(Bloomberg News) Allowing taxes to rise would be a small price to pay to get U.S. lawmakers to accept spending cuts on entitlement programs, even if it leads to a "moderate recession," former Federal Reserve Chairman Alan Greenspan said today during an interview on Bloomberg Television and also at a panel discussion in Washington.
"Even if we have to pay the cost of a significant rise in taxes to get a significant slowing, and then decline, in social benefits that is a very cheap price," Greenspan said in an interview on Bloomberg Television's "In the Loop" with Betty Liu. "A large increase in taxes required to fund what is currently in the books is going to cause a recession," he said. "If we can get away with that as the only cost to this whole problem, I think that's a pretty good deal."
Greenspan, 86, earlier today joined Paul Volcker, also a former Fed chairman, for a discussion on fiscal policy sponsored by the nonpartisan Peter G. Peterson Foundation at the Newseum in Washington. They both said that if policy makers are unable to reach a compromise to address spending cuts and tax increases, markets will react negatively.
"This is a very dangerous situation," Greenspan said today at the event. "Markets may respond negatively before we even notice it, and that's going to cause a huge problem."
Greenspan said it would be a mistake to think that the U.S. is going to fix its "unstoppable" spending "without pain."
Expansion in the U.S. faces headwinds from a slowing global economy and the risk Congress won't reach a deal to avoid the so-called fiscal cliff, more than $600 billion of tax increases and federal spending cuts scheduled to kick in automatically in January. The drop in spending and rise in taxes could push the country back into recession, according to the nonpartisan Congressional Budget Office.
Gross domestic product, the value of all goods and services produced in the U.S., rose at a 2 percent annual rate in the third quarter after climbing 1.3 percent in the previous three months, the Commerce Department said Oct. 26.
Volcker, 85, said that the U.S. tax system is "broken" and "it's going to take some time" to reach a consensus among policy makers about how to redesign the system.
"It's not going to be January 2013, it's going to be 2014, 2015 before that gets put into place," said Volcker during the discussion, which was moderated by Peter Peterson, chairman of the foundation.
Volcker served as Fed chairman from 1979 to 1987 and Greenspan served in the role from 1987 until 2006.