The U.S. economy is mired at about 2 percent growth due to concern about the level of U.S. taxes required to fund the cost of government, according to former Federal Reserve Chairman Alan Greenspan.
Growing social benefits spending and budget deficits may be the primary cause of business trepidation for the long run because it opens the question as to how the government will fund itself, Greenspan said at a conference in New York hosted by The Economist.
“We’re stuck at a 2 percent growth, maybe 2.5 percent, maybe a little less, but all-in-all, well below potential, and we’ve been in that position for quite a significant period of time,” Greenspan said. Business “uncertainty tends to come to, when you press them, inability to make a judgment as to what the tax rates will be in the long-distant future.”
Greenspan said the cost of government is set to rise as a percentage of gross domestic product, fueled by programs including Social Security, Medicare and Medicaid, leading to larger federal deficits. During the current economic recovery, businesses are willing to commit to shorter-duration projects, he said, while investment for more than 20 years, mostly structures, “has come back only marginally.”
“It is very difficult politically to resolve this issue and what we’re seeing is it’s turning into a form of gridlock, which we saw in the shutdown, and probably going to shut down again,” Greenspan said.
Greenspan, 87, who preceded Ben S. Bernanke as chairman of the central bank, served at the Fed during an era dubbed the “Great Moderation” for its economic stability. In the final years of Greenspan’s 1987-2006 time at the Fed, a massive housing bubble developed as home prices more than doubled.
The bursting of that bubble led to a financial crisis that toppled companies such as Bear Stearns Cos. and Lehman Brothers Holdings Inc. and sent the nation’s unemployment soaring to 10 percent. It has since fallen to 7.2 percent.
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. President Barack Obama nominated Fed Vice Chairman Janet Yellen as the next head of the central bank.
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