The Paradox of Thrift

John Maynard Keynes made the concept of The Paradox of Thrift (aka The Paradox of Savings) a mainstream economic theory. Essentially the theory is that ubiquitous individual savings leads to lower overall savings. The reason this would happen is because if everyone started saving more, that means they are consuming less. Less consumption means less economic growth overall. That would lead to fewer raises and fewer new hires for companies – which means “new” money not paid in wages that could have been saved.

The theory is not without it’s critics.

However, I’m bringing it up because I saw some interesting charts yesterday (tip of the hat to Barry Ritholtz). If you didn’t know, S&P 500 companies are actually doing quite well in terms of earnings per share (EPS) and after tax profits as a % of GDP. As Barry states, “Peak corporate profits should lead, under normal circumstances, to more hiring and Capex spending. However, we are not seeing enough of either.”

He asks if this is a corporate version of the paradox since corporations are tightening the belts, making higher profits, but there is no job growth to fuel consumption. I thought it was an interesting question, and the charts certainly make you pause.

It reminded me of another adage: It’s tough to have mass manufacturing without mass consumption. I think this could apply to both individuals and corporations.

If you haven’t already, click here to see the charts.

 

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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