Treasury Secretary Timothy Geithner said Wednesday in Chicago that improvement in the economy is "promising" after strong gains in investment and exports, but he emphasized that aggressive deficit cutting now could undermine the recovery.
Speaking at the Economic Club of Chicago, Geithner noted that the nation must deal with the deficit but warned against "using the fear of future deficits" to cut as deeply as Republicans have proposed into critical government functions.
"Cutting deeply into the safety net for low-income Americans is not financially necessary and cannot plausibly help strengthen economic growth," he said. "Cutting government investments in education and infrastructure and basic science is not a growth strategy."
"This strategy is a recipe to make us a declining power -- a less exceptional nation," he added. "It is a dark and pessimistic vision of America."
Geithner said the U.S. has done a better job than other economies in "making adjustments after the financial crisis." He also noted that business investment in equipment and software is up by 33 percent over the past 2.5 years, and exports have grown 24 percent in real terms in the period.
"Manufacturing is coming back, with factory payrolls up by more than 400,000 since the start of 2010," he said. Still, he noted, unemployment remains high and too many Americans are still facing difficulty despite progress in paying down debt.
"Household debt is down 17 percentage points relative to income since before the crisis," he said.
He urged political leaders to be cautious about moving too quickly with extreme deficit reduction because the lesson of past financial crises has been that cuts too early bring about new recessions.
Even before the financial crisis, 20 percent of American children were living in poverty, he said, and the government must provide children good schools and health care.
Eventually, he expects deficit cutting to follow the basic format of the Simpson-Bowles National Commission on Fiscal Responsibility and Reform. But he said the commission's proposed cuts in Medicare and defense were deeper than the administration will accept.
He challenged business leaders critical of higher taxes to understand they are necessary to cut the deficit.
"The changes are very modest, and on the richest Americans the effective tax rate is still very low," he said. "Life is about alternatives. If you do not like the plan, you must ask: Where are you willing to find another $1.5 trillion?"
He also urged political leaders not to repeat last summer's fighting when Congress this year will have to extend the nation's debt ceiling. Last summer's debate, he said, was "damaging for confidence" and held the economy back.
Geithner defended Dodd-Frank overhauls in the financial system along with those for health care.
He said financial laws have reduced the risk of another crisis, and U.S. banks are in good shape after being required to build up capital.
"In my judgment, reforms are absolutely essential to protect the country from a financial crisis," he said.
Europe is behind the U.S. in addressing weakness in the banking system, but he said he is pleased that eurozone leaders have set up a "firewall" to prevent the spread of financial problems while implementing reforms to strengthen economic growth and the eurozone structure.
When asked if the eurozone will hold together, he responded, "They've decided they will do whatever it takes, and they have the ability to do it."
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