Saving money during the recession could help to save the funds of the individuals, but cause problems in the country’s economy. This essay explains the concept of the paradox thrift and highlights its main features. It shows the criticism that was expressed to this paradox.
Paradox of Thrift
The Paradox of thrift is the anomaly in the economy that was described by the American economists. More people try to increase their savings in order to escape the financial difficulties, the faster they will come in form of the economic decline. If during the economic downturn, the population will start to save, it will then lead to the increase of aggregate demand. Consequently, it will lead to the decrease in wages. Thus it will result in the reduction of savings. It is a fact that when all people will be saving, it inevitably will lead to a reduction in aggregate demand and a slowdown in economic growth. In other words, the process of saving will cause the slowdown in the consumption at each level. Overall, it is the negative effect for the economy.
The other negative consequence of the population’s attempt to save money is that it will decrease the total savings. There has to be the equilibrium in which the total saving has to be equal total investment, and total output has to equal the total income. The recession pushes people to raise savings faster, as a characteristic of the income than the link between output and investment. It will lead to the shift of the equilibrium point to the lower value. Savings are beneficial for individuals, but critical for population as a whole. However, the paradox of thrift was criticized. During the recession, buying power leads to lower prices. In turn, low prices will stimulate the consumption. The next point is that savings represent the borrowed funds from banks. Thus, it will increase the lending and decrease the interest rate. It will lead to the subsequent spending and investment. These two arguments are debated. The only criticism that is accepted is that savings will not be invested abroad.
Despite the fact that concept of the paradox of thrift was criticized, in my opinion the savings decrease the consumption, and it could lead to destruction of many businesses without further recovery and make the whole economy suffer.