Growing Deficit Has Greenspan Concerned

With just three months left before he leaves office, Federal Reserve Chairman Alan Greenspan raised a warning to Congress: The country could face “serious economic disruptions” if bloated budget deficits are not curbed.

The Fed chief’s strong comments, made during an appearance Thursday before Congress’ Joint Economic Committee, come after the government produced a $319-billion budget deficit this year -- an improvement from the record amount of red ink registered in 2004 but still the third-highest deficit on record.

In the short term, costs related to rebuilding after the trio of devastating hurricanes will make it harder to improve the nation’s balance sheets, he acknowledged. In the long term, a huge wave of retiring baby boomers will put massive strains on government resources, he said.

“There are no easy choices. Easy choices are long gone,” said Greenspan, whose 18-year-plus run at the Fed comes to an end Jan. 31.

Congress is working on separate packages of tax cuts and spending cuts.

Even as he sounded an alarm about the dangers that budget deficits pose to the country’s long-term health, Greenspan struck a more positive note about the economy’s current prospects after being jolted by the recent hurricanes.

Katrina, Rita and Wilma are likely to “exert a drag” on employment and production in the short term and may aggravate inflation pressures, Greenspan said. “But the economic fundamentals remain firm, and the U.S. economy appears to retain important forward momentum,” Greenspan said in his most extensive remarks thus far on the effect of the storms.

On the budget front, Greenspan called on Congress to get the nation’s fiscal house in order and bring the swollen deficits under control.

Persistently large deficits will eventually push up interest rates, Greenspan said. Higher borrowing costs would weigh on the willingness of consumers and businesses to spend and invest and that could be a drag on economic growth, analysts say.

“I find it utterly inconceivable, frankly” that persistent budget deficits over the long run “will not have a significant impact on long-term interest rates,” he said.

Greenspan repeated his call for lawmakers to restore caps on spending. And, he urged them to pay for any future tax cuts with either increases in other taxes or reductions in spending.

The Fed chief also underscored his belief that benefits currently promised to the baby boom generation through Social Security and Medicare probably cannot be met and probably will have to be trimmed.

“We owe it to those who will retire over the next couple of decades to promise only what the government can deliver,” he said.