Paul Krugman has just mentioned that the “paradox of thrift” has shown up in the data. Now my opinion has moved over time, and I do think that the US is now experiencing a paradox of thrift – but his evidence appears to have nothing to do with this.
I believe that we are hitting a “paradox of thrift” as unemployment in the US is at 9.5% and rising – that is a hell of a lot of wasted labour input, and implies to me that there is a large failure in the labour market reducing national output. As a result, if lower individual private savings could bring some of these guys back into producing it is possible that total private savings could rise (although it is not a given).
However, Krugman puts in the following graph and says this shows the paradox of thrift:
Now just a sec here, yes net national savings has fallen but the fact that net (aggregate) private savings has risen doesn’t say this is a paradox of thrift. For me, we only have conclusive evidence of a paradox of thrift if individual private savings and a proportion of income rose – but total private savings fell! We haven’t got that here so the numbers seem ambiguous.
An alternate explanation for the above graph is: we had a shock that lowered national income temporarily and as a result net national savings must fall. However, the government decided to just in and borrow heaps. Because of “Ricardian equivalence” households responded to government borrowing by saving. In this case we have government borrowing up, total borrowing up, and private borrowing down – just like now.
As I’ve said – I think the paradox of thrift could be happening, and I realise the above movement could be the result of it happening. However, this isn’t conclusive evidence of it – show me that people are saving more of income but that total household savings has fallen and we have an UNDENIABLE paradox of thrift.