The Paradox of Thrift

Description

Americans find themselves in a situation economists describe as 'The Paradox of Thrift:' Saving is good for the household, but bad for the overall economy.

Transcript
The Paradox of Thrift For years, we Americans have been defined by our urge to spend. We max out our credit cards, drained our homes of equity, wind our roads with mega malls. The American consumer was the engine for economies all around the world. Well, what a difference a little economic crisis makes? Consumer spending fell more than 3 ½ percent in the last half of last year, the equivalent of 2 weeks pay; that’s the first drop since 1991. Debt declined for the first time since 1953 and savings rose from less than zero in 2006 to an annual rate of about 3.6% in December. That must be good news, right? Thrift? Good! Being buried in debt? Bad! Look around. Retailers from shopper image to Foot Locker to Wickes Furniture are closing down stores by the hundreds. GM is on the verge of bankruptcy. The government passed an 800 billion dollar Stimulus Law to try to get us to please, please spend again. In Economics, this is known as the Paradox of Thrift, saving is good for the household bad for the economy overall. But the economy would just have to cope. The stimulus package may supply a temporary jolt but all the president’s men can’t put the American spendthrift back together. We’re too spooked by what’s happened. And even if we wanted to resume our spending spree, banks are too spooked to lend us the money. Higher savings will hurt in the short while but the economy needs it. Savings help finance business investment and fund long term obligations like Social Security, used productively, they turn into a higher standard of living and sucking it up and saving certainly beats handing over our economic destiny to the Chinese. Back in 1994, Americans saved more than 8% of their income. That was the year when the incentive to spend in the form of easy credit begins to outweigh the incentives to save. Well the balance has tilted back again; not now but ultimately, that will be a very good job.
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