been $ 564 billion. a reasonable hypothesis is that the congress would, in fact, have responded by taking actions to pare the deficit. in that case, the end result would have been lowered government dissaving and correspondingly higher national saving. a simple reshuffling from the unified accounts to the lockboxes would not have, in itself, added to government savings ; but higher taxes or lower spending would have accomplished that important objective. the major attraction of personal or private accounts is that they can be constructed to be truly segregated from the unified budget and, therefore, are more likely to induce the federal government to take those actions that would reduce public dissaving and raise national saving. but it is important to recognize that many varieties of private accounts exist, with significantly different economic consequences. some types of accounts are virtually indistinguishable from the current social security system, and the congress would be unlikely to view them as truly off - budget. other types of accounts actually do transfer funds into the private sector as unencumbered private assets. the congress is much more likely to view the transfer of funds to these latter types of accounts as raising the deficit and would then react by taking measures to lower it. * * * failure to address the imbalances between our promises to future retirees and our ability to meet those promises would have severe consequences for the economy. the most recent projections by the office of management and budget show that spending on social security, medicare, and medicaid will rise from about 8 percent of gdp today to about 13 percent by 2030. 3 under existing tax rates and reasonable assumptions about other spending, these projections make clear that the federal budget is on an unsustainable path, in which large deficits result in rising interest rates and ever - growing interest payments that augment deficits in future years. but most important, deficits as a percentage of gdp in these simulations rise without limit. unless the trend is reversed, at some point these deficits would cause the economy to stagnate or worse. closing the gap solely with rising tax rates would be problematic ; higher tax rates rarely achieve a comparable rise in tax receipts, and the level of required taxation could in itself severely inhibit economic growth. in light of these sobering projections, i believe that a thorough review of our commitments - and at least some adjustment in those commitments - is urgently needed. the necessary adjustments will become ever more difficult and larger the longer we delay.

. increases in compensation might be offset by higher labor productivity or absorbed by a narrowing of firms'profit margins rather than passed on to consumers in the form of higher prices ; in these circumstances, gains in nominal compensation would translate into gains in real compensation as well. underlying productivity trends appear favorable, and the markup of prices over unit labor costs is high by historical standards, so such an outcome is certainly possible. moreover, if activity expands over the next year or so at the moderate pace anticipated by the fomc, pressures in both labor and product markets should ease modestly. that said, the possibility remains that tightness in product markets could allow firms to pass higher labor costs through to prices, adding to inflation and effectively nullifying the purchasing power of at least some portion of the increase in labor compensation. thus, the high level of resource utilization remains an important upside risk to continued progress on inflation. another significant factor influencing medium - term trends in inflation is the public's expectations of inflation. these expectations have an important bearing on whether transitory influences on prices, such as those created by changes in energy costs, become embedded in wage and price decisions and so leave a lasting imprint on the rate of inflation. it is encouraging that inflation expectations appear to have remained contained. the projections of the members of the board of governors and the presidents of the federal reserve banks are for inflation to continue to ebb over this year and next. in particular, the central tendency of those forecasts is for core inflation – as measured by the price index for personal consumption expenditures excluding food and energy – to be 2 to 2 - 1 / 4 percent this year and to edge lower, to 1 - 3 / 4 to 2 percent, next year. but as i noted earlier, the fomc has continued to view the risk that inflation will not moderate as expected as the predominant policy concern. monetary policy affects spending and inflation with long and variable lags. consequently, policy decisions must be based on an assessment of medium - term economic prospects. at the same time, because economic forecasting is an uncertain enterprise, policymakers must be prepared to respond flexibly to developments in the economy when those developments lead to a re - assessment of the outlook. the dependence of monetary policy actions on a broad range of incoming information complicates the public's attempts to understand and anticipate policy decisions. clear communication by the central bank about the economic outlook, the risks to that outlook, and its monetary policy strategy