ABSTRACT

The “paradox of thrift” says that attempts to increase saving, by reducing spending and aggregate demand, may lower output and national income so much that the actual ex post savings end up being smaller than at the outset. The companion “paradox of the budget,” as proposed by William Vickrey,2 holds the same lesson for the government, namely, that attempts to reduce budget deficits by cutting back on spending may induce lower private spending, sluggish growth and erode the tax base to such an extent that the deficit ends up bigger than it was at the outset. These paradoxes are traditionally held to be short-run phenomena whose logic calls for active counter-cyclical measures on the part of the government.