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?