Greenspan Says McCain Tax Cuts Need Similar Budget Reductions

By Scott Lanman

Sept. 13 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the U.S. can't afford $3.3 trillion of tax cuts proposed by Republican presidential nominee John McCain without similar reductions in the federal budget.

Greenspan, a lifelong Republican and longtime friend of McCain, said on Bloomberg Television's ``Political Capital With Al Hunt'' that ``I'm not in favor of financing tax cuts with borrowed money.''

McCain has said he would balance the cost of most of his tax cuts with budget reductions, while providing few details beyond eliminating earmarks and other pork-barrel spending, which have totaled about $171 billion since 2001. Democratic nominee Barack Obama is proposing fewer tax cuts and more ambitious spending programs.

Greenspan also said the loss of investor confidence in Lehman Brothers Holdings Inc. would best be resolved by Wall Street firms acting without federal financial aid. ``If that can be done, that's the ideal solution,'' he said when asked if regulators should pressure private financial institutions to work out the problems at Lehman.

Bank of America Corp. led a list of potential bidders for Lehman, a person with knowledge of the talks said yesterday, even as the U.S. Treasury opposed funding a deal and the structure of any transaction remained in flux.

Greenspan said he has ``mixed feelings'' about a second government economic-stimulus bill after the U.S. provided a $168 billion package in February. While such an action may increase the budget deficit at a time when spending on retirees' medical benefits is about to cause ``big'' financial problems, it may also boost economic growth, he said.

Even Odds

Greenspan has said there's at least a 50 percent chance the U.S. economy will slide into a recession.

``There is no infinite piggy bank here,'' Greenspan said in the interview. It's ``far more important'' to use federal resources, if necessary, to shore up the financial system and end the credit crisis, as Treasury Secretary Henry Paulson did in taking over mortgage-finance companies Fannie Mae and Freddie Mac, averting a possible run on the system, Greenspan said.

House Speaker Nancy Pelosi and other Democrats in Congress have called for an additional $50 billion in economic stimulus. A request by General Motors Corp., Ford Motor Co. and their suppliers for at least $25 billion in government loans to help them shift to more fuel-efficient auto models will likely be included, Democrats said this week.

`Critical Need'

Greenspan's memoir, ``The Age of Turbulence,'' was released in a paperback version this week, a year after the first hardcover edition. In a new epilogue, the former Fed chief, who retired in 2006, cited a ``critical need'' to create procedures for bank bailouts that ensure there is no impact on the Fed's balance sheet and interest-rate policy.

In the interview, Greenspan, 82, said the ``most critical question'' is where to draw the line between companies that get government-led bailouts. It's impossible to rule out such actions completely, Greenspan said, citing crises such as the current one as a ``once-in-a-half century, once-in-a-century event'' that can't be avoided.

``If you want the system to stay together, there comes a time when you basically have to substitute sovereign credit for private credit to keep the system moving,'' Greenspan said. If a bailout is necessary, it's important that ``you do it in a way which essentially does not have major long-term consequences.''

Pork-Barrel Spending

McCain's proposal, outlined April 15, would extend President George W. Bush's tax cuts, reduce the top corporate rate, repeal the alternative minimum tax and double exemptions for dependents. That would be offset by eliminating pork-barrel spending, freezing a portion of the budget and saving from Medicare spending, McCain said at the time.

``I always have tied tax cuts to spending,'' Greenspan said. In 2001 testimony before Congress, Greenspan was widely interpreted to have endorsed Bush's proposal to cut taxes by $1.6 trillion over 10 years. In the book, Greenspan characterized his testimony as politically careless and said his words were misinterpreted.

Paul Volcker, Greenspan's predecessor as Fed chairman, has endorsed Obama, a first-term U.S. senator from Illinois, in the presidential election, and is serving as an economic adviser to the candidate.

Greenspan said the widening income disparity among Americans is a ``very serious'' issue, and requires both raising the pay of lower-income workers and reducing higher incomes. ``The best way of doing that is to remove what is essentially protectionism for those skilled workers in the United States who are helped by keeping out their competition,'' he said, referring to the issue of ``skilled immigration.''

The U.S. education system is ``critical'' to help ``cutting- edge technologies'' replace older industries that will be phased out over time, Greenspan said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net