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Alan Greenspan Speaks in New York

Published by The New York Sun on 2005-03-11

The chairman of the Federal Reserve System, Alan Greenspan, warned last night that America's burgeoning fiscal deficit was "unsustainable."

"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. Greenspan told a gathering of corporate executives assembled by the Council on Foreign Relations, and in informal remarks afterward.

His remarks came on a day when it was announced in Washington that the Federal fiscal deficit last month was $113.94 billion, a record. In February 2004, the figure was $96.76 billion. The deficit occurred because the government's receipts -- through taxes and other revenues -- of $100.87 billion, although some $9 billion higher than in February last year, wasn't enough to offset a spending increase of $26 billion on defense and other items.

The Bush Administration has projected that the fiscal deficit this year would be $427 billion, a record for the third straight year; it has promised to reduce the fiscal deficit by 50% in five years, a pledge that many economists are skeptical about in view of the growing expenditures on Iraq, defense, and the global war against terrorism. Critics of the administration are fearful that deficit reductions could come by spending cuts on social and education programs, and on entitlements -- especially since President Bush has said he would not raise taxes.

Mr. Greenspan coupled his concern for the budgetary deficit with alarm over what he characterized as an "exceptionally low domestic savings rate" in America.

"What we know for sure," Mr. Greenspan said, "is that the 30 million baby boomers who will reach 65 years of age over the next quarter-century are going to place enormous pressures on the ability of our economy to supply the real benefits promised to retirees under current law."

Moreover, the chairman said, "Our success in attracting savings from abroad may be masking the full effect on investment of deficient domestic saving."

There are two kinds of deficits, budgetary and current-account, or trade deficit (which this year is projected to reach $700 billion). These deficits are typically financed through the sale of government debt, such as Treasury bills, and other bonds.

He was not overly worried by the current-account, or trade, deficit, Mr. Greenspan said, because of the essential soundness of the American economy, an assertion he has made in recent testimony on Capitol Hill.

"Two federal reserve studies of large current-account adjustments in developed countries, the results of which are presumably applicable to the United States, suggest that market forces are likely to restore a more long-term sustainable current-account balance here without substantial disruption," he said. "I say this with one major caveat. Protectionism, some signs of which have emerged in recent years, could significantly erode global flexibility and, hence, undermine the global adjustment process. We are already experiencing pressure to slow down the expansion of trade."

In response to a question, the chairman said he was unwilling to be drawn on a discussion on the declining value of the dollar, which has contributed to making imports costlier -- although it has also made American goods cheaper for foreign buyers and thus increased American exports.

"I try to stay out of dollar forecasting," Mr. Greenspan said, in between sniffling into a handkerchief. His voice was raspy and he appeared to be nursing a cold.

However, Mr. Greenspan suggested that even America's ability to attract foreign buyers of its debt could be affected.

"The more-rapid aging of European and Japanese populations relative to the aging of the U.S. population should slow the flow of foreign savings available to the United States," he said.

Mr. Greenspan then turned to the issue of globalization, a market-oriented concept that he said he heartily endorsed because it expedited the freer flow of capital, ideas and people across borders.

But he cautioned: "A significant minority, trapped on the adverse side of the market's process of creative destruction, are suffering. This is an issue that needs to be more fully addressed if globalization is to sustain the public support it requires to make further progress."

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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