In thinking about the long run while contemplating the current economic situation, I would humbly amend the famous observation of economist John Maynard Keynes.  in the long run, we are all dead but our children will be left to pick up the tab.

Over the past two decades, the U.S. has created for itself a set of economic imbalances that, in my judgment, have significantly increased uncertainty and placed economic growth at risk for future generations of Americans.
...
Because the U.S. economy is so large and, by historical standards, so successful, it has the capacity to carry such imbalances far longer than most economies would be permitted in today's global markets.  However, such an advantage will eventually end and comes with its own costs.

I am pleased to see that the new administration has embraced what was hitherto perceived as the third rail of American politics and brought the issue of unfunded entitlement liabilities to the fore. For the sake of our grandchildren, I hope that the administration and the Congress will take this vexing beast of a problem by the horns and tame it.

Immediately upon taking office, the President and the Administration worked with Congress to enact the American Recovery and Reinvestment Act, a package of targeted investments and tax cuts designed to get Americans back to work and get the economy growing again...  We estimate that the plan will save or create at least 3.5 million jobs over the next two years, and will boost GDP – over where it would have been had we not acted – by almost 1% this year and more than 3.2% next year.

"From a long-run standpoint, we really do face a horrific deficit..."

...

"We certainly will be soon addressing the question of financial reforms and modernization of the structure of financial oversight and supervision," Yellen said.

Yellen said she has no detailed plan herself, and there are lots of different proposals being discussed. Almost all have indicated there needs to be a regulator to focus on the stability of the entire financial system.

"That's something I strongly agree with, and the Federal Reserve would be the natural candidate to fulfill that role," Yellen said.

The Fed can play a role "in trying to make sure that the system as a whole ... behaves in a way ... that makes it less prone to boom and bust cycles."

In audience Q&A session, as reported by Dow Jones

Unless the deficit problem is addressed through explicit fiscal policies or changes in national saving rates, creditors might reasonably conclude that debtor governments will resort to inflationary policies. Ultimately, however, central banks cannot control either fiscal policy adjustments or private consumption decisions. If fiscal dynamics don't improve, central bankers could once again face the difficult challenge of maintaining price stability in a world where expectations are moving in the wrong direction.

BERNANKE: I think it would be extraordinarily difficult to move that far to on-budget surplus in a few years, within five years.

ANDREWS: But if it were, would it be a positive development?

BERNANKE: Well, we would have to -- the Federal Reserve would have to offset the short-term spending effects of that with lower interest rates. But that would be...

ANDREWS: Do you promise us lower interest rates if we do that?  Is that what I just heard?

     (LAUGHTER)

BERNANKE: If you do that, we will do our best.  But what we would do is we would respond in such a way as to try and keep the economy at full employment.

Because of demographic changes and rising medical costs, federal expenditures for entitlement programs are projected to rise sharply over the next few decades. Dealing with the resulting fiscal strains will pose difficult choices for the Congress, the Administration, and the American people. However, if early and meaningful action is not taken, the U.S. economy could be seriously weakened, with future generations bearing much of the cost. The decisions the Congress will face will not be easy or simple, but the benefits of placing the budget on a path that is both sustainable and meets the nation's long-run needs would be substantial.

To some extent, strong economic growth can help to mitigate budgetary pressures, and all else being equal, fiscal policies that are supportive of growth would be beneficial. Unfortunately, economic growth alone is unlikely to solve the nation's impending fiscal problems.

Official projections suggest that the unified budget deficit may stabilize or moderate further over the next few years. Unfortunately, we are experiencing what seems likely to be the calm before the storm. In particular, spending on entitlement programs will begin to climb quickly during the next decade. In fiscal 2006, federal spending for Social Security, Medicare, and Medicaid together totaled about 40 percent of federal expenditures, or roughly 8-1/2 percent of GDP.² In the most recent long-term projections prepared by the Congressional Budget Office (CBO), these outlays are projected to increase to 10-1/2 percent of GDP by 2015, an increase of about 2 percentage points of GDP in less than a decade. By 2030, according to the CBO, they will reach about 15 percent of GDP.

Perhaps the most straightforward way to raise national saving--although not a politically easy one--is to reduce the government’s current and projected budget deficits.  To the extent that reduced government borrowing allows more private saving to be used for capital formation or to acquire foreign assets, future U.S. output and income will be enhanced and the future burdens associated with demographic change will be smaller.

Although demographic change will affect many aspects of the government’s budget, the most dramatic effects will be seen in the Social Security and Medicare programs, which provide income support and medical care for retirees and which have until now been funded largely on a pay-as-you-go basis.  Under current law, spending on these two programs alone will increase from about 7 percent of the U.S. gross domestic product (GDP) today to almost 13 percent of GDP by 2030 and to more than 15 percent of the nation’s output by 2050.  The outlook for Medicare is particularly sobering because it reflects not only an increasing number of retirees but also the expectation that Medicare expenditures per beneficiary will continue to rise faster than per capita GDP.  For example, the Medicare trustees’ intermediate projections have Medicare spending growing from about 3 percent of GDP today to about 9 percent in 2050--a larger share of national output than is currently devoted to Social Security and Medicare together. 

By 2030, almost one in five U.S. residents will be 65 years or older.  Well before then, beginning in about 2018, Social Security will start to pay out more in ben­efits than it receives from payroll taxes.  Even before that, -- in the neighborhood of 2010 -- Social Security will start exerting upward pressure on the unified federal budget deficit as its surplus diminishes, with a consequent reduction in net public saving, absent changes in the program itself, increased taxes, or reduced spending on other government programs.  

The situation for Medicare is similar and, potentially even more serious.  Payroll taxes to cover Medicare expenditures are currently in surplus.  Over time, however, Medicare spending is expected to increase more rapidly than related tax revenues, creating a deficit prob­lem that analysts see as potentially greater in size and more difficult to deal with than that associated with Social Security.   Thus, despite the relatively benign federal deficit we currently see, it is clear the situation will worsen dramatically over the next decade.  And, unlike the late '80s when deficits became a national concern, there seems to be no political consensus on the nature of this problem or its resolution -- a fact that should be a concern to all of us.

The Center for Retirement Research (CRR) has developed a National Retirement Risk Index to measure the share of working-age households that are in danger of being financially unprepared for retirement. Their findings are sobering.  They report that almost 45 percent of all such households are “at risk” of falling well short of the amount estimated to be necessary to maintain the household’s pre-retirement standard of living.  Younger households are particularly vulnerable, as are low-income households and those with neither a defined benefit pension nor a 401(k) plan. 

To reduce its dependence on foreign capital, the United States should take action to increase its national saving rate. The most direct way to accomplish this objective would be by putting federal government finances on a more sustainable path.