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Paul Solman Breaks Down The ‘Paradox of Thrift’

During the economic downturn, the American savings rate is rising fast, with some unexpected consequences. Paul Solman examines how the economy might suffer when thrifty consumers decide to save their money instead of spending it.

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  • PAUL SOLMAN, correspondent:

    The American savings rate is rising fast, from an abysmal near-zero or below just a few years ago, up past 4 percent in January and February. Well, it's about time, you might think.

    And yet, by definition, saving means not spending, and spending is what we supposedly need right now, need desperately. So to save or not to save? That is the question.

    It's a debate that last raged during the Great Depression, when the English economist John Maynard Keynes coined a phrase again in vogue, "the paradox of thrift."

    "But what does it mean?" we asked one of our favorite living English economists, MIT's Simon Johnson.

    SIMON JOHNSON, MIT Sloan School of Management: Paradox of thrift is the idea that you try — everyone tries to increase their savings, so desired savings goes up, thrift being savings, but the act of trying to save pulls down the entire economy, gives you a big recession or maybe even a depression, and total savings don't go up. Maybe they even go down. So everyone trying to save leads to a big slowdown and less savings. That's a paradox.

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