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There have been a striking diagnostic inflation and a corresponding increase in the use of psychotropic drugs during the past 30 years. DSM-5, scheduled to appear in May 2013, proposes another grand expansion of mental illness. In this article, we will review the causes of diagnostic exuberance and associated medical treatment. We will then suggest a method of stepped care combined with stepped diagnosis, which may reduce overdiagnosis without risking undertreatment of those who really need help. The goal is to control diagnostic inflation, to reduce the harms and costs of unnecessary treatment, and to save psychiatry from overdiagnosis and ridicule.