People save their income for different purposes such as to buy a dream house or car, ensure future financial safety or to accumulate wealth to live to a certain standard. Statistically, people save less during economic declines to maintain their consumption levels. However, in a Great economic recession, people tend to keep more because they are uncertain about their future income, pricing of goods and in an attempt to reduce debts (Vermann, 2012). The high rates of saving are beneficial to individuals but unfavorable for the economy for various reasons.
The increases in saving affect the economy in multiple ways. The paradox of thrift concept explains that people increase their savings during high inflation and hence it reduces investment. Instead of investing in productive projects that will generate income people shift to saving which produces no income. With increased savings, the interest rates decrease in an attempt to improve borrowing. Savings hold back the economy instead of driving it because instead of money being in the economy it is kept without circulation. The lack of investment leads to a financial crisis which hurts the economy (Corden, 2012). Thus, the paradox of thrift creates stagnation of the economy by reducing expenditure and holding money from the economy through increased savings.
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Savings increase the economic slump due to reduced consumption. When households are consuming less so that they can save, it means that selling and buying of goods minimizes. Business goes down and hence deepening the economic slump. Demand decreases leading to decreased supply which causes after effects such as unemployment when trades go down and consequently reduced growth (The paradox of the paradox of thrift, 2009).It is, therefore, safe to say that high emphasis on personal savings worsen the state of the economy by reducing consumption which in turn has several negative impacts on the economy such as laying off of workers when businesses go down.
In conclusion, the paradox thrift concept is valid in the long run. When saving becomes the priority for a long time, then it causes adverse effects on the economy. Conservation is beneficial only in the short term and when the savings are for investment. For an economy to maintain a positive state, there is a need for an increase in consumption so that it can increase demand and supply for businesses to thrive and stimulate growth.
References
Corden, W. M. (2012). Global imbalances and the paradox of thrift. Oxford Review of Economic Policy , 28 (3), 431-443.
The Economist. (2009). The paradox of the paradox of thrift. Retrieved on 29 January 2018 from https://www.economist.com/blogs/freeexchange/2009/11/the_paradox_of_the_paradox_of.
Vermann, E. K. (2012). Wait, is saving good or bad? The Paradox of thrift. Page One Economics . Retrieved on 29 January 2018 from https://research.stlouisfed.org/publications/page1-econ/2012/05/01/wait-is-saving-good-or-bad-the-paradox-of-thrift/.
