Obama's economic dilemma: Spend or save?

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - U.S. President Barack Obama needs to convince Americans to spend now and save later in order to get the U.S. economy back on solid footing.

With consumers fearful of losing their jobs and retirement nest eggs, this is no small task at home or abroad. And even if he is successful the end result is likely to be slower economic growth than what the world enjoyed before the financial crisis unleashed a global recession.

It involves changing not only the way U.S. consumers think about spending and saving, but also how the rest of the world views the world's biggest consumer market.

Economists have warned for years that the world economy was overly reliant on American consumption, which contributed to what they refer to as global imbalances -- unsustainably large deficits in the United States and surpluses in export-heavy countries such as China.

Obama, in a series of press conferences in Europe last week, put the world on notice that the "borrow-and-spend" U.S. economy must change its ways once the crisis had passed.

"In order for growth to be sustainable, it can't be based on speculation, it can't be based on overheated financial markets or overheated housing markets, or U.S. consumers maxing out on their credit cards, or us sustaining nonstop deficit spending as far as the eye can see," Obama said last week.

"The whole point is to move from a borrow-and-spend economy to a save-and-invest economy," he said, adding, "There is probably going to need to be a rebalancing of who is spending, who is saving, what are the overall trade patterns."

That may sound a little odd coming from a president who just passed the biggest government spending program in history and proposed a record-large budget deficit.

It reflects the dilemma Obama faces: While heavy spending may make sense for the economy in the short run, it is exactly the opposite of what needs to happen longer term.

When the recession ends, the United States will be left with a multi-trillion-dollar deficit and an aging population that will soon be collecting publicly funded retiree benefits.

"The only possible way I see of getting out of this crisis is going to set things up for potentially worse outcomes in the future," said Eswar Prasad, a senior fellow at the Brookings Institution and a former head of the China division at the International Monetary Fund.

DO THE OPPOSITE

With the U.S. unemployment rate at its highest in 25 years and the stock market turbulence decimating retirement funds, Americans are busily rebuilding savings, something that is essential to long-term economic stability but harmful in the middle of a deep recession.

That is what the stimulus package is aiming to address.

But the tougher task may come when the economy recovers and Obama turns his attention to reducing deficits as he has promised. Coaxing reluctant households to spend is far more politically popular than encouraging confident consumers to hold back for the greater good of the nation's finances.