Greenspan on Budget Deficits

On Wednesday, Alan Greenspan testified before the House Budget Committee, not as Fed Chair but "speak[ing] for myself and not necessarily for the Federal Reserve." Most news reports failed to mention that tidbit and focused on Greenspan's support for private accounts, although government data suggest that the more pressing budgetary challenge is Medicaid, not Social Security. Greenspan began his prepared remarks voicing concern about the deficit:

.. the positive short-term economic outlook is playing out against a backdrop of concern about the prospects for the federal budget, especially over the longer run... our budget position is unlikely to improve substantially in the coming years unless major deficit-reducing actions are taken.

Some news reports quoted Greenspan as saying, apparently in response to questioning:

When you begin to do the arithmetic of what the rising debt level implied by the deficits tells you, and you add interest costs to that ever-rising debt, at ever-higher interest rates, the system becomes fiscally destabilizing.

Greenspan urged House leaders to adopt fiscal restraint, noting that House leaders allowed limits on discretionary spending and the PAYGO requirements, artifacts of the '90s, to expire in 2002. What he did not point out is that the House has been controlled by Republicans during this time -- from restraint to excess.

He identified "our inability to identify the upper bound of future demands for medical care" as a significant impediment to easy policy decisions.

See Alan Greenspan Testimony, 2 Mar 2005 ; CIO Today