Seattle's Child Magazine: The Cold, Hard Truth: Penny-Pinching Families Can Exacerbate a Recession

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Published: Tuesday, January 6, 2009

The Cold, Hard Truth: Penny-Pinching Families Can Exacerbate a Recession

The Wall Street Journal

Many U.S. families are newly embracing frugality amid the worst economic downturn in decades. That may be good for their household budgets, but that same thriftiness is also a major reason the downturn will likely continue for some time.

Frugality is usually a good thing for individuals and the economy. Savings fill up a reservoir of capital that can be used to pay for investments, which helps raise the nation’s standard of living. The same principle isn’t true in a recession. Increased saving and decreased spending lead to what economists call “the paradox of thrift.”

U.S. household debt, which has been steadily growing since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.

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