Is Saving Bad? The Paradox of Thrift Says Yes
I was watching the morning news last weekend and an interesting debate broke out between the panelists about the ailing economy.
For so long, credit has been handed out like free t-shirts. It’s part of the reason we eventually got ourselves into this huge financial mess: easy, irresponsible credit.
Couple that with the US having a negative savings rate, and it adds up to some irresponsible behavior from institutions and from citizens.
Now the latest data is showing that people are starting to become smarter with their dough—they’re saving more of it instead of spending it. Which is good, because, well—just ask any personal-finance writer out there: you want to spend less than you make.
That’s our first commandment.
But with the economy wearing cement shoes as it is right now, it needs people to spend money—to buy things, to keep the gears turning.
Where do you draw the line between being financially responsible and doing your part to help the economy?
This is what’s known as the Paradox of Thrift, and it’s one of the issues the panel on the news started to discuss. From the Wikipedia article:
If a population saves more money (that is the marginal propensity to save increases across all income levels), then total revenues for companies will decline. This decrease in economic growth means fewer salary increases and perhaps downsizing. Eventually the population’s total savings will have remained the same or even declined because of lower incomes and a weaker economy.
Here are a couple other good reads on the Paradox of Thrift:
There are some good points on both sides of the argument, but I’m inclined to go with what makes more sense and what we as individuals can control—so I’m all about saving as much as you can. Put it in the bank so the bank can loan to the people that want to spend, that way money isn’t just sitting on the sidelines.
With the personal savings rate finally seeing a small increase, the last thing we need is some old economics theory to say to us: “No no no, you had it right the first time—STOP SAVING!”
What’s your take?
This post was included in the Festival of Frugality over at Broke Grad Student.
February 2nd, 2009 at 8:50 am
I’m not a fan of this paradox. It only supports the keynesian economic view that consumption should be the backbone of the economy.
Look at it from a different perspective. If you save more then you keep more deposits with the bank. Deposits at the bank are used for lending. More lending creates more jobs, more jobs create more consumers.
I think there is a sweet spot between consumption and saving that we must find to have a stable economy. The keynesians will argue this isn’t true, but that argument is simply based on the fact we’ve never tried it before.
February 2nd, 2009 at 9:47 am
The biggest reason for the increase in savings is that people have stopped paying on their upside-down mortgages. i.e. All things being equal, I still have a job, no major expenses, I just decide not to continue paying on the upside down loan… SO
If I stop paying my 3500 dollar mortgage until they kick me out (1-2 years)
Am I really saving?
These trends have been with us for over 30 years, no way we change direction on a whim.
The rest of the world lives by the following statement: “You are worth what you own” In the USA though, “You are worth what you owe”. Not good.
Best,
February 7th, 2009 at 5:51 am
[...] Is Saving Bad? The Paradox of Thrift Says Yes An extremely interesting post at The Writer’s Coin discusses why it may be in your best interest to spend, rather than save. Like he said, a good argument is presented on both sides, but I’m a saver by nature and that’s a character trait that won’t be changing anytime soon, struggling economy or not! [...]
February 10th, 2009 at 6:03 am
[...] Writer asks Is Saving Bad? The Paradox of Thrift Says Yes at The Writer’s Coin. In these tough financial times, people are saving more money instead of [...]
March 4th, 2009 at 10:04 am
Checkout the Mises institute at http://www.mises.org
The Austrian school of economics maintains that this view is completely off base. Savings is really just future consumption that is put on hold to finance increases in productive capacity. If you have no savings, GDP cannot grow. What the Keynesian model neglects to address is the fact that savings is the source of capital for investment. This whole economic mess is due to a lack of savings in the first place. This recession will last until our savings level comes back up to acceptable levels.