Use Your Credit Card, Save the Economy?

First, the good news: With overleveraged consumers trying to get their debts under control, credit card debt has dropped sharply, falling nearly 10 percent from a year ago, according to a recent government report.

From the point of view of individual consumers, this is an eminently smart thing to do: with the economy still rocky (despite the recent perkiness of the stock market), most Americans really can’t afford to shell out a lot in interest.

Here’s the bad news: With overleveraged consumers trying to get their debts under control, credit card debt has dropped sharply.

While cutting debt is great for consumers, it’s not so good for the economy as a whole: when you and I quite sensibly rein in our spending, less stuff gets sold, companies have to cut back what they’re making, yada yada … the recession continues and maybe gets worse. You know the drill.

This (as I mentioned in a blog post a little while back) is what economist John Maynard Keynes famously called the “paradox of thrift.”

Or, in this particular instance, what economist and New York Times columnist Paul Krugman calls the “paradox of debt.” As he put it a blog post of his own: “Consumers are pulling back because they’ve realized that they’re too far in debt. The economy is shrinking in large part because consumers are pulling back.”

So is it your patriotic duty to go out and spend like there’s no tomorrow? No. Keep on keeping your spending down and your debt as low as you can get it; that’ll help you get through the recession and put you in a much better position when the recovery comes at last . (Here’s some good advice on that front. And here’s a more detailed plan.)

Leave the seemingly crazy spending binge to the government. It’s the only player in the economy with the ability to counteract the “paradox of debt,” and that’s just what it needs to do.

— David Futrelle

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