greenspan says economy doing well, deficits a thre

Greenspan Says Economy Doing Well, Deficits a Threat

Dec. 2 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan said the U.S. economy is expanding ``at a reasonably good pace'' and warned that widening budget deficits may have ``severe'' consequences for future growth.

Greenspan cited the rise in retirement and medical costs, including Social Security and Medicare, as major threats, and said concern about the budget looms over a ``positive'' outlook for the economy. The remarks came in a videotaped speech shown at a Philadelphia Fed bank conference today.

The speech is one of the final opportunities for Greenspan, 79, chief of the central bank since 1987, to repeat his concern about the budget before he steps down Jan. 31. His nominated successor, former Fed governor Ben Bernanke, told a Senate panel Nov. 15 that he probably won't comment on specific federal budget issues.

Greenspan said the U.S. economy ``has delivered a solid performance thus far in 2005.'' Even after the disruptions from the hurricanes, ``economic activity appears to be expanding at a reasonably good pace as we head into 2006.''

The Fed chairman didn't comment on interest rates or inflation.

Greenspan said future growth will be determined in part by the state of the budget, including the challenge of meeting the demands of future retirees.

``Crafting a budget strategy that meets the nation's longer-run needs will become more difficult the more we delay,'' Greenspan said. ``In the end, the consequences for the U.S. economy of doing nothing could be severe.''

Economic Reports

The U.S. economy added 215,000 jobs in November, bouncing back from two months of weak job growth triggered by Hurricanes Katrina and Rita, the Labor Department said today. The economy grew at a 4.3 percent annual rate from July to September, the quickest pace since the first quarter of last year, the Commerce Department said earlier this week.

Treasury Secretary John Snow said after the speech that the next federal budget would be ``tough minded,'' tackling so- called discretionary spending, or programs that Congress must approve each year.

``It is going to be a tough-minded, stringent budget,'' Snow said in a televised interview from London with CNBC. ``It is going to go after discretionary spending hard.''

Retirement and health-care outlays usually don't fall into that category of spending because they are considered ``entitlements.''

Spending Cuts

Greenspan will retire after the Fed's January rate-setting meeting, when his non-renewable term on the Board of Governors ends. He will speak in London later today on international imbalances at the U.K. government's Advancing Enterprise Conference.

Greenspan told Congress Nov. 3 that lowering the deficit further in the near term ``will be difficult in light of the need to pay for post-hurricane reconstruction and relief.''

In his remarks today, Greenspan favored spending cuts over tax increases as the best way to close the deficit.

``Tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth,'' he said. Such risks are ``sufficiently worrisome to warrant aiming, if at all possible,'' to use mainly spending cuts to close the gap.

Cost Projections

Greenspan cited projections from the White House Office of Management and Budget that spending on Social Security, Medicare and Medicaid will rise to 9.5 percent of the economy in 2015 and about 13 percent in 2030 from 8 percent in the current fiscal year. If health-care costs outpace economic growth, ``they will exert budget pressures that seem increasingly likely to make current fiscal policy unsustainable,'' he said.

``The soaring cost of medical care for an aging population is certain to place enormous demands on our nation's resources and to exert pressure on the budget that economic growth alone is unlikely to eliminate,'' Greenspan said.

As for other parts of the economy, an increasing deficit ``would drain a correspondingly growing volume of real resources from private capital formation and cast an ever-larger shadow over the growth of living standards,'' Greenspan said.

The Fed chairman said rules that automatically limit spending, deal with ``unanticipated budget outcomes'' and let Congress regularly assess the cost of programs may help narrow the deficit.