[O]ne of the high points of the semester, if you're a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone's income.
In fact, consumers' income may actually fall more than their spending, so that their attempt to save more backfires — a possibility known as the paradox of thrift.
Now think about this one a minute. When you refuse to spend a dollar, something automatically takes the place of that spending. Specifically, you have saved that dollar, and it is available for debt repayment, capital formation, charity, or (yikes) taxation. Hence, Krugman's (and Keynes') premise is absurd; there is no dollar that fails to function in our economy. Even the wad of bills stuffed in a mattress sends economic signals (specifically; the owner expects deflation to make banks fail and prices to fall).
And so Keynes' ship "Paradox of Thrift" finds itself where it ought to be; crashing against the hard rocks of Bastiat's "That Which is Unseen." When we divert resources from their desired use to a less desired use, we reduce utility and deepen economic difficulties. It's scary that they give out prizes for thinking like Keynes'.