Greenspan optimistic on job creation but concerned about deficit

While remaining upbeat about the prospects for a U.S. economic recovery, Federal Reserve Chairman Alan Greenspan sounded a cautionary note Thursday about the dangers of the federal government’s growing budget deficit.

“The … relatively optimistic short-term outlook for the U.S. economy is playing out against a backdrop of growing longer-term concern in financial markets about our federal budget,” he said in a speech delivered via satellite to the Securities Industry Association annual meeting in Boca Raton, Fla.

If uncontrolled, spiraling budget deficits could push up interest rates and become a drag on economic growth. They already have increased the federal government’s debt, Greenspan noted, making it that much harder to handle a coming explosion in Medicare and Social Security costs when baby boomers _ those born between 1946 and 1964 _ retire.

Those costs threaten to put the federal budget on the path of ever-growing deficits, Greenspan warned. “Such a development could have notable, destabilizing effects on the economy,” he said.

The deficit reached $374 billion in the fiscal year that ended Sept. 30 and is projected to rise to about $500 billion in the current fiscal year. That would be equal to about 4.4 percent of the U.S. economy, a level not seen since the early 1990s.

Greenspan appeared to be trying to pressure Congress and President Bush to address the expanding deficit.

“Recent budget deliberations are not encouraging,” Greenspan said. “The current debate appears to be about how much to cut taxes or how much to increase spending. No significant constituency seems to support taking the actions that will be necessary to move toward _ and, one hopes, achieve _ budget balance.”

Treasury Secretary John Snow said Thursday that the Bush administration was “serious” about reducing the deficit. He cited the fact that interest rates on bonds remain relatively low as evidence that financial markets have confidence in the administration’s ability to address the deficit.

“If the markets thought these deficits were becoming unmanageable, we wouldn’t have the lowest interest rates in 40 years,” he said at a breakfast meeting with reporters.

Analysts said the key for the bond market was whether the deficit would peak this year, as the Bush administration projected, or would keep going up.

Right now, market players sense that the deficit could peak this year, but they remain somewhat nervous, said David Greenlaw, a bond market economist at the Morgan Stanley investment bank in New York. His firm projects the deficit will hit $490 billion this fiscal year, then tail off to $450 billion the following year.

Still, he said, “there is some element of concern about the prospects of rising deficits.”

On the economy, Greenspan was cautiously optimistic that companies would begin to hire. He noted that inventory levels have fallen in many industries, so firms may take on more workers to rebuild their stocks.

In one positive sign, the Labor Department reported Thursday that new applications for unemployment benefits dropped sharply last week to 348,000 from 391,000 the previous week.

“The odds … increasingly favor a revival in job creation,” Greenspan said.