Greenspan Warns About U.S. Deficit : Economy: The Fed chairman says debt could endanger future prosperity.

Federal Reserve Board Chairman Alan Greenspan said Friday that the United States is having “ideal” economic times, but he warned that future prosperity is jeopardized by the nation’s deep budget deficit.

“The U.S. economy has recently been experiencing the ideal combination of rising activity, falling unemployment and slowing inflation,” Greenspan told a bipartisan commission on government spending and tax reform.

But he made it clear that the nation must not let good economic times create an atmosphere in which policy-makers take the view that the deficit, despite some recent improvement, is no longer a critical problem.

“We cannot let this good behavior lull us into neglecting the underlying problems of our economy,” Greenspan said.

He said the impact of the deficit is pervasive and continues to keep long-term interest rates high, making it more expensive to finance the red ink.

“Long-term interest rates are higher now because markets are anticipating rising deficits in the next century,” Greenspan said.

At the same, he said, he detects a dramatic shift in the public’s attitude toward the deficit and a willingness to make the hard choices necessary to bring the economy into balance.

“I hope and really do believe” progress will be made, Greenspan said, adding that improvement will show up in interest rates.

He said the United States has no choice but to deal with the deficit, because the debt will eventually bring economic instability and very hard times.

“There is no alternative to scaling back growth in federal spending if we are to avoid growing deficits as we move into the next century,” he said.

He also said the deficit looming in the years ahead is mostly a creature of medical costs, which are expected to balloon.