06 Jan 2009

WSJ: Families Save More And Wreck Economy

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I’m not making this up. The actual headline is, “Hard-Hit Families Finally Start Saving, Aggravating Nation’s Economic Woes.” (HT2LRC) Here’s some great analysis from the nation’s “economically savvy” newspaper:

As layoffs and store closures grip Boise, these two local families hope their newfound frugality will see them through the economic downturn. But this same thriftiness, embraced by families across the U.S., is also a major reason the downturn may not soon end. Americans, fresh off a decadeslong buying spree, are finally saving more and spending less — just as the economy needs their dollars the most.

Usually, frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation’s standard of living. But in a recession, increased saving — or its flip side, decreased spending — can exacerbate the economy’s woes. It’s what economists call the “paradox of thrift.”

Good for you, American consumers! Too bad the government increased its debt by more than one trillion in 2008 on your behalf. (HT2 Tim Swanson)

If you would like a careful unpacking of the “paradox of thrift,” see my earlier article. It’s bad enough when the Nobel laureate brings it up, but now the Journal? Oh man.

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