Former Federal Reserve Chairman Alan Greenspan said the current debt crisis has him so scared that he is urging the United States to embrace a higher tax policy, similar to the one from the Clinton administration, if it is going to escape disaster.
If he had it his way, spending plans put forth by Rep. Paul Ryan, R-Wis., would be best but in reality, compromise rules the day when Democrats control the White House and Senate while Republicans control the House.
So what is best for the country includes a balance of spending and revenue found under President Bill Clinton.
“I am a long-standing small government, free-market economist for years and years back and I have never veered from that,” Greenspan tells CNBC.
(Getty Images photo)
But he believes that in order to raise revenue and close the debt gap, 1990s-era taxes must be reinstituted.
“The fact that I am in favor of going back to the Clinton tax structure is merely an indication of how scared I am about how this debt problem has emerged and it’s order of magnitude.”
Tax rates fell under former President George W. Bush, who instituted sweeping cuts, which last year were renewed in a deal between President Barack Obama and congressional Republicans. But the rates, particularly those on citizens earning more than $200,000 a year, are considered in danger depending on how next year's elections go. Congressional Democrats see higher taxes as a key to raising revenue to close the budget gap.
Greenspan said Congress has no choice but to approve raising the debt ceiling as the United States would risk catastrophe if it doesn't meet its obligations.
"The problem is we're all going and maneuvering around and as the days pass we're getting closer and closer" to economic disaster, said Greenspan, who called Washington brinkmanship on the issue an "extraordinarily dangerous problem for this country."
Recommendations made by a presidential commission co-chaired by Democrat Erskine Bowles and Republican Alan Simpson to reduce the deficit by about $4 trillion by 2020 via spending cuts and raising the retirement age should also be considered.
More draconian spending proposals coming from Ryan won’t happen.
“If I had my own way, I like the Ryan budget, in all respects, and I think that essentially that sort of thing would be what I would vote for if in fact I were voting. But the problem essentially is that it is not going to get a majority vote in Congress or be signed by the President of the United States.”
So a fallback position on which all can agree is better for the country.
The critical issue, Greenspan says, is making sure debt service of U.S. Treasurys continues as is.
In other words, don’t disrupt the system.
“I cannot conceive of any Secretary of the Treasury, or for that matter, any president, basically forfeiting on U.S. Treasury issues. That would create horrendous problems in the money markets and would probably cost the American taxpayer very significantly.”
Furthermore, more attention is needed to improve the country’s education system and changes to Medicare and Social Security are needed as well.
"It's not an issue of saying we have a choice for what we're going to do. We don't have the physical resources," Greenspan says.
Government is "guaranteeing their medical services, and I think that's not accurate. We cannot do that granted our lack of resources."
Treasury Secretary Tim Geithner has said without an increase in the $14.3 trillion debt limit by Aug. 2, the government will default.
However, Geithner says he is confident politicians from both sides of the aisle can agree on a spending plan.
"I'm confident two things are going to happen this summer," Geithner says, according to the Associated Press.
"One is we're going to avoid a default crisis, and we're going to reach agreement on our long-term fiscal plan."
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