Colin Barr

Following the money in banking, economics, and Washington

Greenspan calls for tax hike

September 15, 2010: 9:00 AM ET

Longtime tax-cut advocate Alan Greenspan called for the government to raise taxes, arguing the best medicine for an ailing economy is a shrinking budget deficit.

Greenspan and Bush in 2005

The former Federal Reserve chief, appearing for an interview with media magnate Mort Zuckerman at the Council on Foreign Relations, warned that Americans are "fooling ourselves about how much time we have" to bring the ballooning U.S. fiscal deficit, exceeding $1 trillion in recent years, under control.

He shrugged off arguments in favor of additional stimulus spending, saying the big problem for the economy is "a heavy weight of uncertainty" that hasn't been eased by previous government spending efforts. That uncertainty is visible in businesses' decision to hold large cash balances and buy new software and equipment rather than investing in constructing new plants and the like.

Greenspan added that he believes the stimulus has been less effective than advertised. He said something on the order of a third to a half of existing stimulus spending has been counteracted by the effect of businesses sitting on their hands.

"The only way to get economy going again is to lift this pall," Greenspan said Wednesday.

Greenspan advocated that U.S. officials drop their bias for stimulus and move toward the stance seen in recent months in Europe, where governments have focused on cutting spending in a bid to put their finances on a more sustainable footing. He said delaying so-called fiscal consolidation for two years to allow the economy to recover, and the deficit to deepen, risks a debilitating shift in psychology.

He said this happened in 1979, when Treasury rates spiked as inflation fears took off. and he warned that policymakers must take steps now to prevent a recurrence.

"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."

Greenspan said he feels so strongly about the issue that he is now in favor of raising taxes -- a position he could hardly have imagined earlier in the decade, when he famously came out in favor of former President George W. Bush's 2001 and 2003 plans to cut taxes.

Greenspan said all the Bush tax cuts should be allowed to lapse -- a position that conflicts with Republicans' desire to extend the cuts and the Obama administration's efforts to let them stand for those making less than $250,000 annually. He said he still believes taxes should be cut, as a general principle, but not at a time when the government is digging a deeper and deeper fiscal hole.

"We should not have tax cuts with borrowed money," he said. Otherwise, he said, there are "very grave problems ahead."

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Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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