May 6, 2004
Greenspan Issues Warning of Deficit's Impact on Economy
By TERENCE NEILAN
The head of the Federal Reserve voiced a note of
concern today about the effects of America's soaring national budget
deficit on the country's long-term economic stability.
"We in the United States have been incurring ever larger deficits," the
Fed chairman, Alan Greenspan, said. He added that "we have lurched"
from a budget surplus in 2000 to a deficit that is projected by the
Congressional Budget Office to amount to 4.25 percent of gross domestic
product this year, or about $500 billion.
The "yawning" budget deficit, he told a banking conference, was a
bigger concern to him than the equally growing trade deficit or high
"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 that stabilize other imbalances," Mr.
He added that one issue that worries most analysts is the inadequate
national saving rate, which he described as "meager."
Another concern, in the face of the widening budget gap, is the
commitment made by the United States to senior citizens, he said.
"We have legislated commitments to our senior citizens that, given the
inevitable retirement of baby-boomer generation, will create
significant fiscal challenges in the years ahead," he said, his words
transmitted by satellite from Washington to the conference in Chicago.
"Has something fundamental happened to the U.S. economy and, by
extension, U.S. banking that enables us to disregard all the
time-tested criteria of imbalance and economic danger?" he asked.
Then, answering his own question, he said: "Regrettably, the answer is
no. The free lunch has still to be invented."
Mr. Greenspan has made clear his objections to budget deficits in the
past, and today's remarks were equally forthright. He also clung today
to his belief that consumer debt is not a worrying factor, even though
his beliefs are not accepted by all traditional economists.
It is also somewhat at odds with the Congressional Budget Office, which
in March published new calculations showing that the budget deficit now
stems almost entirely from tax cuts and spending increases rather than
from lingering effects of the economic slowdown.