inflation expectations remain well contained. for example, the median expected inflation rate during the next five to ten years, as reported in the university of michigan's survey of consumers, has barely edged up in recent years, even as short - term inflation has been boosted by rising energy prices. meanwhile, inflation compensation for investors implied by the spreads between the rates on nominal and cpi - indexed treasury notes at both five - and ten - year maturities also has not shown any tendency to move higher on balance. in recent years, declining prices of imports and the threat of import competition have also probably held down costs and prices to a degree. moreover, increases in compensation costs have generally been modest. to be sure, average hourly earnings of production and nonsupervisory workers have been accelerating in recent quarters. however, the broadest measures of compensation have not picked up, suggesting that competition in labor markets has been intense. nonetheless, with labor markets tightening, some pickup in compensation increases for the broad measures would not be surprising. nor would a pickup necessarily be inflationary, given the very good growth in labor productivity that we have experienced in recent years. despite the relatively moderate increases in prices and costs that we have observed lately, the capacity utilization rate and the unemployment rate have recently reached zones that on occasion in the past have been associated with the beginnings of upward pressure on inflation. of course, the past is not always a good guide to the future, in part because a great deal of uncertainty surrounds the relationship of resource utilization and inflation. for instance, we cannot directly observe full capacity of either labor or production resources ; consequently, we can never be certain what level of activity represents the full utilization of capacity. in addition, measurement issues aside, the empirical evidence of the past half - century suggests that the relationship between utilization and inflation can shift over time. unfortunately, we typically are only imperfectly aware of the changes and their magnitudes in real time. in the 1990s, that relationship was affected by, among other things, changing trends in the growth rate of productivity and innovations in the structure of labor markets, such as increased use of temporary help supply. these uncertainties mean that we, as policymakers, need to keep not only an open mind about estimates of the economy's potential but also a close eye on the various indicators of costs and prices so that we can recognize incipient price developments and react to them as early as possible. but we also must recognize that, by the time evidence of

that spending in the long run. at the same time, economic vitality is enhanced when taxes are not excessive and are collected through a system that is economically efficient, equitable, and transparent. at present, a broad consensus exists that the u. s. tax code does not satisfy these criteria and is in need of reform. i suspect that it is too much to ask the commission to review the tax code in detail, but a full picture of our budgetary dilemma will require attention to the strengths and weaknesses of our current system of raising revenue. the path to fiscal sustainability the ultimate goal of the commission ’ s efforts should be to put us on a path to fiscal sustainability. one widely accepted criterion for sustainability is that the ratio of federal debt held by the public to national income remain at least stable ( or perhaps even decline ) in the longer term. this goal can be achieved by bringing spending, excluding interest payments, roughly into line with revenues. unfortunately, most projections suggest that we are far from this goal, and that without significant changes to current policy, the ratio of federal debt to national income will continue to rise sharply. thus, the reality is that the congress, the administration, and the american people will have to choose among making modifications to entitlement programs such as medicare and social security, restraining federal spending on everything else, accepting higher taxes, or some combination thereof. achieving long - term fiscal sustainability will be difficult, but the costs of failing to do so could be very high. increasing levels of government debt relative to the size of the economy can lead to higher interest rates, which inhibit capital formation and productivity growth – and might even put the current economic recovery at risk. to the extent that higher debt increases our reliance on foreign borrowing, an ever - larger share of our future income would be devoted to interest payments on federal debt held abroad. moreover, other things being equal, increased federal debt implies higher taxes in the future to cover the associated interest costs – higher taxes that may create disincentives to work, save, hire, and invest. high levels of debt also decrease the ability of policymakers to respond to future economic and financial shocks ; indeed, a loss of investor confidence in the ability of a government to achieve fiscal sustainability can itself be a source of significant economic and financial instability, as we have seen in a number of countries in recent decades. neither experience nor economic theory clearly indicates the threshold at which government debt begins to endanger prosperity and economic stability. but given