Duncan’s Economic Blog

The Paradox of Thrift

Posted in Uncategorized by duncanseconomicblog on July 8, 2009

I am really pleased with the debate in yesterday’s thread. My thanks to everyone that took part.

Part of the discussion focused on the Paradox of Thrift. So it’s nice to see Paul Krugman posting on the same issue.

As Paul says:

The effect of this upward shift in desired savings at any given level of GDP is, paradoxically, a fall in actual savings and investment.

One key implication of the fact that we’re living in a paradox of thrift world is the folly of demands that we reduce budget deficits in the near term. Slashing spending or raising taxes right now wouldn’t just deepen the slump — it would actually make us poorer in the future, too, because it would lead to lower overall saving and investment.

Now, we won’t always face the paradox of thrift. But right now it’s very, very real.


18 Responses

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  1. Paul said, on July 8, 2009 at 9:24 am

    Blimey, looks like I’m in for another day of enlightenment. It’s like going to university only without the exams and such like. I was just going to do a quick post naming yesterday’s discussion, principally between yourself and Tim but with Rommeldak (I think his name’s John) as late inputter, as blog post of the year to date (followong on from don Paskini’s post enthusing about how it is possible, if all sides are willing, to engage in debate which actually goes somewhere.

    In this respect, as interesting as Krugman’s post itself are the comments that follow – this one plucked more or less at random:

    ‘So, in order for the Krugman/Keynes bubble blowing economy to work right is to get people to stop saving. How many different ways can we punish savers? Maybe we should ban evil saving altogether. What say you, Mr. Krugman?’

    This, and this type of comment, give an indication of the challenge that remains in ‘selling’ the argument about the need to spend our way out of recession – it’s not called a ‘paradox’ for nothing, and we need to acknowledge that it will sound counterintuitive, or more likely, simply bollox, to lots of people who have had a very, very different story about ‘thrift’ sold to them for many years, and – at household level (including mine) – it would seem mad to think we should support ‘macro-theory’. That’s not what’s being asked for by Krugma, but that’s what he’s being interpreted as asking for, and in UK terms is the ‘narrative’ problem with the VAT cut.

    The solution to ‘selling’ the paradox has to be, I increasinlgy think, to put it in a different wrapper (horrible continuation of metaphor but i’m typing quickly). And the most attractive wrapper is equality as necessity. I reckon people can really get to grips with the idea that having more money though raised wages at the lower end, for example, can lead to more sustained demand.

    As witness, I call upon myself. As Tim has already identified, I can get a little ‘confused’ by the theoretical economics, which is why I pushed the debate towards this blog (10 out of 10 for me for good thinking, based on the debate to date). Yet even I have been able to grasp ‘intuititively’ (according to Duncan) this essence of post-Keynesian economics.

    Have a nice debate today. I hope to read more later.

    • duncanseconomicblog said, on July 8, 2009 at 9:31 am

      Puts me in mind of my favourite Joan Robinson quote.

      “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.”

  2. Brian Hughes said, on July 8, 2009 at 10:24 am

    All jolly interesting but somewhat beyond me and, I guess, the vast majority of ye populace.

    No wonder Mrs T’s sweetshop economic analogies for the UK’s economy were so popular even though so inappropriate.

    Me? I’ll go on doing what I’ve been doing for half a century i.e. living within my means and saving as much as possible but hoping that HMG and other governments adopt a different strategy in order to keep the greater economy going. Selfish I know but that’s life.

    Were the option of adopting the strategy favoured by the inhabitants of Magrathea, i.e. being kept in cryogenic state until the intergalactic economy recovered, available on this earth, unethical or not, I’d probably go for that…

    • charliemarks said, on July 8, 2009 at 11:00 am

      Me too.

      • duncanseconomicblog said, on July 8, 2009 at 11:13 am

        Brian & Charlie,

        This is the point.

        For you two as individuals it is pefectly rational to save. But if everyone acts as you do and spends less, demand in the economy will fall. Leading to slower (or negative) growth and more unemployment.

