Productivity: The Paradox of Thrift

by J. Walker Smith, Jan 2, 2009, 12:46 PM

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Since the meltdown on Wall Street, the media has maintained a deathwatch. It's not helping, and it's incorrect. You've heard it all before: The economy is a mess. Consumers are beset by falling home prices, debt, tightening credit and rising food prices. The gains realized during the dot-com and housing booms have evaporated. Credit markets remain frozen shut. Consumer spending has plummeted. New home sales, orders for durable goods and foreign trade (both exports and imports) are bottoming out, while claims for unemployment benefits skyrocket.

This has all the hallmarks of another Great Depression, right? Wrong.

The economy is hurting severely, but it's not dying. Two things distinguish the current economic crisis from the Great Depression. First, the safety net of benefits and protections we have today was nonexistent in the 1930s. Second, there has been massive intervention by the federal government, particularly the Treasury Department and the Federal Reserve, to put one finger after another in the dike as quickly as possible.

The other benchmark being used for the current economy is the double-dip recession of the early 1980s. That was a harsh, extended downturn. But it is highly unlikely that the current slowdown will be as bad as that. Worst-case scenarios for this year don't forecast double-digit unemployment, which was one of the defining elements of the 1980s downturn. The others were double-digit interest rates and inflation. Neither is a problem today. The prime rate, as this piece goes to press, is 1 percent, and deflation, not inflation, is the threat menacing the economy.

Indeed, it is this deflationary threat that should command all of the attention of media planners and pundits, because this is the risk exacerbated by the reaction to the breathless coverage of this crisis. Nothing is more important right now than consumer morale. If consumers quit shopping, then the economy will go into a deflationary cycle that will be difficult to fix. Japan, for example, is still suffering from the aftereffects of its "lost decade" of the 1990s.

Economist John Maynard Keynes called this the paradox of thrift. When consumers save instead of spend during a recession, the lost demand forces businesses to make further cutbacks. This causes even more retrenchment, which in turn leads to even more cutbacks. What seems prudent for an individual consumer is imprudent for consumers in aggregate, and ultimately creates more damage than consumers can protect themselves against by saving.

This is what media plans should be about for the immediate future: encouraging consumers to shop. Of course, as one might expect, consumers find this annoying. Yankelovich has an ongoing research program that tracks economic anxiety about personal finances. In the most recent wave, 67 percent agreed
"[i]t is wrong for marketers to keep encouraging people to spend more money in the middle of an economic downturn." Yet, marketers must do so. And there is no reason to feel guilty about it. There is a time for saving money, but that time is not now. If consumers don't keep spending, then they will be worse off, not better off, so marketing to encourage consumers to shop is in the best interests of everyone.

The problem with making the deathwatch the dominant storyline right now is that it unnecessarily saps consumer morale. It adds to worries and anxieties and offers little, if any, encouragement. Similarly, when marketers pull advertising or join in frenzied price-slashing, the message to consumers is one of fear and desperation.

Obviously, this is a tough balancing act: Marketers must manage costs without eroding consumer confidence. Otherwise, the cost-cutting will be self-defeating.

Despite assertions to the contrary, consumers have not lost their appetite for spending. As the surprisingly strong results from Black Friday demonstrate, consumers are resilient. They want to participate in the marketplace. But right now they need reassurance and encouragement. This is what marketers must do. This is the correct way for marketers to help both consumers and the American economy.

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0 comments on "Productivity: The Paradox of Thrift".

1. Marie Sutton from Rockett, Burkhead & Winslow
   

   commented on: February 3, 2009 at 10:15 a.m.

   I agree with most of what you said. Consumers may not have lost their appetite for spending but a lot of them have lost their jobs and can't spend.

2. Tiffany Lyman Otten from AcquireB2B
   

   commented on: February 3, 2009 at 10:22 a.m.

   I saw a similar article by Liz Pulliam-Weston on MSN Money, talking about the same paradox from a consumer standpoint - and she said the same thing, that ironically, what is best for the individual in this case is ultimately horrible for the economy as a whole. She did not take the next step (that I can recall) in cycling that effect back to the consumer in terms of job losses & contraction, but the article was (I think) about 6+ months ago, before the last shoe dropped.

   However, dare I say that some deflation is necessary to counter the inflation of the 80's - many things have been out of reach/more expensive than they should be, and frankly a lot of companies have been greedy about it. Your long-term argument is correct, but the long-LONG term argument is that it needs to balance out - the economy itself was in a bubble across the board and anyone saw this coming eventually. I think it just had a catalyst to have it come sooner.

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