Recently, our college president spoke to the faculty. In her speech to us, she said that some economists think that the economy may NEVER recover from the current recession. Scary words, even when heard by an economist. I must admit, however, that I am not so pessimistic about our current recession.
I look at our current recession, and although I am certainly not a macroeconomist, I recognize in it the “Paradox of Thrift”. This idea says that when people increase their saving, this, while good for individuals, it is bad for the economy.
The Paradox of Thrift rests on the Fallacy of Composition, and idea that was made clear to us in graduate school when someone wrote on to the college newspaper with what they thought was a great idea. There was a serious parking problem at our university, making it difficult to find parking spaces during peak class times. This writer suggested that the school move our classes to the evenings and weekends, when there were fewer cars on campus. This should solve the problem, they suggested.
Of course, it would not. It would only move the problem to another time. While it may be useful for ONE person to move their classes to other times, moving everyone’s classes to different times just moves the problem. In a similar way, the Paradox of Thrift says that while saving more is good for one person, when everyone saves more this leads to a decline in consumer demand, causing the onset of a recession. When the headline in our local newspaper read “What Now?” the day after the stock market crash last fall, the answer was for people to cut spending and increase saving, to levels not seen in recent years. And this led to the current recession, which we are hoping go get out of by stimulating consumer demand through a “stimulus package”.
Of course, saving more is a good thing for individuals. My immigrant grandparents valued saving so highly that they used to spend Sunday afternoons counting the cash their business had earned that past week. Of this money, they kept some on reserve and invested another portion in real estate or back into their business. My parents were also savers, and today I try to teach my daughter to save.
For my daughter to save, this means that she must give up using any money she earns to purchase things she wants. And for her, that often means giving up buying pieces of candy, which she, like most children, craves. Slowly, she filled up a piggy bank with quarters and other change, quite an accomplishment for a little girl with a sweet tooth. I am therefore in awe of something she did recently that taught me that we economists don’t always have all the answers about what it is that people will do with their money.
Her Sunday School class gave the students a special envelope to use to earn quarters over the course of six weeks. They were to do some extra chores and then donate the money they earned to the Parish Food Bank. The morning when it was time to turn in the money, she took a few extra minutes in her room before we left. I didn’t know what she was doing, so I was surprised to find, as we gave her contribution to the teacher, that she had not only added to the six quarters she had earned, but had EMPTIED her piggy bank to donate to the Food Bank. Although economists generally think that people gain satisfaction from the things they buy, my daughter had a lesson to teach us all about other ways to gain satisfaction. I guess you could say that her actions were another paradox, as she gained more satisfaction from donating her money than from buying the things that she wanted.
I hope, as she grows, that my daughter learns not only how to save, but also how to be generous. Her recent actions indicate that she may have a few things to teach us all about exhibiting this latter virtue.