A Shout-out for Savings in a Primetime Press Conference

In a primetime news conference designed mainly to promote and defend the pending economic recovery bill, I expected to hear a few curveballs from the media. What was fairly unexpected, however, was a chunk of time devoted to the delicate balance between consumer spending and savings in the context of economic recovery. But sure enough, near the halfway point of the broadcast, there was Chuck Todd of NBC News playing the role of inquisitive asset-builder. Here’s the exchange (my emphasis added):

Chuck Todd, NBC News: Thank you, Mr. President. In your opening remarks, you talked about that, if your plan works the way you want it to work, it’s going to increase consumer spending. But isn’t consumer spending, or overspending, how we got into this mess? And if people get money back into their pockets, do you not want them saving it or paying down debt first before they start spending money into the economy?

President Obama: Well, first of all, I don’t think it’s accurate to say that consumer spending got us into this mess. What got us into this mess initially were banks taking exorbitant, wild risks with other people’s monies based on shaky assets and because of the enormous leverage, where they had $1 worth of assets and they were betting $30 on that $1, what we had was a crisis in the financial system.

That led to a contraction of credit, which, in turn, meant businesses couldn’t make payroll or make inventories, which meant that everybody became uncertain about the future of the economy, so people started making decisions accordingly, reducing investment, initiating layoffs, which, in turn, made things worse.

Now, you are making a legitimate point, Chuck, about the fact that our savings rate has declined and this economy has been driven by consumer spending for a very long time. And that’s not going to be sustainable.

You know, if — if all we’re doing is spending and we’re not making things, then over time other countries are going to get tired of lending us money and eventually the party’s going to be over. Well, in fact, the party now is over.

And so the — the sequence of how we’re approaching this is as follows. Our immediate job is to stop the downward spiral, and that means putting money into consumers’ pockets. It means loosening up credit.

It means putting forward investments that not only employ people immediately, but also lay the groundwork for long-term economic growth.

…

Now, what we are going to also have to do is to make sure that, as soon as the economy stabilizes, investment begins again, we’re no longer contracting but we’re growing, that our mid-term and long-term budget is dealt with, and I think the same is true for individual consumers.

Right now, they’re — they’re just trying to figure out, how do I make sure that, if I lose my job, you know, I’m still going to be able to make my mortgage payments? Or they’re worried about, how am I going to pay next month’s bills? So they’re not engaging in a lot of long-term financial planning.

Once the economy stabilizes and people are less fearful, then I do think that we’re going to have to start thinking about, how do we operate more prudently? Because there’s no such thing as a free lunch.

So if — if you want to get — if you want to buy a house, then putting zero down and buying a house that is probably not affordable for you in case something goes wrong, that’s something that has to be reconsidered. So we’re going to have to change our — our bad habits.

But right now, the key is making sure that we pull ourselves out of the economic slump that we’re in.

The tone and the sequencing of the answer seems right, and hints that in the midst of trying to jumpstart the economy, the President takes seriously the importance of individual savings as a long-term strategy for economic stability. While it is true that declining consumer spending on its own could have a negative effect on an already shaky economy, it is also certainly the case that a reemphasis on savings will facilitate long-term growth.

The balance and timing are tricky, but the argument can easily be made that, in a time of de-facto belt-tightening by the average American consumer, the federal government should fill the void being left by consumers. This makes it possible for people to save without shouldering the burden of economic recovery now, and it lays the groundwork for policy that incentivizes responsible behavior by consumers and businesses down the road.