Tuesday, December 23, 2008

Paul Krugman and The Paradox of Thrift

For a long time I resisted reading any economists for this very reason. Why do I want to read books by guys who tell me I am ruining the economy. Well, since I started writing The Nifty Thrifty, I began to wonder what all the things I was saying meant, and if I didn’t have a better intuitive grasp intuitively on the economy that I thought. Turns out, Paul Krugman addresses my very question in his 1997 essay Vulgar Keynesians. Krugman addresses, among other things, the "paradox of thrift"; an element of econo-god John Maynard Keynes' teachings which states in simple terms that if everyone saves we all lose. Krugman points out though, that this virtue turned vice relationship is not such a straightforward one, especially since we now have a Federal Reserve bank that can raise and lower interest rates to offset the vicious cycle of recession.

But Krugman wrote Vulgar Keynesians in 1997. Who was in recession then? Not us, yet. So now, here we are in 2008, nearly 2009, and we get to see what happens. Krugman's most recent op-ed on the topic, he states that major policy changes and a stimulus package that doesn't put the onus on the already over-committed consumer is what we need. I think the truth is, no one knows what we need, but I think Krugman is moving in the right direction. That was just a little Freshman Economics for you so that you don't have to feel bad if you can't spend money. In fact you will feel bad if you can't spend money and you do.

More on the topic:

Consumers Don't Cause Recessions by Robert P. Murphy. I have commented on this blog post for clarification, as Prof. Murphy seems to state that Krugman erroneously perpetuates the Paradox of Thrift. We await his response.




Anonymous said...


Tom (and Tess) here. Great to meet you and Kevin today. Welcome to CH. Writing for an old jokey blog of my own. Read a few of your entries. Love that thrift is coming back. I dig it.

See you around the neighborhood.

Christine Rath said...

Hey Poor Man, I have been trying to figure out how to get back to you, since Poor Man is defunct. Thanks for commenting and it was nice to meet you and Tess. Now that Kevin and I are settling in, I am trying to post more often, but the semester has just started up for me again, so we'll see. Hope to see you guys in the neighborhood!

Christine Rath said...

BTW, I loved the Poor Man idea, and got a good laugh from it while I was looking around.

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