  3. newmania said, on July 8, 2009 at 11:07 am

    In as much as I was able to follow that thread it still sounds to me as if you are suggesting that if we have ten people on an Island and one pig to eat we are poor but if we have twenty people and increase demand for the pig we are rich. If we make our currency leaves we are leaf millionaires and pretty soon we will need Leaf economists to advise us on the distorting effect of leaf derivatives leaf futures

    None of that makes any bacon and this all sounds eeerily like the same sort of magical thinking that lead to the current problems

    • duncanseconomicblog said, on July 8, 2009 at 11:16 am

      Thing is Newmania, this isn’t 10 people on an island with a pig. It’s an advanced financial capitalist economy.

      If, to use your example, we have ten people and one pig farm and the ten people decide to save more of their money and buy less pork, what will the pig farmer do? He certainly won’t buy more pigs.

      But if the ten people decide to buy more pork from him, he might well decide it’s in his interest to buy more pigs and increase his bacon output.

      And it gets more complex, because presumably some of those ten people are employed on the pig farm… And if demand for pork falls, they might get the sack.

  4. newmania said, on July 8, 2009 at 11:14 am

    BTW – Given that Economists occupy much the same position as Michael Fish when most of England got blown into the Atlantic why should we care what they say ?

    • duncanseconomicblog said, on July 8, 2009 at 11:18 am

      I’m with you on most forecasts there Newmania. Too much uncertainity. But in terms of general principles and likely cause and effect of different actions, there is a role for economists.

      • Mr. Mxyzptlk said, on July 8, 2009 at 11:21 am

        as long as there are economists you know there are bigger liars than yourself about.

  5. Mr. Mxyzptlk said, on July 8, 2009 at 11:20 am

    Don’t worry dunc my wife will take up the slack for anyone who doesn’t want to spend

  6. Will M said, on July 8, 2009 at 12:03 pm

    Sniff. I thought I might at least have got a credit.

    • duncanseconomicblog said, on July 8, 2009 at 12:09 pm

      Thank you to Will for bringing the above to my attention.

  7. newmania said, on July 8, 2009 at 12:35 pm

    what will the pig farmer do? He certainly won’t buy more pigs.

    He will probably produce pigs more efficiently though and in the end that’s the only thing that makes us richer. He might spend more time pig farming and less being a social worker and general loafer ( hint hint)
    My feeling is that what we have is like cold .Throwing money around is like taking Lemsip , it may feel a bit better , it may even be valid at the worst point to stop suicidal misery , but it cannot cure anything because it does not engage with the real causes .Those causes has to be on the supply side and , as they are , there is no point getting further into debt .( Unless you have an election coming up)

    • duncanseconomicblog said, on July 8, 2009 at 12:43 pm

      I’ve got us stuck on pig farmers now haven’t I?

      By producing pigs more efficiently – I assume you mean for less cost?

      If that comes through technological process, great (maybe bio-engineered pigs? I wish I’d chosen a better example). But if he does it through cutting wages, given his customers are also his staff… not so great. They’ll then buy less pork.

      The supply side is very important. I don’t doubt that. What I do doubt is the view that if we look after the supply side the demand side will sort itself out. You need both to work.

  8. Paul said, on July 8, 2009 at 12:36 pm

    Will – can I also thank you for the Krugman reference. I really must start looking at his blog regularly.

    You may be happy to know that I am currently quality assuring Duncan’s blog, and that he will be losing marks for non-accreditation (‘hat tip’ in blog vernacular) as well as for his delay in bringing forward a blog on JA Hobson that I had set for him (he assures me it will be with us tomorrow) However, I think we will both agree that he is doing well overall and should continue to receive our general support.

    In some ways I’m as interested in Charlie and Brian’s comments as I am in Tim and ‘Rommeldak’s’ from yesterday. While they feign ignorance of the subject matter (and I suspect it is false modesty) the fact that they have chosen to ‘register’ their readership of this growing debate speaks volumes.

  9. Paul said, on July 8, 2009 at 12:51 pm

    Blimey, talk about insensitivity towards Islam in the blogosphere. More marks dedcuted, Duncan.

    Chicken farmers is much better example.

  10. charliemarks said, on July 9, 2009 at 8:10 pm

    Don’t worry, I’ve been spending. But not so much that I’m in debt. I lve with in my means, is what I’m trying to say.

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