In a speech on global imbalances, Fed Chairman Bernanke again warned about the need to put the U.S. on a sustainable fiscal path, saying:
"The United States must increase its national saving rate. Although we should deploy, as best we can, tools to increase private saving, the most effective way to accomplish this goal is by establishing a sustainable fiscal trajectory, anchored by a clear commitment to substantially reduce federal deficits over time."
This is very similar to the advice CRFB has been recommending. The U.S. needs to adopt a credible budget plan now, to be phased in gradually. In our report, Deficit Reduction: Lessons from Around the World, we recommend six lessons for creating a consolidation plan:
Lesson 1: Countries with weak fiscal credibility should establish a deficit reduction plan
Lesson 2: The announcement of a credible deficit reduction plan can have positive effects on consumers, businesses, and financial markets
Lesson 3: Most successful plans have involved large, multi-year adjustments, but the composition of the plans has varied
Lesson 4: A fiscal consolidation plan should be phased in gradually
Lesson 5: A crisis can make it easier to adopt consolidation
Lesson 6: It is preferable to make fiscal adjustments on your own terms before they are forced upon you by creditors
The Fed tends to be cautious about stepping into fiscal policy. These repeated warnings are a testament to just how important it is that we develop a fiscal exit strategy.