Abstract
Vermann (2012) and Thies (1996)’s papers indicate that the paradox of thrift is no longer in vogue in United States of America (USA). This paper argues that the paradox of thrift is still applicable to USA even though she is operating with sufficient demand. The main objective of this paper is to determine whether the paradox of thrift is applicable to USA after the Great Depression. In doing this, a vector error correction model was estimated using annual data of gross national income, gross domestic saving, gross domestic investment and final consumption expenditure from 1971 to 2020. The results of the investigation showed that final consumption expenditure and gross domestic saving increase when gross national income increases. Gross national income falls and current saving is unchanged when previous saving rises. The paradox of thrift is applicable to USA after the Great Depression. The target of economic policy should be gross national income and not gross domestic saving because naturally both final consumption expenditure and gross domestic saving will increase if gross national income increases in USA.
Highlights
The paradox of thrift is the paradoxical result of the simple Keynesian model that when planned saving rises, income falls and actual saving is no higher than before (Amacher and Ulbrich, 1986)
Paradox of thrift becomes practicable in applied research when the words, previous saving is used in place of “planned saving” and the words, current saving is used in place of “actual saving”
With this change in semantics from planned saving to previous saving and actual saving to current saving, paradox of thrift is the result of the simple Keynesian model that when previous saving rises, income falls and current saving is unchanged (Chuba, 2021)
Summary
The paradox of thrift is the paradoxical result of the simple Keynesian model that when planned saving rises (the saving function shifts up), income falls and actual saving is no higher than before (Amacher and Ulbrich, 1986). Paradox of thrift becomes practicable in applied research when the words, previous saving is used in place of “planned saving” and the words, current saving is used in place of “actual saving” This change in semantics from planned saving to previous saving and actual saving to current saving does not alter the analysis of the Keynesian economic theory about the paradox of thrift. This paper argues that the paradox of thrift is applicable even to a nation which is operating with sufficient demand This is because all other things being equal, an increase in previous saving causes the saving schedule as well as the leakages line to shift upward. Based on Keynesian model, an upward shift in the leakages line causes the equilibrium level of national income to fall while current saving remained unchanged (chuba, 2021).
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