How often have we heard in hard economic times about our patriotic duty to spend more money? If only we would all go out and buy things, anything really, we could pull out of this recession. On the one hand, we want to commend paying down debt and saving. On the other hand, if all we do is save our economy will stall out. It’s called the paradox of thrift. Frugality may be good for us, but it is bound to be bad for everyone else.
I’ve heard this kind of reasoning often. And it has always struck me as morally and economically dubious. Is the private virtue of thrift really a public vice? Not at all, argues David Blankenhorn in an article entitled “There is No ‘Paradox of Thrift'”. He gives five reasons why thrift is not bad for the economy. He lists them in ascending order of importance.
5. Saved money is likely to be productive money. Americans are not in danger of saving too much. We are saving more, but even if the saving rate reaches 7 or 8 percent by the end of the year, this is roughly the same rate we’ve averaged since 1930. By the same token, economists universally agree that racking up debt and saving nothing is a recipe for long term, wide-spread economic disaster. Right now Americans have too much debt. Paying down this debt in the short term may seem harmful to the economy, but will help the whole country in the long term. Those who have fewer debts and more savings are in the position to invest in new business ideas and ventures. And investment, not consumption, is the lifeblood of the economy.
Along these lines (and this is a point Blankenhorn doesn’t make), we need to remember that people today don’t tend to save money by hiding it under their mattress. We put it in a bank or buy stocks or bonds, or entrust out assets to a financial adviser who invests the money for us. In other words, our saved money is usually invested somewhere else. It’s being spent even as we are saving it. That’s the genuis of a (healthy) credit system and free market capitalism.
4. For individuals and families, it’s always wise to live within your means. We aren’t helped, and the country isn’t either in the long run, when people spend recklessly. When people stay within their means and save, they usually get richer. And rich people spend and invest more than poor people. Families getting their financial houses in order are not the problem; they are the solution.
3. Governments, not individuals or families, are responsible for any deficit spending needed to moderate economic downturns. How much deficit spending is responsible is always the question, but most economists agree that a small amount in lean years can be justified, and governments should do it before individuals. Governments can borrow at a lower rate than individuals (as low as 2 or 3 percent) and do so more effectively.
2. Assuming that there is a paradox of thrift encourages waste. The story is told that Keynes, in a fancy hotel, once dramatically pushed a stack of towels on the floor because he believed it would stimulate the economy. The thought being, “I just created more work for people” (he was serious). But this is not job creation by entrepreneurial activity. This is waste, plain and simple. Not every dollar spent is real enterprise. Spending our money wisely is better for productivity and does more to cause the whole economic pie to grow.
1. Properly understood, “thrift” means the ethic and practice of wise use. Thrift is more than simple abstinence. Etymologically, the thrifty person is the thriving person (sounds like Proverbs doesn’t it?). When we are wise with our money, careful, and conservative, we tend to make the best use of the resources we have, whether that be time, money, health, possessions, or oil and coal. And when we maximize the effectiveness of what we have, we increase productivity. And this is how economies grow; they get more production for less. The economy doesn’t grow by paying people to dig holes and fill them back in again. The economy grows when the needed ditch digger figures out how to build better ditches, in a faster time, for less money. That’s called thrift. And it’s not a bad thing.
So don’t worry about being frugal, saving money, being careful about your purchases and getting out of debt. You’ll be better off if you do these things, and in the long run, the country will too.
