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.