Fed Chief Calls Deficits ‘Dangerous’ : Cites ‘Corrosion’ of Economy as Major Problem Facing Bush

Federal Reserve Chairman Alan Greenspan said today that continuing high federal budget deficits represent a “dangerous corrosion” of the U.S. economy and must be reduced.

Greenspan joined a number of other top economic experts testifying as the National Economic Commission launched its post-election effort to come up with solutions to the seven-year budgetary deadlock.

While the budget deficit was often ignored during the presidential debates, Greenspan and many other witnesses told the advisory panel that it is the major problem facing President-elect George Bush and the new Congress.

Given Top Priority

Bush has been forced in recent days to calm jittery financial markets by stating that he plans to make deficit-reduction a top priority and will meet with congressional leaders to come up with an acceptable package.

Many of the witnesses before the commission said this is exactly what Bush needs to do, and several said that unless a credible deficit agreement is reached quickly, the country faces continued turmoil in financial markets.

Greenspan, given his sensitive position as head of the U.S. central bank, was not as blunt as some of the witnesses. However, his testimony emphasized “the long-term corrosive impact of the deficit” and the need to act quickly.

“If we do not act promptly, the imbalances in the economy are such that the effects of the deficit will be increasingly felt and with some immediacy,” he said. “The deficit already has begun to eat away at the foundations of our economic strength, and the need to deal with it is becoming ever more urgent.”

U.S. Borrowing Needs

One chief concern, Greenspan said, is how long foreign investors will be willing to bankroll U.S. borrowing needs. He said the experience of history shows that the United States cannot continue to count on the high levels of foreign investment that it has received over the last six years.

Greenspan said that failing to correct the deficit problem “courts a dangerous corrosion of our economy.”

Another witness, C. Fred Bergsten, director of the Institute for International Economics, said that the United States has had to borrow $700 billion since 1982 and that foreign investors are nearing the end of their willingness to continue lending such huge amounts of money.

“The rest of the world may well give up on the dollar if it foresees four more years of towering twin (budget and trade) deficits,” he said.

Bush’s campaign pledge against any tax increases could undercut recommendations by the 12-member commission.

The panel is headed by Democrat Robert Strauss and Republican Drew Lewis,

After Bush’s 40-state victory last week, the stock market fell sharply, the opposite reaction from that which normally occurs when a Republican candidate wins the presidential election.

Market analysts said investors, who vote with their pocketbooks, were voicing concern about the incoming Administration’s ability to tackle the interlinked problems of the budget and trade deficits, especially in view of Bush’s “read my lips” stand against new taxes.