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How Paradoxical Is The Paradox Of Thrift?

Looking at the data since the start of the recession, Paul Krugman says we're firmly trapped in the paradox of thrift:

...the sharp increase in personal saving has been accompanied by a decline in overall national saving — partly via reduced corporate savings, largely via increased public deficits.

One caveat: some of the decline in investment, and hence in saving, is due to disruption in the credit markets. Still, my sense is that the big reason for declining business investment, at least, is simply the fact that consumer demand has fallen — which is paradox of thrift in action.

If you look back at several recent recessions, net national saving often declines even as personal saving increases, just like Krugman says is the case this time. (Though, interestingly, personal saving decreased substantially during the 2001 recesssion--we just piled up more debt to get through it.) But corporate saving is flat or rising about as often as it declines. So I'm not sure I agree with Krugman that the decline in business saving is largely a function of reduced demand.

Indeed, as recent recessions go, our current one is most often compared to 1981-2 (in terms of severity, etc.), and corporate saving actually ticked up slightly back then. It's obviously impossible to draw good conclusions from a handful of data points, but the corporate saving piece seems more likely a result of the still-dysfunctional banking system.

--Zubin Jelveh