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Greenspan says growing deficits threaten reduction of unemployment The Associated Press
July 17, 2003
WASHINGTON - Federal Reserve Chairman Alan Greenspan says that "substantial and excessive" federal budget deficits -- if not reduced -- will hurt the economy's ability to grow enough to reduce unemployment.
Greenspan, testifying Wednesday before the Senate Banking Committee, was more pointed in his criticism of rising federal deficits than he had been in an appearance before a House panel Tuesday, the day the Bush administration announced its new projections showing a serious worsening of the deficit outlook.
"There is no question that if you run substantial and excessive deficits over time, you are draining savings from the private sector, and, other things being equal, you do clearly undercut the growth rate of the economy," Greenspan said, noting the area where economists think deficits inflict the most harm.
Rising government borrowing crowds out the borrowing that private corporations need to make investments to expand and modernize. It is this investment that is a major contributor to rising productivity, which allows the economy to grow at faster rates and boosts U.S. living standards.
"I have no question that if we do not come to grips with these deficit issues, it will make it more difficult for us to maintain the type of growth rates" that will bring the unemployment rate down, Greenspan said.
He noted that 75 million baby boomers begin retiring at the beginning of the next decade. Those retirements will make severe demands on the government's two biggest benefit programs, Social Security and Medicare.
Greenspan said the benefits mean Congress promised a level of spending "in excess of our capability to finance it...When we get into the period beyond 2010...we are running into potentially serious troubles."
Greenspan never specifically mentioned the Bush administration's new deficit projections, which forecast record deficits of $455 billion this year and $475 billion next year, sharply higher than the administration's forecast earlier in the year.
But Democrats on the committee seized on Greenspan's remarks to bolster their arguments that the government's soaring deficits, which they blame on the administration's tax cuts, will be harmful to the economy.
"We're in the midst of some of the worst economic news we've had in a long time, particularly the unemployment numbers," Sen. Jack Reed, a Rhode Island Democrat, told Greenspan. "And the administration seems to suggest more tax cuts and it'll get better. So the Congress has passed more tax cuts, and it's getting worse."
President Bush heard more encouraging words Wednesday from handpicked economists.
Bush invited private economists to reassure him -- and to try to persuade the country -- that the large tax cuts he engineered are helping create jobs at a time when the unemployment rate is at a nine-year high of 6.4 percent.
The economists, who included two Reagan White House officials, told Bush what he wanted to hear -- "how the growth and tax package has had such a very positive impact on the economy," Commerce Secretary Donald Evans said.
Democrats argued otherwise.
"This administration's economic policy is a failure, a total failure," said Rep. Richard Gephardt of Missouri, a candidate for the Democratic presidential nomination. "This is about as dismal and poor a performance in economics as I can remember in the history of this country."
The economists summoned to the White House said they saw no short-term harm in the deficits.
"I think the deficits at this point are having a positive impact," Martin Feldstein, an economics professor at Harvard University who was an adviser to President Ronald Reagan, told reporters after meeting Bush. He said the deficits had to be controlled in the long term.
Princeton University economist Burton Malkiel added: "If there is any time in which one ought to have a deficit, it is a time where there is economic slack and a job market that is not recovering the way we would like to see it recover."
Greenspan said that the level of government deficits affects long-term interest rates, a view that some administration officials have challenged.
And he told the committee that he didn't think tax cuts were the right way to provide short-term stimulus to the economy.
Many economists think that it takes Congress so long to pass tax cuts that they normally only have an effect after the economy has begun to improve.
Greenspan told the Senate committee Wednesday that it had been "fortuitous" that the large tax cuts turned out to have passed Congress in time to help the economy.
Greenspan provided crucial support to Bush shortly after he took office in 2001 by dropping his longtime insistence that any government surpluses should be used to reduce the national debt as a way of bolstering the government's finances.
He said in 2001 that the surpluses being projected at that time -- $5.6 trillion over 10 years -- were so large that there was enough money to pay down the debt and provide for a tax cut of the size Bush was proposing.
However, at the beginning of this year, Greenspan voiced opposition to Bush's third round of tax cuts, saying he thought the economy would improve without them.
He also repeated his view that the worsening deficits necessitate paying for any further tax cuts, either by reductions in government spending or by increases in taxes in other areas.
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