The ‘paradox of thrift,’ in essence, is the concept in which people inherently value being thrifty during economic recessions in order to not overspend, but this paradoxically leads to lower economic growth because people are spending less (Krugman, 2009). It is an important attribute to Keynesian economics, and it essentially calls into question the inherent virtue of saving as an overall good. When we have less money to spend, it is thought to be a good idea to avoid overspending and save money, since you need to save it for more important things. However, if enough people do that during a recession, this causes further recession due to the fact that the economy cannot grow if people are not buying things.
One example of the paradox of thrift is a family that receives $1,000 of income, and only spends the rest. If everyone does this, the economy can expect that the demand for their product fits within that $500 budget. However, if people start spending less of that $500 in order to save more of it, the demand lowers, which means that fewer products get sold, leading to lower profits for companies selling those products. If those companies do not make enough, they start laying off workers, which makes for more unemployed people and lower tax revenue, and fewer people spending. In essence, sustained thrift leads to a vicious cycle of economic recession as people are not spending as much as they should be.
References
Krugman, P. (July 7, 2009). The paradox of thrift – for real. The New York Times.
