WASHINGTON — Americans are hunkering down and saving more. For a recession-battered economy, it couldn’t be happening at a worse time.
Economists call it the “paradox of thrift.” What’s good for individuals – spending less, saving more – is bad for the economy when everyone does it.
On Friday, the government reported Americans’ savings rate, rose to 2.9 percent in the last three months of 2008. That’s up sharply from 1.2 percent in the third quarter and less than 1 percent a year ago.
It is good that Americans are saving more. Unfortunately, as we learn from above, it’s at the expense of the overall economy. When people save, it decreases the demand for products. When the demand for products goes down, companies adjust by producing less (this usually leads to layoffs). It will be a painful road for many this year but eventually President Obama and his economic team will help guide our economy back to normal levels.
What kind of economy do Americans want for the long term? It is back to our old way of spending with little savings (and lots of debt)? Or will this teach us a lesson about the importance of saving and not spending as much on “useless toys”. A colleague in the Political Science department believes Americans will go back to their normal spending ways after this crisis ends. He says history has shown that is the case with us. What do you think?