At the Crossroads; Warning: As the U. S. deficits rise, so do the risks. The time to change course is now, before a crisis hits.

Byline: ROBERT E. RUBIN (Rubin is the director and chairman of the Executive Committee of Citigroup Inc. and the former U.S. secretary of the Treasury under President Bill Clinton.)

The economy of the United States is at a critical juncture. On the one hand, we have great comparative advantages: our historical embrace of change, our dynamic society, our flexible labor markets, our willingness to take risk and the sheer size of our economy and our economic infrastructure. These strengths are particularly relevant in a time of great change, which we have today with globalization and the new technologies.

On the other hand, the United States also faces complex and consequential challenges.

To start, over the past three years, the fiscal position of the U.S. government has decayed dramatically. In 2001 the Congressional Budget Office projected a $5.6 trillion 10-year surplus. Now Goldman Sachs and most independent analysts project a 10-year deficit of $5 trillion to $5.5 trillion. Adjusting for methodological differences, that represents a deterioration in the 10-year fiscal position of the U.S. government of roughly $9 trillion. The Congressional Budget Office estimates that the 2001 and 2003 tax cuts--if made permanent--will cost roughly $4 trillion over the next 10 years, which puts them at the heart of this long-term fiscal threat.

Fiscal stimulus was an appropriate policy in 2001. But temporary tax cuts, aimed toward people who live week to week and are likely to spend most of any unexpected disposable income, could have achieved all the stimulus we wanted at far less cost, and avoided the great preponderance of the long-term fiscal morass we now face. Moreover, while 10-year numbers are highly unreliable, the likelihood is as great that the deficit will be higher as lower. Beyond 10 years, which is as far as federal budget projections go, the fiscal situation will become all the more difficult with every passing year, as America's post-world-war baby boomers' retirements accelerate.

Some suggest that stronger economic growth than mainstream forecasts project will restore fiscal health. That hope is a highly imprudent basis for fiscal policy--especially since those deficits seriously threaten to undermine growth. Virtually all mainstream economists agree that sustained long-term deficits will crowd out private investment, increase interest rates, reduce productivity and reduce growth. Even more dangerously, if the markets begin to fear long-term fiscal disarray, interest rates for long-term debt could rise sharply, with serious consequences for our economy. Those effects would be exacerbated if foreign providers of the capital inflows, now so critical to us, add to this fear a concern about our currency because of our large current account deficits.

Interest rates have not been materially affected so far, because private-sector demand for capital in the last few years has been so limited. But a change in the private demand for capital--or a change in market psychology--could well turn these risks into reality. Also, the evidence of the early 1990s strongly suggests that prolonged deficits could have serious adverse effects on U.S. business and consumer confidence more generally. A dramatic change in fiscal policy--requiring both parties to come together to make difficult choices--is imperative.