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Greenspan warns of deficit as big threat to economy { May 7 2004 } Original Source Link: (May no longer be active)
http://www.nytimes.com/2004/05/07/business/07fed.htmlhttp://www.nytimes.com/2004/05/07/business/07fed.html
May 7, 2004
Greenspan Warns of Deficit as Big Threat to Economy
By EDMUND L. ANDREWS
WASHINGTON, May 6 - Alan Greenspan, chairman of the Federal Reserve, warned on Thursday that rising federal deficits may be the biggest threat to the nation's longterm economic stability.
In a speech that ranged from Americans' household debt to the nation's huge foreign debt, Mr. Greenspan said he was optimistic that most financial imbalances could be reduced smoothly through the effect of normal market forces.
"But that is certainly not the case for our yawning fiscal deficit," he told a conference at the Federal Reserve Bank of Chicago. "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."
Mr. Greenspan refrained from directly criticizing either the Bush administration or Congress, and he made no reference to the bitter battles under way in Congress over making President Bush's tax cuts permanent.
But his comments suggested growing alarm about the budget deficit, which is likely to run more than $400 billion this year and is widely expected to remain high even though tax revenues are now rising because of faster economic growth.
In his speech, Mr. Greenspan appeared to be defending the kind of consumer debt that Federal Reserve policies have encouraged while criticizing the budget deficits that are outside its control.
The central bank's prolonged policy of very low interest rates has fueled a surge in consumer borrowing over the last several years - most of that in the form of bigger home mortgages and home equity loans, but some in the form of higher credit card debt.
Mr. Greenspan said much of the added consumer debt had gone hand in hand with a rise in home ownership to a record level of 69 percent. "It can scarcely be argued that the substitutions of debt service for rent materially impaired the financial state of the new homeowner," he said. The federal budget deficit, by contrast, is the one big area of American borrowing that is outside the central bank's control.
Both kinds of borrowing helped push the current account deficit - the nation's indebtedness to the rest of the world - to a record of more than $500 billion last year.
In recent months, Mr. Greenspan has repeatedly urged Congress to reinstate "pay as you go" rules for federal budgets, under which tax cuts and new spending programs would have to be financed with tax increases or spending reductions in other areas.
President Bush and most Republicans in Congress are adamantly opposed to applying any such requirements to tax cuts, because such a move would derail Mr. Bush's goal of permanently extending the tax cuts from 2001 and 2003.
But Mr. Greenspan stayed out of that argument on Thursday, perhaps because he was reluctant to be drawn into the pitched and partisan battle over that issue in Congress.
While noting that "a free lunch has still to be invented," the Fed's chairman said globalization and technological innovation had made it much easier for the United States to attract a major share of the world's savings without dire consequences.
The changes, he said, have created "a paradigm somewhat different from that which fit much of our earlier post-World War II experience."
Staunchly defending free trade and brushing aside political anger over "outsourcing" of jobs to foreign countries, Mr. Greenspan said that expanded trade would make it easier rather than harder for the United States to reduce its foreign borrowing.
As he has before, Mr. Greenspan warned political leaders against erecting trade barriers in an attempt to shield American companies from foreign competition. "Protectionism, some signs of which have recently emerged, could significantly erode global flexibility and, hence, undermine the global adjustment process," he said.
Though Mr. Greenspan said his outlook for the next few years had "brightened," he was gloomier about the long-term outlook, which he described as "opaque."
Copyright 2004 The New York Times Company
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