'True Revolution' Ahead for US Fiscal Future: Greenspan

The United States faces a "true revolution" in the choices it will have to make to secure its fiscal future now that the welfare state has run up against a "brick wall of economic reality," former Federal Reserve Chairman Alan Greenspan said Wednesday.

Alan Greenspan
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Alan Greenspan

In an opinion piece for the Financial Times, Greenspan argued that the political landscape in the United States was more divided than ever, resulting in political paralysis as the Tea Party’s influence had created "an effective veto of new legislation before the current heavily Republican House of Representatives".

The failure last year of the Super Committee — a congressional committee tasked with finding spending cuts to reduce the United States’ ballooning budget deficit — to reach a deal underscores this shift in U.S. politics, Greenspan said.

"A political tsunami has emerged out of our past in the form of the Tea Party, with its ethos reminiscent of rugged individualism and self-reliance," Greenspan wrote.

The Tea Party "has so altered the distribution of votes within Republican Party’s House caucus that the party’s center has moved closer to the Tea Party," he added.

And with an ideological battle raging over the future of the welfare state, “Congress, having enacted increases in entitlements without visible means of funding them, is on the brink of stalemate," Greenspan wrote.

The only viable long-term solution appears to be "a shift in federal entitlements programs to defined contribution status" — programs that require employees to make a set contribution to their pensions, Greenspan said.

"Cutting back on benefits that are ‘entitled’ is going to be a far harder political task than curbing federal discretionary spending. We have created a level of entitlements that will require a greater share of real resources to fulfill than the economy seems likely to be able to supply," he said.

Greenspan warned that the U.S. education system needed to improve and that the country needed to increase immigration quotas of skilled workers to avoid a slowdown in growth as a result of a drop in productivity growth.

"With rising concerns about income inequalities, it is a disgrace that these quotas are protecting upper income groups from competition," Greenspan wrote.