Greenspan: Controlling gov’t debt will be painful

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WASHINGTON (AP) — Former Federal Reserve Chairman Alan Greenspan told Congress on Tuesday that new revenue raised from overhauling the tax code and eliminating loopholes should be used to reduce federal deficits, not to lower tax rates.

Greenspan told lawmakers that automatically paid benefit programs — such as Medicare and Medicaid — are growing faster than the government’s ability to pay for them. He said a tax overhaul must be part of any effort to fix the nation’s budget problem.

At a hearing of a Senate Finance Committee subcommittee, Sen. Mike Crapo, R-Idaho, said he believed the best use of savings from closing tax loopholes would be to lower rates.

“Ordinarily I’d agree with you,” Greenspan told him. “But we are in such precarious shape fiscally at this stage that I think it is essential we get the level of the deficit down as quickly as possible.”

Then, he said, spending should be brought under control, followed by tax cuts.

Greenspan’s comments, coming as President Barack Obama and Congress begin an autumn of dueling over job creation and debt reduction, seem to put him at odds with congressional Republicans who want to revamp the tax code by eliminating loopholes and lowering tax rates. Obama and congressional Democrats are more inclined to use savings from closing loopholes to pay for job creation and cutting the debt.

Greenspan, Fed chairman from 1987 to 2006, spent much of that period as a revered economic seer. He since has been criticized for failing to closely oversee the housing market and banking industry, which later collapsed and helped touch off the worst recession since the 1930s.

In 2001 at a time of large projected federal surpluses, his support for a $1.35 trillion, 10-year tax cut proposed by President George W. Bush provided it with crucial momentum as it moved through Congress.

On Tuesday, as he has done before, Greenspan said those tax cuts should be rescinded because of today’s deficit problems. This year’s deficit is expected to be about $1.3 trillion, and the government’s accumulated debt is more than $14 trillion.

He also said no new tax cuts should be enacted that add to deficits. Obama has called for cutting the payroll tax, but he has proposed paying for the cut by boosting levies on the wealthy.

“It doesn’t make sense except in very extraordinary circumstances to cut taxes funded by borrowed money,” Greenspan said. “I don’t think, at the end of the day, that works.”

Greenspan said there is no credible way to control the federal debt without inflicting economic pain, because policy makers have waited too long to deal with the burden that retiring baby boomers are starting to put on government programs.