The Magazine

There Is No 'Paradox of Thrift'

Neither a borrower nor a spender be.

Jun 15, 2009, Vol. 14, No. 37 • By DAVID BLANKENHORN
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Frightened by tough economic times, formerly spendthrift Americans are beginning to save. But the shift is causing alarm among some economists and commentators. Prudent savers, say these writers, are exemplars of the "paradox of thrift," which holds that the practice of thrift, while seemingly wise and rational for the individual, can be harmful for society.

So it is that a Wall Street Journal headline warned: "Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woes." A story in the New York Times said the "re-emergence of thrift as a value" presents a serious problem: "Economists call it the Paradox of Thrift." Another Times piece cautioned: "Putting away money and paying down debt may be good for one family's kitchen-table economics, but the broader economy suffers in the short term when millions of families do it." Nobel Prize- winning economist and syndicated Times columnist Paul Krugman regularly beats this drum. And a recent Newsweek cover, evoking World War II recruitment posters, featured a stern-looking Uncle Sam pointing at the reader with the patriotic appeal: "I Want YOU to Start Spending!"

In the 20th century, the paradox of thrift found its greatest champion in John Maynard Keynes. In his Treatise on Money (1930), Keynes argued that "mere abstinence is not enough by itself to build cities or drain fens." It is enterprise that builds. "If Enterprise is afoot," he explained, "wealth accumulates whatever may be happening to Thrift; and if Enterprise is asleep, wealth decays whatever Thrift may be doing. Thus, Thrift may be the handmaiden of Enterprise. But equally she may not. And, perhaps, even usually she is not."

In 1931, in a radio address to the British people on how to fight back against the oncoming Great Depression, Keynes was more vehement about the futility of saving and the wisdom of spending. Sometimes, he said, saving one's money was "quite right," but at other times, including the present one, saving was "utterly harmful and misguided." He bluntly warned his fellow citizens: "The best guess I can make is whenever you save five shillings, you put a man out of work for a day." He concluded with an Uncle Sam-like appeal to patriotism:

Therefore, O patriotic housewives, sally out tomorrow early into the streets and go to the wonderful sales which are everywhere advertised. You will do yourselves good .  .  . [and you will] have the added joy that you are increasing employment, adding to the wealth of the country because you are setting on foot useful activities, bringing a chance and a hope to Lancashire, Yorkshire, and Belfast.

When writing for policymakers and economists, Keynes and his followers spelled out this idea in more formal terms. They posited that whenever a nation's desire to save exceeds productive investment, the result is a savings glut. The excess savings, because they are not smoothly turned into investments, are effectively quarantined from normal economic life, much as if the savers had hidden their money under the floorboards. This phenomenon in turn can help trigger a downward economic spiral, a sort of negative feedback loop in which reduced consumer spending causes greater unemployment, and greater unemployment reduces spending, and so on. In the end, everyone--including the well-meaning chap who saved his five shillings in the first place--comes out poorer.

Finally, periods of economic downturn, when people's natural concern for the future may cause them to try to save more, are precisely the periods in which savings gluts can do the most damage to society, by deepening rather than counteracting the downward turn in the business cycle.

Ever since Keynes, the proposition that thrift can be paradoxical has been widely accepted. It made its way into the best-known economics textbook of the second half of the 20th century, Economics by Paul A. Samuelson and (in later editions) William Nordhaus. Not only does it continue to influence each generation of policymakers and commentators, but among the general public, the notion is widespread that, in order to keep the economy growing, citizens have a duty, whatever else may happen, to keep on spending.

But is it true? Is there actually something paradoxical about thrift that can make it more a curse than a blessing for society? Here, in ascending level of importance, are five reasons why, in fact, there is no paradox of thrift.

5. Saved money is likely to be productive money.

It is actually possible to save too much. Anyone who is denying his children adequate food or medicine or endangering his own health in order to allocate more to savings is almost certainly saving too much.