action soon to change the nation’s fiscal course.

Despite the seriousness and scope of the budget challenges, however, there are a number of reasons for optimism and for believing in the efficacy of action:

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