WASHINGTON—The U.S. economy, while not poised to grow as rapidly as emerging nations and saddled with a $1.4 trillion a year deficit, has the fundamentals in place and “the resiliency and strength” to reclaim its position as the leading economy of the world, Treasury Secretary Timothy Geithner told attendees at the Investment Company Institute’s General Membership Meeting here Wednesday.

“The U.S. makes up one-fifth of global GDP and is only 5% of the world’s population,” Geithner said. “It is very important that the U.S. is restored as the leading economy in the world. I am very confident that we can again become the world’s leader and participate in global growth that will be driven by China and India. But we cannot do that without checks and balances on risk. We cannot do that without regaining the world’s trust. We cannot do that without setting spending caps to and a tax reform plan to meet President Obama’s goal to reduce the deficit by $4 trillion over the next 12 years.”

Asked by ICI President and CEO Paul Schott Stevens how the government can improve GDP growth, which has averaged 2.8% in the past seven quarters, and lower the 8.8% unemployment rate, Geither said, “The three biggest economic challenges are making sure the U.S. economy is growing as rapidly as it can; repairing, restructuring and reforming the financial system; and bringing the deficit back toward a balance. It is the right and necessary time to build bipartisan support to reduce the U.S. debt. This is not something we can delay.”

Geithner continued: “ But we must address the deficit in a balanced manner,  set forth a tax reform plan and obtain bipartisan political leadership into support so that we are still able to invest in education, innovation and infrastructure, and meet out obligations to the disabled and the poor.  As more Americans retire and live longer, we will face higher healthcare costs. Thus, while reducing the deficit, we must set clear savings targets for Medicare and Medicaid. We must manage all of these challenges in a balanced manner that is sensible, doesn’t damage future growth and is fair to people. This is not a challenge of math or accounting but of composition.”

The Treasury Secretary said the deficit was the result not just of the TARP and other emergency financial measures that the government put in place to support U.S. capital markets and the economy following the financial crisis, but also of “decisions made a decade beforehand.”

In answer to Stevens’ question as to whether Geithner fears higher energy and food prices are a sign of impending inflation, Geithner said he is confident that the Federal Reserve, Congress and the executive branch will do whatever they can to keep inflation low to instill confidence in the U.S. economy.

Because the government responded so quickly to the financial crisis, the U.S. is emerging from the financial crisis ahead of all other nations, and that is another key factor that will keep inflation low, Geithner added.

Stevens asked Geithner if the Treasury will protect the tax incentives in IRAs and 401(k)s and permit money market funds to maintain their $1 NAV. The Treasury Secretary said the government “respects the incentive to save,” and he noted that the savings rate in the U.S. is between 5% and 6%, whereas it was negative before the crisis. “We would like to build on that,” he said.

Geithner was less forthcoming on further reforms to money market funds, expressing his confidence in the “transparency” and measured approach to the issue that SEC Chairman Mary Schapiro is taking.

As for the Financial Stability Oversight Council, Geithner said its most important goal is to assure that “leveraging constraints and better shock absorbers are imposed on investment banks and other financial institutions that engage in leveraging. We still need to define which other institutions need to be regulated,” he said. It is equally important for the FSOC to remain flexible, Geithner added.

“You can’t lock it in and never change the rules because the markets will adapt and arbitrage risk on the margins,” Geithner said. “That vulnerability is what is guiding this reform .”


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