Savings and Austerity

A note about the principle behind budget deficits in Keynesian economics

We are becoming a nation of savers

What happens when domestic spending falls and the government simultaneously cuts spending and raises taxes?

Surely, its good to be virtuous and pay of debt? In one sense yes, but the paradox of thrift shows the dangers of a rapid rise in saving, especially if government reduces its own spending.

Well, it’s not good and its likely to happen to the UK. Ireland has already tried a strict period of austerity, they have seen GDP fall by 7%! This year. Ireland and Austerity at NY Times

6 thoughts on “Savings and Austerity

  1. Austerity isn’t optional (think about it, what politician whould do it voluntarily?) so we have to move on.

    GDP is a notion, debt is real.

  2. It is useful to make a distinction between saving money and saving in the form of acquiring other assets (e.g. consumer durables, academic qualifications, a bigger house, etc).

    It is saving money that leads to the paradox of thrift. Saving other assets doesn’t pose the same problem. Indeed, running down one’s money savings and buying a consumer durable or house provides the economy with stimulus.

    Re Ireland, the latest I saw (article in the Wall Street Journal, I think) was that things are looking up there due to increased exports.

  3. It’s happened in many places like Japan. But we have no choice but to continue to save on a personal level and teach our children to save. If there was a bit of thrift in the first place, we probably won’t reach this stage.

  4. austerity is to be moderate in your in my openion it should be practised by all government.but austerity i not important all the time ,actually it is tha need of hour.
    but keynes was badly against austerity .

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