Facing two forks in the road.

• Author: Edwards, Chris
• Position: ECONOMIC OBSERVER - National Academy of Sciences' report called "Choosing the Nation's Fiscal Future"

THE NATIONAL ACADEMY of Sciences has released the study "Choosing the Nation's Fiscal Future," which looks at the Federal government's finances and lays out different paths that the U.S. might take in the coming decades. The report was produced by a committee of 21 policy specialists and a dedicated professional staff. As a member of the NAS committee, I was able to discuss and debate vital budget issues with quite a high-caliber group. The following are my personal views on some of the more interesting aspects of the report:

The NAS report does not provide a specific plan to cut Federal deficits or reform fast-growing entitlement programs such as Medicare. Rather, it describes four possible fiscal paths that the Federal government may take in the coming years. The paths are defined by the share of gross domestic product that the Feds will consume.

For decades, spending has hovered around 20% of GDP, but official projections show that, if no cuts are made to entitlements, Federal spending could rise to 33% of GDP by 2040 and about 60% by 2080. That would create massive increases in Federal debt, crushing tax burdens, or both.

The four NAS scenarios examine various taxing and spending combinations. The low scenario would keep the government at about the same size as today. Under the other scenarios, payroll taxes would increase and all individual income tax rates would rise to generate added revenues. Under the high scenario, for instance, all income tax rates would increase by 43%; the payroll tax would jump to 19%; and a new value-added tax similar to a sales tax would be tacked on at eight percent.

The NAS report focuses on controlling government debt and is neutral on the overall size of government. The report concludes that, un less reforms am made, rising debt may raise interest rates, reduce domestic investment, push the dollar down, and create other economic damage.

Federal debt also could be stabilized at a smaller size of government than under the NAS scenarios. In the past, I have described reforms that would shrink the government to 15% of GDP by termination, privatization, and devolving activities to the states. That, in my view, would enhance growth and expand personal freedom--and improve the functioning of core Federal activities.

A technical note is that the report's projections do not take into account the macroeconomic effects of tax changes. If tax rates were to rise as under the larger government options, GDP likely...