Bush shocked many lawmakers and analysts last week when he announced a tax cut and budget proposal that his administration estimated would push up the annual deficit to $300 billion.
Greenspan avoided direct criticism of Bush's proposal. In fact, he endorsed the centerpiece of the tax-cut package, the proposed elimination of the tax on dividend payments to investors.
But he said that such a step should be taken only in conjunction with other steps that would offset the loss in tax revenue. More generally, he warned that budget constraints would force Congress to make difficult choices among a bevy of otherwise meritorious tax-cut and spending proposals in the years ahead.
"The trouble is that when you add them all up, they come to a total larger than the fiscal capacity of the country," he said.
"We ought to be . . . very careful not to allow deficits to get out of hand," he added, warning that a growing population of retirees means the federal government will face soaring Social Security and Medicare costs in about a decade.
A budget deficit of $100 billion to $200 billion is manageable, Greenspan said, implying that anything larger risks a dangerous increase in the federal government's debt.
"A rise in the debt increases the amount of interest payments, which in turn increases the debt still further, and there is an accelerating pattern after you reach a certain point of no return," he said.
Some tax-cut supporters say that budget deficits are not important. They dismiss the argument that deficits push up long-term interest rates, thereby harming economic growth.
Instead, they say that tax cuts will promote economic growth, and that a strong economy is the key factor in generating budget surpluses.
Greenspan, a leading proponent of President Clinton's deficit-reduction strategy in the 1990s, flatly rejected the conservative arguments.
"There is no question that if deficits go up, contrary to what some have said, it does affect long-term interest rates, it does have a negative impact on the economy," he said.
"Faster economic growth, doubtless, would make deficits far easier to contain, but faster economic growth alone is not likely to be the full solution to currently projected long-term deficits," he added.
The Fed projected yesterday that the economy would grow 3.25 to 3.5 percent this year, though the unemployment rate would remain in the 5.75 to 6 percent range. Merrill Lynch & Co. Inc., which described the forecast as "optimistic," projects only 2.75 percent growth and a rise in unemployment to 6.3 percent.
Greenspan said he believed that the economy would bounce back whenever the Iraqi crisis ended. Congress should wait to see how the economy performs after that before deciding whether another economic-stimulus package is needed, he said.
"Unless and until we can make a judgment as to whether, in fact, there is underlying deterioration going on - and my own judgment is, I suspect not - then stimulus is actually premature," he said.
Contact staff writer Ken Moritsugu at firstname.lastname@example.org.