Debating the paradox of thrift
March 4th, 2009
I’m sick today – and since economics and sickness don’t really roll together I can’t say much.
However, it looks like Econlog has been busy with authors discussing the paradox of thrift.
Robert Murphy is against it, Bryan Caplan is against a policy solution, and Arnold Kling disagrees with both of them.
How I feel about this has been described previously here, and summed up here. Feel free to say what you think about the issue here 
Categories: Macroeconomics
There is a long term living beyond its means problem in the USA. When you do that there will be problems. We have been “solving” that problem by being non-thrifty and spending money we don’t have for at least 20 years. While I don’t mind the government adopting an economic policy to spend when the economy is very weak (say now) in principle.
I think there is a huge problem with a policy of always being un-thrifty and always spending money you don’t have to create additional demand. And that is what the USA has been doing. If you want to adopt a policy to spend money when the economy is in trouble you have to save up the resources to do so when times are good.
With regard cutting back I think of communications first (mobile phone, broadband) If I stopped them (versus my wifes expensive haicuts*) what would be the effect on the economy?. I can see the hairdresser but Telecom is just a big amorphous (greedy) beast.
* having suffered $10 haircuts for a while I know the effect on the psyche.
“If you want to adopt a policy to spend money when the economy is in trouble you have to save up the resources to do so when times are good.”
The public merely mis-interpreted their wealth – because of an unknown housing bubble. It is unfortunate – but there is the potential for households to “over-react” and cut back spending to the point where we get unemployed resources.
Fundamentally, as long as the resources are employed in their most profitable use then there is no issue with “too much” saving – however, when this is not the case we thrown the cat amongst the pigeons.
“With regard cutting back I think of communications first (mobile phone, broadband) If I stopped them (versus my wifes expensive haicuts*) what would be the effect on the economy?. I can see the hairdresser but Telecom is just a big amorphous (greedy) beast.”
The effect on welfare merely depends on how much of the decline in consumption influences how happy you are. If we were to strictly think about the economy – then for YOUR decision we are only interested in the relative price of the different activities, and the relative costs of producing them.
Actually I was thinking about the effect of cutting back on other people. I don’t think of Telecom as (innocent) people (… tricky devils in fact)whereas a hairdresser is someone from my community.
Hi John,
Well, if you value your hairdresser more than the employees of Telecom I am sure you will be willing to pay more for their service.