Reducing U.S. long-term deficits will inevitably cause economic pain, former Federal Reserve Chairman Alan Greenspan said.
“The presumption that we’re going to have a painless solution to this, I think, is fantasy,” Greenspan said today during a “Bloomberg Surveillance” television interview with Tom Keene and Sara Eisen. “There are a lot of risks out there but the one thing I can be reasonably certain of is we won’t get through this whole issue without some pain.”
The U.S. faces twin fiscal challenges with more than $600 billion of spending cuts and tax increases scheduled to hit at the beginning of next year, threatening to send the economy into an austerity-induced recession, even as rising long-run deficits may prove unsustainable.
Greenspan, 86, who preceded Ben S. Bernanke as chairman of the central bank, blamed U.S. deficits on growth in spending and blamed both political parties, saying “strangely enough, and ironically, the spending surge which is creating the problem here is fundamentally both Republicans and Democrats.”
Bernanke has also spoken of the need to control U.S. deficits. In a Nov. 20 speech in New York, he said Congress and the president should reach a plan to close deficits in the long term without harming the economy in the near term.
“A credible framework to set federal fiscal policy on a stable path -- for example, one on which the ratio of federal debt to GDP eventually stabilizes or declines -- is thus urgently needed to ensure longer-term economic growth and stability,” Bernanke said last month in New York.
While Bernanke has refrained from identifying the mix of fiscal changes that are needed to stabilize fiscal policy, Greenspan said the “key part” of the deficit is “government social benefits to persons.”
Greenspan said the economy is poised for 2 percent growth, without specifying a time frame.
“Two percent is going to be our normal” for now, Greenspan said. “What is going to be the key factors in the long-term productivity outlook is innovation.”
“I think there are types of things out there we can have no insight into,” he said.
After leaving the Fed, Greenspan founded the consulting firm Greenspan Associates and has been a consultant or adviser to Deutsche Bank AG, Pacific Investment Management Co. and hedge fund Paulson & Co.
Greenspan served at the central bank during an era dubbed the “Great Moderation” for its economic stability. During his tenure, the personal consumption expenditures price index averaged yearly increases of 2.6 percent, while the unemployment rate averaged 5.5 percent.
Yet in the final years of Greenspan’s term a massive housing bubble developed, as home prices more than doubled between 2000 and 2006, according to the S&P/Case-Shiller home price index.
The bursting of that bubble led to a financial crisis that toppled firms such as Bear Stearns Cos. and Lehman Brothers Holdings Inc. and sent unemployment soaring to 10 percent. It has taken three years to fall to 7.9 percent.
Economists in a Bloomberg survey expect the Labor Department to announce that the U.S. added 86,000 jobs in November when it releases its monthly employment report. The jobless rate will remain unchanged, according to the median estimate in a survey in advance of the 8:30 a.m. report tomorrow.
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