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The paradox of thrift ::
There was yet another economist blathering sourly about the “paradox of thrift” on NPR’s Marketplace just now. This theory says that if everyone cuts back on their spending, this has the net effect of slowing down the economy’s recovery.
An Austrian economist would reply in more academic terms, but in common-sense terms, consider this.
Collectively, consumers have been spending beyond their means and are now reducing their spending. The first net effect of reducing spending is to reduce their need to dig themselves into deeper holes of debt. This decreases defaults on consumer debt, which decreases bank losses, which decreases government handouts to banks.
When consumers begin to spend less than they make, they save more. That savings becomes available for investment and lending. And isn’t that what these massive government interventions have been trying to stimulate?
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