When you read the papers, good news turns bad with a turn of a phrase.
The Wall Street Journal, reporting on a general decrease in private spending, cannot help but mention that old alleged problem of “the paradox of thrift.”
“Usually,” writes Kelley Evans, ”frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation’s standard of living. But in a recession, increased saving — or its flip side, decreased spending — can exacerbate the economy’s woes.”
Evans goes on, elaborating about the community-wide effects of cutting back spending: Consumer-oriented businesses going out of business.
So, do you see the paradox? In normal times, we say savings is good. But when things are bad, and people wise up to save more — or pay off debt — businesses relying on previous levels of spending are hurt.
Household debt has gone down for the first time since 1952. That’s good for the future, because this savings will allow future investment. For right now, though, the savings and debt reduction come at a social cost.
But this will go on only as long as the rate of savings shifts. When people’s rates of savings to spending stabilizes at a new level, the economy will be able to stabilize, too.
Not so much a paradox as a painful adjustment period. That’s life.
This is Common Sense. I’m Paul Jacob.
6 replies on “No Paradox?”
As a Depression Baby I learned that it was easy to survive in tough economic times. I taught this to my children: Spend less than you earn. No MBA required.
Unfortunately, in this credit card society people are spending more than they earn — a mania which will, ultimately, result in a panic. Now if people would learn this and pass that knowledge on to academia, Congress and all politicians there would be no problems. But, most people today want to be victims and pass their responsibilities to the State where the Socialist Obamas of the world will save them. You can run but can’t hide.
The only situation where savings are bad for the economy is when the money saved is placed under the matress or in the freezer of the refrigerator. When savings are placed in a bank they become available for investment or loans. The economy benefits from savings in good times or bad except when the savings are sequestered and are unavailable. Your column is very much a fallacy.
I agree with Sheldon. The “Paradox of Thrift” is actually a fallacy. This was created by Keynes in the early 1900’s. The problem was his assumptions. He assumed that when people save they stuff it in a mattress as Sheldon mentioned. The reality is that when people save they put it into a bank or other financial institution which subsequently lends it out to producers to use to build their business, i.e. hire workers, buy production goods etc. However, even if a person were to save by sticking money under their mattress it would essentially reduce the money supply and cause a decrease in consumer goods prices — thus spurring on consumer spending at these lower prices.
Economist Bob Murphy fully debunks the “Paradox Of Thrift” here:
My parents were the ones who struggled through the depression of the 30’s and taught our family the importance of staying solvent.
We have had a family rule to not charge unless we have the money in the bank to pay the charge. IE: We charge for things like Airline tickets and things related to travel. Result? Money in the bank and although I got laid off and my husband got laid off this past year we are solvent and not in a panic. (We also were smart enough NOT to buy a house we couldn’t aford)
Why save? The bastards in DC are pouring $$$ into the system that will NEVER be absorbed. My parents lived through or were directly influenced by 3 hyperinflations in Germany (post-WW I, Depression and post-WW II). What they’re doing in DC is EXACTLY what every out of control gov’t does: print money to keep the farce running for one more day. The only way this debt will be accounted for is by inflation soon to be followed by hyperinflation. What will your nest-egg be worth then, the one you’ve been saving and scrimping for years like a fool.