Skip Navigation
Megan McArdle

Megan McArdle - Megan McArdle is a senior editor for The Atlantic who writes about business and economics. She has worked at three start-ups, a consulting firm, an investment bank, a disaster recovery firm at Ground Zero, and The Economist. More

Megan was born and raised on the Upper West Side of Manhattan, and yes, she does enjoy her lattes, as well as the occasional extra-dry skim-milk cappuccino. Her checkered work history includes three start-ups, four years as a technology project manager for a boutique consulting firm, a summer as an associate at an investment bank, and a year spent as sort of an executive copy girl for one of the disaster-recovery firms at Ground Zero … all before the age of 30.

While working at Ground Zero, Megan started Live From the WTC, a blog focused on economics, business, and cooking. She may or may not have been the first major economics blogger, depending on whether we are allowed to throw outlying variables such as Brad Delong out of the set. From there it was but a few steps down the slippery slope to freelance journalism. She has worked in various capacities for The Economist, where she wrote about economics and oversaw the founding of Free Exchange, the magazine's economics blog. She has also maintained her own blog, Asymmetrical Information, which moved to The Atlantic, along with its owner, in August 2007.

Megan holds a bachelor's degree in English literature from the University of Pennsylvania and an M.B.A. from the University of Chicago. After a lifetime as a New Yorker, she now resides in northwest Washington, D.C., where she is still trying to figure out what one does with an apartment larger than 400 square feet.

Bad news, and the paradox of thrift

By Megan McArdle
Jan 28 2009, 3:44 PM ET Comment

So, layoffs have come to the McArdle household, making this a depression by the most commonly accepted definition.  The startup my housemate works for has gone out of business, and as we sat around last night talking about the financial implications of this, I pondered the Paradox of Thrift.

This is Keynes' famous argument that all spending is someone else's income.  If we (hypothetically) decide to eliminate takeout from our menu and eat tuna sandwiches instead, we are saving money.  But the restaurant loses it.  By foregoing spending, we are pulling money out of the economy.  This is the insight behind the liquidity trap--if everyone tries to hoard money by selling more goods and services while buying fewer, the total demand for goods and services will drop, and we will make ourselves worse off.

There's a problem with this crude, version, of course:  it's only true if we hoard the money in the form of cash.  If we put it in the bank and the bank lends it out, that money will be spent by whoever borrows it.

Now, in Keynes' time, this actually wasn't all that unreasonable.  Lots of people did save money in the form of cash, especially after the big bank failures.  Indeed, people who lived through the Great Depression often kept hoarding cash--my Grandmother once idly opened the teapot she was about to put in the church rummage sale bin, only to discover the $3,000 my grandfather had squirreled away there for a rainy day.  And when you're dealing with an economy that largely skates along on cash, there are big delays in the translation of savings into lending.  You have to physically put the cash in the bank.  Someone else has to physically take it out.  Then, after perhaps a delay of several weeks, they physically pay the contractor who upgraded their bathroom.

In the modern economy, of course, what happens is that we just leave the money in the bank longer than we otherwise would have.  No delay.  So what's the problem?

The problem is that the banks aren't lending.  We're hoarding money, and they're hoarding it even more--they don't have to fix the transmission or buy antibiotics.  So as in Keynes' example, the money really is just sitting there.

It's worth remembering that this is why the banks are at the heart of our problems.  Even fixing underlying issues--like forcing write-downs of the home values securing recent mortgages--will not make them lend if they think they need higher capital to ride out potential storms.  That's why even good liberals and Democrats are focused on rebuilding balance sheets, aka giving the banks free money.

Update:  Sorry, let me be super clear that I still have a job.  My housemate worked for a startup that got hit by the credit crunch. 


Presented by

More at The Atlantic

Sarah Palin Brings Out the Barbs at CPAC Sarah Palin Ends CPAC With Rousing Speech
Death by Flavored Vodka Death by Flavored Vodka
A Western Diet High in Sugars and Fat Could Contribute to ADHD A Sugary, Fatty Western Diet Could Be Contributing to ADHD
The Truth About income Inequality in America The Truth About Income Inequality in America
Whitney Houston Has Died Whitney Houston's Greatest Hits

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.
blog comments powered by Disqus
Special Report
Election 2012 Reuters Election 2012
The destination for full politics coverage, from the primaries to the White House. Read more ›
View All Correspondents

The Biggest Story in Photos

The Civil War, Part 3: The Stereographs

Feb 10, 2012

Subscribe Now

SAVE 59%! 10 issues JUST $2.45 PER COPY

Facebook

Newsletters

Sign up to receive our free newsletters

(sample)

(sample)

(sample)

(sample)

Megan McArdle
from the Magazine

Why Companies Fail

GM’s stock price has sunk by a third since its IPO. Why is corporate turnaround so difficult…

The Graduates

Busted banking careers, crashed consultants, and shrunken incomes: the author attends her 10-year…

Romney’s Business

The Republican contender touts his business experience—but does it really matter?