Sometimes it’s important as a small business owner or as an American consumer to do research relating to our economic system. It’s interesting and insightful to learn and apply what we learn while gaining a general understanding of how our Country runs. It’s interesting to see things such as the current trade war with China resonate with things that we learn and absorb. The following is a quick spiel on what the paradox of thrift is relating to saving within our economy.
The paradox of thrift is an economic theory that the savings of a nation’s people bring down the overall growth on an economy during time of a recession. Lower spending, resulting from the paradox thrift, lowers employment and reduces sales within the market. The more money that is saved, the less that’s spent on goods and services and less taxable money for the government. Controversy to the theory, some believe that saving is basically considered as investing and doesn’t slow the economy. Depending on how the paradox is viewed, it can either be real or not so real at all.
If every citizen was given $1,000, saved a quarter of it and spent the remaining $750, goods and services will be in demand and the government can collect the additional tax revenue. If everyone saved $900 of the lump sum, only $100 of it can be used to stimulate those key factors of a healthy economy, reducing the amount that circulates by $650. The reverse paradox of thrift is when spending is an increased amount of consumption and spending, resulting in elevated sales and employment.
The paradox of thrift is a theory that seems to discourage saving, but makes sense when considering the fragile state of the economy during the time of a recession. The public needs to save money to ensure they have enough money for the resources they need, but at the same time it can damage the growth of the economy to help climb out of a recession. Striking a balance between the two done at the right time can help satisfy both sides of the theory.