Defeating the "Paradox of Thrift"

Our work can be quickly summarized (though not perfectly captured) by saying that we're in the business of "promoting savings." There are a lot of reasons that's not a perfect summary, but those kind of shortcuts often come in handy. Now, one of the challenges of "promoting savings" over the course of the last few years has been a broad (though I'd argue, not deep) familiarity with an economic concept known as "the paradox of thrift." This is the idea that when an economy is contracting, the natural human urge is to tighten the belt and save more, and that leads to more contraction and worsening economic conditions. So in a scenario like the one we've seen in the last 4 years in America, more saving is exactly the wrong thing to do. That's kind of a shortcut, but I'm prompted to reference it because I learned from our ever watchful twitter feed (@AssetsNAF) that the Federal Reserve Bank of St. Louis' research department runs a newsletter called "Page One" and that "Page One" had just released a brief explainer on the "paradox of thrift." So, there you go, my shortcut can lead you to a full, nuanced understanding of this term. 

Now, the hard part for us has been working to convince people that increased saving during this last contraction was actually a good thing, and that we should be supporting more saving for more people as a matter of policy, in spite of the "paradox of thrift." I think, given enough time, that there's a strong case to be made. As it happens, Daniel Gross (who used to be great when he was writing Slate's Moneybox column, he probably still is, I just lost track of him when he moved to Yahoo! Finance) has a new book coming out and sat down for an interview with The Atlantic's Derek Thompson. In that interview, Gross gives as good an answer as I've ever seen to this question about the "paradox of thrift":

I don't think that efficient consumers are bad for the economy, any more than efficient companies are bad for the economy. The great problem we've had in the last several years - and we continue to suffer the after-effects - is that millions of our citizens couldn't afford to meet their financial commitments. The inability of people to keep up with mortgages, credit card loans, and other consumer loans has had disastrous consequences for our financial system, for companies, and for the economy at large. Financial failure begets financial failure. Just so, financial success begets financial success. If we buy 500,000 fewer cars, then a bunch of autoworkers and car dealers will suffer. But if 500,000 people are freeing up the $6,000 a year they would have spent on car payments, taxes, and insurance, and using the proceeds to, say, avoid foreclosure, or stay current on payments, or invest in their own education - that's a significant positive.

Gross then connects this idea to his larger thesis that "consumer efficiency" is the way of the future and that:

"The best way to get people to save money on vital goods and services is to create businesses that will profit by helping them do so. If I came and changed all the light bulbs in your house and reprogrammed your thermostat, wouldn't you pay me 20 percentage of your annual savings?

That's a fascinating take on themes we've often invoked, the power of automation, of defaults, and the benefits of individuals and families working to develop financial stability. There's a business opportunity here, and a policy opportunity. Solving that "great problem" that Gross cites is a huge lift, and it requires us to do some things that run counter to our immediate interests and expectations. This is where President Obama had it right in his "house of sand" speech. The solution to unsustainable levels of consumption isn't more consumption. Sustainable practices at the household level translate into a sustainable economy. You can argue that our policies have failed on two counts, not doing more to buy time for households to deleverage in the near term, and doing nothing to set households up to consume more sustainably for the long haul. There's still time to fix one of those errors.