The paradox of thrift is a perfect example of a fallacy of composition (‘what’s good for one is good for all’). One family responding to economic uncertainty by squirreling away money makes sense … for that family. But if everybody does it, the result is that people spend less overall, causing a deeper and longer-lasting downturn.
Government expenditures comprise a huge portion of our economic activity. While it may seem prudent to do a little ‘belt-tightening’ there, the belt is already snug – around the neck of our already-fragile economic recovery. It’s not just state and Federal workers, and aid recipients who would lose out; so would grocers, landlords, car dealers, and on up the line. The deepening and lengthening of a second dip would be a foregone conclusion.
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