Greenspan Says Economy Sound, But Urges Spending Cuts

Calling current American fiscal policy unsustainable, Federal Reserve Chairman Alan Greenspan yesterday urged Congress to enact major spending cuts and pass new laws to enforce them.In remarks to the House Budget Committee, he warned that the federal budget deficit and the baby-boomer generation’s looming wave of retirement threaten Americans’ standard of living that cannot be addressed solely by a growing economy.His remarks – which gave no indication of any major changes in the Fed’s monetary policy – sparked a brief rally on the stock market, driven by relieved investors who had been wary of interest-rate hikes. However, the market retreated in afternoon trading over fears of high oil prices as crude futures shot over $53 a barrel.Though Mr. Greenspan repeated his puzzlement over why long-term interest rates – such as mortgage rates – have not risen in conjunction with the Fed’s short-term rate hikes, he said the mystery has become “less of a conundrum” because long-term rates have been rising in recent weeks.“Clearly, by that statement, he was saying that the Fed was happy that long end interest rates had moved higher,” said an economist at Lehman Brothers, Drew Matus. “They had been moving short-term interest rates higher and actually losing ground on long-end rates.”Mr. Greenspan said that the economy is growing at a “reasonably good pace,” but warned that economic growth alone will be insufficient to address the health-care needs of baby boomers.“So long as health-care costs continue to grow faster than the economy as a whole, the additional resources needed for such programs will exert pressure on the federal budget that seems increasingly likely to make current fiscal policy unsustainable,” he said.“I fear that we may have already committed more physical resources to the baby boom generation in its retirement years than our economy has the capacity to deliver.”Mr. Greenspan’s main criticism of President Bush has been over the ballooning federal budget deficit. Mr. Greenspan has long favored spending cuts over tax hikes to correct it.Mr. Greenspan urged Congress to offset spending increases or tax cuts by slashing other parts of the budget by reinstating rules similar to those in the Budget Enforcement Act of 1990.“For about a decade, the rules laid out in the Budget Enforcement Act of 1990…helped Congress establish a better fiscal balance,” he said. “However, the brief emergence of surpluses in the late 1990s eroded the will to adhere to these rules.”Mr. Greenspan reiterated support for a Social Security overhaul that would include the creation of personal accounts, saying they would improve the national savings rate.Increasing the national savings rate is essential to building enough capital to produce the goods and services necessary to meet the needs of babyboomer retirees “without unduly curbing the standard of living” of American workers, he said.“In my view, a retirement system with a significant personal accounts component would provide a credible means of ensuring that the program actually adds to overall saving and, in turn, boosts the nation’s capital stock,” he said.

Greenspan Says Economy Sound, But Urges Spending Cuts

Greenspan Says Economy Sound, But Urges Spending Cuts

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