Greenspan Reiterates Warning on Deficits

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By Nell Henderson
Washington Post Staff Writer
Friday, November 4, 2005

Federal Reserve Chairman Alan Greenspan said yesterday that the U.S. economy is in generally good health but will suffer in coming years unless Congress slows the growth of federal budget deficits.

Recent hurricanes Katrina, Rita and Wilma will temporarily reduce employment and economic activity, Greenspan said at a hearing of Congress's Joint Economic Committee, his last scheduled public appearance on Capitol Hill before he leaves office Jan. 31.

More than 520,000 people filed initial claims for unemployment insurance benefits because of the storms, the Labor Department reported yesterday.

"But the economic fundamentals remain firm, and the U.S. economy appears to retain important forward momentum," Greenspan said. "The longer-term prospects for the U.S. economy remain favorable."

Greenspan warned, however, that large budget deficits will drive up interest rates over time, raising the government's debt-service costs. "Unless the situation is reversed, at some point these budget trends will cause serious economic disruptions," he said.

Greenspan also repeated that he favors extending recently enacted tax cuts that are scheduled to expire in coming years but only if they are offset by spending cuts of similar value so they do not boost the deficit.

"We should not be cutting taxes by borrowing," Greenspan said, sticking to a position at odds with the White House and Republican congressional leadership. "We should be cutting taxes by reducing the level of spending."

Greenspan supported tax cuts in early 2001, when the budget was in surplus. But Congress ignored his suggestion that year that they include "triggers" that would cancel or reverse the tax cuts if deficits reappeared, as they did in 2002.

The deficit reached $319 billion in the federal fiscal year 2005, which ended Sept. 30, down from a record $413 billion the year before. It is projected to increase in coming years as the large baby-boom generation starts collecting federal retirement and health benefits.

Congress also has dismissed Greenspan's repeated urging that it impose budget controls like those in place from 1990 through 2002. They included caps on discretionary spending and so-called pay-as-you-go -- or "paygo" -- rules that required any changes in taxes or spending be offset by other measures so they caused no increase in the deficit.

The White House and Republican leadership oppose reinstating the paygo rules because they would make it very difficult politically to make the tax cuts permanent. Democrats support restoring the rules.

"Our budget position is unlikely to improve substantially" without such constraints, Greenspan said yesterday. "We have got to put in place a structure which will enable the Congress to make rational choices. . . . There are no easy choices. The easy choices are long gone."

Greenspan has led the central bank for more than 18 years. The White House announced yesterday that he would be awarded the Presidential Medal of Freedom, the nation's highest civilian honor, in a ceremony next week. Several lawmakers yesterday lauded his accomplishments and thanked him for his service.

"You have guided [Fed policy] through stock market crashes, wars, terrorist attacks and natural disasters with a steady hand," committee Chairman Jim Saxton (R-N.J.) said at the outset of the hearing. "You have made a great contribution to the prosperity of the U.S. and the nation is in your debt."

Greenspan thanked the committee members for their kind words but gave much of the credit for the low inflation of recent years to forces beyond the Fed's control. One was the surge in labor productivity, or output per hour worked, over the past decade that resulted from advances in computers, telecommunications and business practices.

Another is the continuing addition to world markets of hundreds of millions of workers from the former Soviet bloc countries, China and India. Their entry into the global economy has restrained the rise of labor costs and helped contain inflation, Greenspan said.

However, he said, the shift of much of the world's workforce from centrally planned economies into the global market economy will occur over time. And as it is completed, he said, the suppression of world inflation will "gradually end."

Undeterred, several lawmakers insisted on giving credit to the departing Fed chairman.

"Mr. Greenspan, I just want to say that we are going to miss you, really miss you," said Rep. Maurice D. Hinchey (D-N.Y.). "I think that you've probably been one of the most effective chairmen of the board in the history of the Federal Reserve. . . . You've done one heck of a job."


© 2005 The Washington Post Company

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