Greenspan Repeats Deficit Concerns

Federal Reserve Chairman Alan Greenspan warned Thursday that the nation would soon have to face the consequences of a mushrooming federal budget deficit as the benefits of globalization fade and the costs of providing government retirement and medical benefits to aging baby boomers grows.

The nation’s central bank chief, in a speech televised to bankers gathered in Chicago, repeated previous concerns about the dangers posed by the federal budget deficit, which is projected to account for about 4.5% of the nation’s gross domestic product this year.

“Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances,” Greenspan said.

Greenspan delivered his remarks only a few days after the Federal Reserve decided to keep interest rates at historical lows but made it clear that the central bank was preparing to hike rates in the months to come amid signs of a reviving economy. Today, economists and investors will get a better idea of how the economy is doing when national employment figures for April are released.

In his comments Thursday, Greenspan suggested that the normal drawbacks associated with large government deficits might have been masked by the expansion of free trade and global investment in addition to low interest rates.

However, he said the ballooning federal and trade deficits would begin to drag down economic growth as interest rates head higher and fewer benefits are wrung out of global trade and investment.

“Has something fundamental happened to the U.S. economy and, by extension, U.S. banking, that enables us to disregard all the time-tested criteria of imbalance and economic danger?” Greenspan asked. “Regrettably, the answer is no. The free lunch has still to be invented.”

In other economic news, the number of Americans filing claims for unemployment benefits fell to the lowest level since October 2000 and productivity trailed economic growth for a second quarter, suggesting that companies will increase hiring.

Initial jobless claims declined by 25,000, to 315,000, last week, the Labor Department said. Productivity, a measure of how much an employee produces for every hour of work, increased at an annual rate of 3.5% in the first quarter after a 2.5% pace during the previous three months.

Bloomberg News was used in compiling this report.