Greenspan: U.S. Deficits Imperil Economy

Greenspan: U.S. Deficits Imperil Economy
Fed chief says economy at risk of stagnation “or worse”

Updated: 10:42 a.m. ET April 21, 2005 WASHINGTON - Federal Reserve Chairman Alan Greenspan warned Thursday that unless lawmakers come to grips with spiraling U.S. deficits, the economy was at risk of stagnation “or worse.”

“Under existing tax rates and reasonable assumptions about other spending ... 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,” Greenspan said in testimony prepared for a Senate Budget Committee hearing.

He said the danger was that deficits would keep rising as a percentage of total national output.

“Unless that trend is reversed, at some point these deficits would cause the economy to stagnate or worse.”

Much of Greenspan’s testimony echoed prior cautions he has made to Capitol Hill lawmakers and he stressed that steps to fix the problem were essential.

“As the latest projections from the [Bush] administration and the Congressional Budget Office suggest, our budget position is unlikely to improve substantially in the coming years unless major deficit-reducing actions are taken,” the Fed chief said.

Greenspan reiterated his call for some type of automatic government spending controls.

“In my judgment, the necessary choices will be especially difficult to implement without the restoration of a set of procedural restraints on the budget-making process,” he said.

Bush has pledged to cut the budget gap in half by 2009. The Congressional Budget Office has estimated the 2005 budget shortfall will be around $400 billion, including funding for military operations in Iraq and Afghanistan.

The Fed chief has long urged renewing so-called pay-go provisions that compel lawmakers to show how they will fund any spending initiatives or tax cuts.

Greenspan said the approaching surge of American retirees was adding urgency to the need to deal with budget constraints in light of uncertainty about the scale of looming medical and retirement costs.

“These uncertainties — especially our inability to identify the upper bound of future demands for medical care — counsel significant prudence in policy-making,” Greenspan said, adding that policy-makers “need to err on the side of prudence when considering new budget initiatives.”

He repeated that the United States may already be in a position where it cannot meet commitments made to the baby boom generation and urged benefit cuts, if needed, be made as soon as possible.

“If existing promises need to be changed, those changes should be made sooner rather than later,” he said.

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