Paradox of Thrift

I have been wondering about consumerism in America, how it got us to where we are today and where it will take us going forward. Certainly, the term “want” has been confused for too long with the concept of “need”, as people everyday consume things that they want with the justification that they need these things. Our entire advertising focused forms of entertainment gear us towards consuming based on false needs. When these needs are examined, it is easy to see them for the wants that they mostly are. I am not against wanting things and taking pleasure in things, we just seem to have too much of everything. There is a lot that could be said here about the pursuit of fundamental happiness that I will leave for another time (and/or for a more qualified author).

But this issue of how much we consume today is of paramount importance in the daily discussion about our now flailing economy. Roughly 2/3 of the entire gross domestmic product in this country is generated by American citizens consuming goods. So, if we save more and spend less, then we could be further hurting the economy. This is referred to by John Maynard Keynes as the Paradox of Thrift. The concept was summed up well by a writer for the MIT online paper:

 If everyone decides to save more money, consumer spending will fall; if consumer spending falls, then total demand will fall; if total demand falls, then total income will fall; and if total income falls, then people have less income to save.

The entire article is here:

I agree with the writer of the article that the idea that to save now will fundamentally hurt the economy is all a matter of degrees. To stop spending altogher would clearly hurt the economy and would exacerbate the issues that we are facing today. But many suggest that we must spend our way out of this mess, and I just do not agree. Ben Stein made this argument this morning on CBS News Sunday Morning (click link for article and comments). He suggested that those with the financial means to do so should be “buying stuff like mad”. I would refer Ben to the MIT article that has a nice explanation of current vs. future spending and the idea that there has to be some balance to the discussion. I do think that people that can afford to spend should continue to do so, but not at the complete expense of saving (probably most who can afford to spend do have savings and are likely the types that have been saving a portion of the income all along, so maybe less of an issue for these people).

The pundits and politicians who talk about stimulus and spending all seem to want to bring the country back to where it was, but is that where we want to go? Consuming on credit, chasing after material happiness, extending ourselves beyond natural means? It seems to me that everyone should be talking about a right sized level of GDP that connects to a reasonable level of savings as we balance the needs of the current vs. future economy. I realize that the government must do whatever it can to avert more really bad news for lots of Americans, but I fear that they will make matters worse by misdirecting dollars and/or overshooting with stimilus and money supply in such a way that we continue on a boom then bust path.


About Chris

I am a husband, father, son and brother. I worked for a long time in investment banking / advisory and looking forward to now building from the inside. What is my purpose?....don't think that I have figured that out, it is tricky. I have lots of good intentions, some of which blossom into good deeds and some of which could use a catalyst. But I am trying to figure it out, and I hope to eventually.
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