Congressional Video - Greenspan Testifies on Debt, Deficit Issues - Sep. 13, 2011
Solid clip. Runs 90 seconds.
WASHINGTON - Former Federal Reserve Chairman Alan Greenspan warned of “devastating” damage to financial markets unless Congress quickly begins to address the soaring national debt. He also reiterated his call for an increase in taxes.
The biggest drivers of the U.S. debt, Greenspan said, are entitlement programs such as Medicare and Medicaid whose funding mechanisms are failing to keep up with their fast-rising costs. He also seemed to indicate that President Obama’s health-care overhaul in 2009 will make the problem worse by contributing to an increase in entitlement spending.
The longtime Fed chief did not predict an imminent budget crisis, but he said the rapidly expanding debt is likely to handcuff the government sooner rather than later. The situation is so worrisome to Greenspan that he is now urging higher taxes despite his longtime opposition to such measures.
“What I do know is that if we presume that we have a year or two before starting serious long-term restraint, and we turn out to be wrong in that optimism, the impact on financial markets could be devastating,” Greenspan told senators during a hearing by the Finance Committee on how to reform the U.S. tax code.
Greenspan said Congress could partly close the budget gap by letting tax cuts passed under President George W. Bush in 2001 and 2003 expire. The Fed chairman, who supported those tax cuts at the time, has previously suggested letting those tax cuts end. They were extended for two years by President Obama at the end of 2010.
At the same time, Greenspan also called for the elimination of most tax subsidies for business. Such tax expenditures are estimated to cost the federal government more than $1 trillion annually.
“Subsidies of whatever stripe, distort the optimum functioning of markets, and ultimately, the standard of living of society as whole,” he said.
To offset the increase in business taxes from the end of exemptions, Greenspan said lawmakers should lower corporate tax rates to help boost growth and job creation.
Yet Greenspan cautioned against cutting taxes before cutting spending, paying for the tax reductions with borrowed money.
The long-term growth of the U.S. is likely to taper off, he said, because America’s working-age population is also slowing. As a result, lawmakers can’t bank on faster growth to solve most of the nation’s financial problems, he cautioned.
During his testimony Greenspan put in a plug for the sweeping budget proposal by conservative Rep. Paul Ryan, R-Wisc., though he acknowledged it lacks the votes to pass.
Greenspan also praised the bipartisan Simpson-Bowles plan that calls for a combination of sharp spending cuts and higher taxes to address the long-term budget gap.
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