Income decline


Income decline can be a challenging experience, but proper financial planning and understanding economic principles can help. Here are two key insights from experts on dealing with a drop in income:

  1. Paradox of Thrift:

    • Steve Fazzari discusses that increased saving by individuals can lead to a decline in total income in the economy. This happens because if everyone cuts back on spending to save more, it reduces aggregate demand, leading to lower incomes overall 1. Essentially, one person’s spending is another person’s income, so widespread reductions in spending can have broader economic impacts.
  2. Building Financial Resilience:

    • Morgan Housel emphasizes the importance of creating a financial safety net by aligning spending with potential future income scenarios. He advises maintaining a gap between current expenditure and potentially lower future income to ensure stability. This cushion allows one to adjust without severe lifestyle changes if income declines. Controlling spending is key, as it’s often more within one’s control than income 2.

By understanding these concepts and managing spending wisely, you can better navigate periods of income decline.

The Paradox of Thrift

Steve and Russ discuss the paradox of thrift, exploring how an increase in saving can lead to a decrease in total income and the potential problems it poses for the economy's aggregate demand. They delve into the concept of one person's spending being someone else's income and the implications of a decline in aggregate demand.


Steve Fazzari on Keynesian Economics