TORONTO - Austerity measures are not the best path right now for the United States, the head of U.S. financial giant Goldman Sachs Group Inc said Wednesday.
"You can't austere yourself into a higher GDP," Goldman Sachs chairman and CEO Lloyd Blankfein told a business crowd in Toronto.
"I'm all for implementing budget changes that accelerate over the long term, but in the short term I wouldn't take too much money away from people or cut back on a lot of expenditure programs."
It's also not the time for another stimulus package, he said, but the key for success in the near term will be a balance: holding off on austerity measures while not taking away "the punch bowl."
He said the U.S. is approaching a "fiscal cliff" if warring politicians in Washington don't get together this fall to extend programs and tax cuts that have helped keep the economy out of recession.
The current problems are self-inflicted and within everyone's power to stop, Blankfein said.
He said the U.S. political system is bringing out the extremes within the two main parties — Republicans and Democrats — rather than the moderates.
It's a "defect" of the system, he said, recalling the debate over the U.S. federal government's debt ceiling last year.
"If moderation is a pejorative...and a guarantee of failure at the polls, which it seems to be in some cases, that's not a good environment for compromise," Blankfein said.
But, he said, these situations have a way of working out and even though the fiscal cliff lies ahead, it doesn't have to be a problem because the "basic guts" of it are good.
What hasn't worked out so far is the widening gap between the rich and the poor in the U.S., Blankfein said.
The two goals of the whole financial and economic system should be to expand the wealth of the world and distribute it fairly.
"No one's going to accuse me of being a socialist, and I'm not, and I don't believe in wealth redistribution over producing," Blankfein said.
"But over the long term if the system works well it should accomplish both goals and it hasn't accomplished enough of the second goal in the right way."
Turning to Europe, Blankfein said the last few months have shown that it has both the capacity and the political will to make the euro work.
"If this fails it will be 100 years before you can go back and think of a united Europe and the consequences of a disunited Europe feel very, very heavy to the leadership," he said.
The real challenge for the eurozone, as Blankfein sees it, is how to sponsor growth in the short term and at the same time promise market austerity and more balanced budgets in the long term.
"There's a chance of going off the rail there, but I think it's unlikely at this point," he said.
There are a lot of challenges and a lot of risks ahead in the global economy, Blankfein said, but his message was one of cautious optimism.
"The world's not going to come to an end," he said. "We're going to muddle through."