Former Federal Reserve chief Alan Greenspan, reversing a long-standing aversion to higher taxes, said Wednesday tax rates must rise and the fiscal stimulus wound down in order to reduce the U.S. budget deficit and allow private investment to expand.
"I am in favor for the first time in my memory of raising taxes," Greenspan told an audience at the Council on Foreign Relations in New York. He said the economy could not recover while the high deficit remains high.
Greenspan warned that the deficit, swollen by massive stimulus spending, was crowding out capital investment. We "must find a way to simmer down fiscal activism and allow the economy to heal," he said, adding that stimulus spending had been far less successful than anticipated.
Bush era tax cuts are set to expire at the end of this year. President Obama says he wants to cap taxes on middle and lower income households but allow taxes rates to revert to higher levels for the wealthy.
The issue is key in the forthcoming mid-term elections in November, with the Republicans pushing for tax cuts to remain in place across the board. They say higher rates on the wealthy would hamper the recovery.
"We should not have tax cuts with borrowed money," said Greenspan. "We should have tax cuts but only in the context of bringing the deficit down."
He said the choice over whether to raise taxes was "between terrible or worse." Letting the budget deficit run rampant was the worse option, he said.
Greenspan headed the Federal Reserve for almost 19 years until he retired in 2006. The 84-year old Greenspan was regarded as an oracle on the economy before the financial crisis.
However, suggestions that his loose-money policies in the early 2000s helped inflate the U.S. housing bubble hurt his reputation. In a Time Magazine list of people responsible for the economic crisis, Greenspan was named No. 3.
Greenspan said the chances the U.S. economy would slide back into recession were clearly receding but warned that "all bets were off" if house prices started to fall further because of high levels of unsold inventory.
He also said new rules to impose capital increases on banks were unlikely to cause a credit crunch as banks rush to raise capital as some have suggested.