Provide value added comments to the discussions below :

The Paradox of Thrift

1. The paradox of thrift is an economic theory that suggests if everyone become more frugal with their money, the economy would suffer. In my opinion, it is very real and can be a good and a bad thing. Saving money is always a good and smart thing. However, saving and never spending money is a bad thing. Not just for the economy, but you end up denying yourself things while living. I liked the example that was provided on the paradox of thrift that if I'm saving money by not going out to eat, which I love to do, then I am denying the staff at the restaurant their work hours and tips, etc. The reverse paradox of thrift would be an increase in spending, sales going up, and therefore employment is higher.

After reading these articles, I now understand what paradox of thrift is. I have never heard of it before and never knew it was a "thing." But after reading these articles, it makes perfect sense and has both positive and negative outlooks. I always thought it was a positive, smart thing to save money. As much money as you can. However, I never would have thought that by cutting back on things to save money could end up hurting the economy in the meantime. It almost seems like it could be a double-edged sword. It definitely gives me a new perspective that, while I need to save money so I have a type of "safety net," I also need to support businesses and restaurants by spending money as well. I'd rather treat myself than treat myself in life!

Chapter 12: The Keynesian perspective. (n.d.). Principles of Macroeconomics. Retrieved from https://learn.umgc.edu/d2l/le/content/712838/viewContent/29136298/View

Vermann, E. K. (2012, May). Wait, is saving good or bad? The paradox of thrift. Economic Research - St. Louis Fed. https://research.stlouisfed.org/publications/page1-econ/2012/05/01/wait-is-saving-good-or-bad-the-paradox-of-thrift/

The Paradox of Thrift

2. The paradox of thrift is a theory that can be explained using the "paying it forward" concept. For the most part, everyone's income is generated from someone else's expense. When someone purchases something or pays a bill, part of that money is "paid forward" and deposited into the employees' checks of the company that sold the good or service. Those employees, in turn, then take their checks and make purchases, and the money from those purchases gets passed on to that company's employees. This is a cyclic process that continues indefinitely.

Now, if an employee decides to cut all unnecessary spending out and instead saves that money, this reduces the amount of money (and demand) in the cyclical process. The store or business that would have sold the good or service to that employee no longer does. By not making the sale, that money is lost and therefore not passed on to their employee(s). Those employees now have less money and may cut spending which then affects the next business and that business's employees, and so forth and so on. In macroeconomics, this is known as the expenditure multiplier working in a negative direction ("Chapter 12: The Keynesian perspective," n.d., para 36)

This example provided was at the micro level. If this scenario occurred throughout the microeconomy the paradox of thrift theorizes that the macroeconomy aggregate demand would decrease and as a result, everyone will be less well off financially as income will continue to shrink with each passing revolution. Furthermore, if this paradox occurred during a recession the problem would be exacerbated.

Is the paradox of thrift real? Yes and no. It is real in the sense that if everyone did cut superfluous spending out (whether by choice or unease about the economy) it could have a significant impact on one of the components that comprise GDP, personal consumption expenditures. However, this is somewhat of a short-sided view and does not look at the economy holistically and in the long run.

First, with savings comes an increase in capital investment. Vermann (2012) notes that as a result of these savings, businesses would be able to borrow and purchase capital for production (para. 6). She goes on to say that ultimately this increase in capital leads to higher levels of business growth. So, although fewer consumer goods would be purchased, more capital goods would be purchased in its place therefore spending (over the long haul) is evened out.

Secondly, at some point for many, those savings will eventually turn into expenses. It could be to pay for bills, use it for large purchases down the road, etc. The point being the money will eventually be fed back into the cycle - it could be this month, next year, or the year after. This is why once again in the long run, unless everyone is buried with their savings, it will come full circle.

As far as what is the reverse paradox of thrift, on the extreme end it would appear to be inflation. An economy that sees everyone's savings depleted and being injected into the markets will drive up prices as there are only a finite amount of goods and services that can be produced.

This assignment has introduced me to the controversial concept of the paradox of thrift and the arguments for and against it. It has helped me to better understand how aggregate microeconomic decisions can have macroeconomic consequences. It has also continued to remind me that there are two lenses that all issues must be considered through - a short-term lens and a long one. I will be able to use the lessons and apply them within my major (Business Administration) moving forward.

References

Chapter 12: The Keynesian perspective. (n.d.). Principles of Macroeconomics. Retrieved from https://learn.umgc.edu/d2l/le/content/712838/viewContent/29136298/View

Vermann, E. K. (2012, May). Wait, is saving good or bad? The paradox of thrift. Economic Research - St. Louis Fed. https://research.stlouisfed.org/publications/page1-econ/2012/05/01/wait-is-saving-good-or-bad-the-paradox-of-thrift/