What is the paradox of thrift?

The paradox of thrift is an economic theory that asserts that individuals choosing to save rather than spend their money can make a recession worse, and that individual saving can collectively be harmful. The paradox of thrift, like many economic theories, is not universally accepted as true.

Proponents of the theory posit that decreased spending by individuals harms businesses, causing the owners to lay off employees, who are then themselves unable to spend. This creates a snowball effect, as each round of layoffs impacts additional businesses, as well as heightening existing perceptions of weakness in the economy, which discourages further investment.