Paradox of Profits

Over a year ago, I wrote

The paradox of thrift is that with investment fixed, not all consumers can increase savings at once. The paradox of profits is that with consumer spending fixed, not all businesses can increase revenues at once.

Now, the New York Times has picked up on this theme.

Corporate cost-cutting and labor-saving layoffs appear in the forecasts as the golden road to greater productivity and rising profits. Never mind that we have just fired the workers and extinguished the salaries that would have been spent on the merchandise and services to fatten the profits. With sales revenue failing to rise, we cut costs more. The process feeds on itself - until there are not enough workers and salaries left to generate sales and profits.

For long-term growth and productivity, consumer saving and corporate efficiency are good things. In the short run, if demand is inadequate, saving and efficiency lead to unemployment. The best of all worlds is one in which corporations ruthlessly cut costs, consumers save much of their incomes, but aggregate demand remains high. As the Times article points out, economists count on fiscal and monetary policy to sustain aggregate demand.

Discussion Question. What does the experience of Europe tell us about economic performance when corporations do not cut costs and pursue efficiency?