There is No Paradox of Thrift
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As we formerly spendthrift Americans, prodded and frightened by economic hard times, are once again considering the possibilities of thrift, an old specter still haunts us. This specter is the "paradox of thrift." The basic idea is simple enough. The ethic of thrift, while seeming to be wise and rational for the individual, can become unwise and harmful for society. Behavior that seems good for the individual can hurt the group.
This idea has a long history, and finds expression in all economic weathers. But during economic downturns and hard times, the claim that thrift is paradoxical tends to become particularly loud, and boldly expressed.
It's certainly hard to miss this message these days in the United States. When U.S. household savings, after stagnating for years at rates approaching zero, recently registered a modest uptick, the headline in the Wall Street Journal warned: "Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woes." The New York Times recently ran a story on what a University of California professor quoted in the piece calls "a re-emergence of thrift as a value." Sound pretty good? Not so fast! Being thrifty, the Times informs us, can lead to a big social problem: "Indeed, economists call it the Paradox of Thrift." According to one of the people interviewed: "If everyone followed this advice, it would be catastrophic for the economy."