The government should refrain from extending any of the Bush-era tax cuts and from approving any more fiscal stimulus, says former Federal Reserve Chairman Alan Greenspan.
That’s because cutting the budget deficit should be top priority, he said in recent remarks to the Council on Foreign Relations. The deficit is slated to exceed $1.3 trillion for the fiscal year ending Sept. 30.
"I don't think we have time to wait," Greenspan said. "Our choice is not between good and bad, it's between terrible and worse."
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Greenspan also says the increase of gold prices to a new record high of above $1,280 also should be watched.
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Gold still constitutes the "ultimate means of payment," he said. The metal’s rise "is a signal there is a problem with respect to currency markets."
While that problem is now small, gold’s rise could be "the canary in the coal mine to keep an eye on," Greenspan said.
As for fiscal stimulus, he said the $862 billion package implemented last year has produced fewer sparks for the economy than almost anyone expected.
“I’m not saying the stimulus is not working, I’m saying it’s working far less than anyone anticipated.”
Greenspan’s thinking on taxes has taken a 180-degree turn since 2001 and 2003, when tax cuts proposed by President George W. Bush were adopted. Greenspan was a strong cheerleader for those reductions.
But now, with the government’s debt expected to hit 62 percent of GDP by the end of the month, Greenspan’s singing a different tune.
"We should not have tax cuts with borrowed money," he said. Otherwise, there are "very grave problems ahead."
The outlook for extending the Bush tax cuts has turned quite murky. They will expire Jan. 1 unless Congress acts. But Democrats and Republicans are divided even within their own parties about how to proceed.
President Barack Obama has proposed continuing the decreases only for those with annual income of less than $200,000, while most Republicans seek to extend the cuts for everyone. But no consensus has yet emerged.
Greenspan says the most important task is to remove the “heavy weight of uncertainty" that has been created by increased spending and decreased taxes. "The only way to get the economy going again is to lift this pall," he said.
Economic growth slid to 1.4 percent in the second quarter from 3.7 percent in the first.
The government has injected itself too far into the economy, he says. “We have to find a way to settle down the extent of activism that is currently going on and allow this economy to heal.”
Alice Rivlin, director of the Congressional Budget Office under President Clinton, offered some specific suggestions to cut the deficit in a recent speech.
"Can we fix the budget deficit? I think we can, I think we must, I don't even think it's all that hard," she said.
Rivlin favors an increase in the retirement age to trim government spending and a tax overhaul/simplification, perhaps including a national sales tax, among other steps.
"We can't fix it on the spending side alone," she said. "We can't fix it all on the revenue side either."
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