Lockdown economics: Why the paradox of thrift could damage our economy – Bill Jamieson

If people save their money, rather than spend it, the economy is likely to suffer, but Bill Jamieson is ‘with the squirrels’ on the need to keep a store in case of further trouble

Squirrels famously keep a store of food and, in a crisis, people tend to build up their savings even though this could make the situation worse (Picture: Jeffrey Wang/SWNS)
Squirrels famously keep a store of food and, in a crisis, people tend to build up their savings even though this could make the situation worse (Picture: Jeffrey Wang/SWNS)

Should we be saving or spending more? It seems counter-intuitive that we should splash out on a spending spree as coronavirus restrictions are lifted. But economists say that this is exactly what we should do. Yet faced with the sharpest plunge into recession in living memory and uncertainty over our future income, we curb our spending and build our household savings.a

It’s a great paradox or trap of saving – and not the only one – that while we strive to save for a rainy day when that rainy day comes, caution also comes to the fore. The household savings ratio – the percentage of disposable income that is saved – spikes upward. Last year the UK household savings ratio was five per cent – way below the average over the past 54 years of 9.2 per cent of disposable income. But even before the coronavirus emergency erupted, January saw an uptick to 6.2 per cent, a likely reflection of a slowing economy and Brexit uncertainties.

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But the nationwide lockdown in the UK may bring about long-lasting behavioural change – less spending on inessential or impulse purchases.

The main paradox of thrift is that if everyone saves at once, it can cause macro-economic problems – like a recession. From an individual perspective, it makes sense to save and pay off debts in a recession. But, if everyone pursues the same course of higher saving, it causes a fall in aggregate demand. This is the trap.

And it would be compounded if, as seems likely, any return to ‘normality’ in the economy would be offset by consumer fears of higher taxes to pay back the explosive rise in government debt. As well as higher income, there are already calls for a one-off tax on capital.

So the economic gurus are saying we should bear down on our “inner squirrel”, stop storing those nuts and instead help the economy by spending.

But I’m with the squirrels on this. A store of nuts helps give some protection from future crises and helps rebuild confidence after this epochal shock.

As the Covid-19 pandemic has dramatically shown, we were unprepared for “future shock”. And the reverberations from this one are set to last a long while.

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