Former Federal Reserve Chairman Alan Greenspan predicts that the Republican-sponsored tax reform plan will do "very little" for economic growth.
He also warned that Congress should focus on the deficit or risk inflation roaring out of control.
"This is a terrible fiscal situation we've got ourselves into," Greenspan told CNBC.
To be sure, investors have been digesting the U.S. Senate’s approval on Saturday of the biggest tax law change since the 1980s, taking President Donald Trump a big step closer to slashing taxes for businesses and the rich while offering everyday Americans a mixed bag of changes.
In what would be the largest change to U.S. tax laws since the 1980s, Republicans want to add $1.4 trillion over 10 years to the $20 trillion national debt to finance changes that they say would further boost an already growing economy, Reuters explained.
However, Greenspan criticized the plan.
"The administration is doing tax cuts and a spending decrease, but he's doing them in the wrong order. What we need right now is to focus totally on reducing the debt," he said.
Greenspan said he worries of imbalances in wealth the plan could create.
"We're in a stage where if nothing is changed, we're about to go from stagnation to stagflation, with a significant rise in inflation and a wholly significant imbalance in the economy, which is very difficult to anticipate at this stage," he said. "But the outlook is not exactly terrific."
Asked how much he thought tax reform would contribute to growth, Greenspan said, "Very little. The tax cuts, remember, at the same increase the deficit. All the econometrics that I've seen over the years tell me that when you increase the deficit and you increase the demand for funds, you're crowding out capital investment, and capital investment is the key statistic determining output per hour, that is, productivity."
The median estimate of economists surveyed by Bloomberg is for the U.S. economy to expand 2.5 percent next year and 2.1 percent in 2019, after 2.2 percent growth in 2017.
Trump, speaking to reporters as he left the White House for New York hours after the pre-dawn vote, praised the Senate for passing “tremendous tax reform” and said “people are going to be very, very happy.”
Once the Senate and House of Representatives reconcile their respective versions of the legislation, he said, the resulting bill could cut the corporate tax rate from 35 percent “to 20 (percent). It could be 22 (percent) when it comes out. It could also be 20 (percent).”
Republican leaders predicted the tax cuts would encourage U.S. companies to invest more and boost economic growth, Reuters explained.
“We have an opportunity now to make America more competitive, to keep jobs from being shipped offshore and to provide substantial relief to the middle class,” said Mitch McConnell, the Republican leader in the Senate.
Meanwhile, many experts disagree with such a gloomy outlook for the economy because of the tax plan.
For his part, economist Larry Kudlow predicts Republican tax reform will translate into between 3 and 4 preen economic growth “for as far as the eye can see.”
In an interview aired Sunday with radio host John Catsimatidis on AM 970's "Cats Roundtable," Kudlow, a former adviser to Trump, declared new legislation from both the Senate and House that’s set to be hammered out in conference committee “is going to make all the difference in the world.”
“There are warts in this bill — I've never been crazy about the individual side — but the big economic bang is coming from the business tax cuts,” he said. “This is powerful stuff. The economics profession doesn't understand, nor does the Joint Tax Committee, nor does the [Congressional Budget Office], just how powerful this is going to be.”
“I believe you're looking at 3 percent to 4 percent economic growth for as far as the eye can see,” he said. “We're moving into a higher gear. And that's why I think people should hang on to their stocks."
He also reiterated his assertion that "Donald Trump has ended the war against business.”
“This tax cut bill is really proof positive,” he said, adding: “The big picture is going to be a big growth and big investment.… Foreign investment is going to start flowing down to the United States the way it did in the 1980s and 1990s… American companies offshore are going to come back and bring their cash home."
(Newsmax wire services contributed to this report).
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