By Walter Alarkon - 04/28/10 08:02 PM EDT
Greenspan made the remarks at an event in Washington on the country's fiscal situation sponsored by the Peter G. Peterson Foundation.
Greenspan said more rationing will be necessary unless the country makes changes to its political system, which he criticized for being unable to cut spending or find ways to pay for programs. He noted Congress' failure to pass a long-term extension of unemployment benefits because of a partisan argument over their cost. Senate Republicans have insisted that an extension of the jobless benefits for the rest of the year be paid for, while Democrats have said that the program qualifies as "emergency spending" that shouldn't be offset and should be passed as quickly as possible.
"We're coming to essentially a bankrupt process," he said. "Something has got to give. I'm fearful that medical care is the big 800-pound gorilla in the system, we have to shrink that one form or another."
Economic projections expect the costs of Medicare and Medicaid, the two big health entitlements, to be the main source of increased debt levels over the next few decades. The Congressional Budget Office has estimated the level of debt under President Barack Obama's policies to go from roughly 60 percent this year to 90 percent by 2020. That growth rate in debt is unsustainable, the White House and independent economists have said.
Greenspan said policy makers must do more to change the healthcare system from one that charges fees for service to one that bases payments on quality.
"You cannot have a fee-for-service, sub third-party payment system in an area where people find it's extra important to be in a position where they can get the care they want," he said.
Greenspan, who presided over robust economic growth in the 1990s while at the Fed, said the U.S. economy is now doing "okay" and "accelerating faster than we realize."
He suggested that inflation won't be a problem for another year.
"The global economy is still coming out of a very deep period of deflation, so the notion of inflation expectations pretty much at the moment [are] out of the system," he said.
Soon, the country will have to deal seriously with debt to avoid inflation problems, he said.
"We can't have a system in which you have very large deficits, a very large expansion in monetary base and not ultimately get inflation," he said. "It has never happened."