Last In. First Out: An Economic Treatise

For most businesses, ads are discretionary. Budgets are made by estimating revenue and then figuring out how much spending can be afforded. Spending priorities are, in rough order:

  • Salaries
  • Product costs
  • Consumable goods and services
  • Replacement capital
  • New employment
  • Expansion capital
  • R & D
  • Advertising

    If the going gets tough as the year unfolds, advertising spending is first held back and then quickly cut back, followed, in reverse order, by the other items in the above list. This is the truth, though obviously quite ironic because of all the items on the list, advertising is the only one that might actually help the business to meet its near-term goals.

    So, it's the first item out in tough times. But, is it therefore the first item back? Don't believe it. In fact, items are added back to business budgets after "leaders" begin to believe in a turnaround in roughly the same order as above, with attention to advertising coming last. So: Last in, First out.

    During the years of slow economic growth leading out of a recession, the advertising economy grows even more slowly than the overall economy as businesses first give attention to the other items on their list. As profits begin to improve, businesses begin to look for places to put excess bucks. Voila! How about spending a little more money on advertising next year for a change of pace?

    Since advertising actually DOES work, revenue growth will begin to accelerate, leading eventually to rapid profit growth. (And those crazy ad ideas actually begin to look good to business leaders again.) As a result, for a number of years in the mid to late stages of an expansion, the advertising economy will grow at a much healthier clip than that of overall GNP.

    But, then, somehow, nervousness once again sets in or there is a shock to the system from outside (war, stock market plunges, disasters of one kind or another) and fears of a slowdown start to spread. Wise business leaders look for ways to be "responsible" and become the fastest to cut spending among their peers. Guess what goes first? You know what. Then, since they have cut their investments in the engine of their business growth, upward revenue movement DOES slow. How smart they were to plan ahead for that contingency! And it starts all over again. (See paragraph One.)

    The Federal Reserve and other economy watchers spend a lot of energy talking about business investment, by which they mean expenditures on "fixed capital." In the late 90s a bunch of that spending was on technology. That kind of spending is often useful. It employs people in the tech industries and it is a commitment by business leaders to the future. The Fed and the pols spend a lot of energy trying to prop all this up. If only they knew! The real engine of economic expansion is advertising. It has all the direct benefits of capital spending -- income and employment (in this case in the media industries) -- with the added value that it actually provokes a widespread positive reaction by customers. After all, our problem is excess product and excess capacity, not a need for new factories and machines. What could be a better stimulant for the economy than advertising investments that both employ people and stimulate demand for existing products with the same dollar?

    Well, don't count on support of the advertising industry as the next federal stimulus program. But, each of you DOES control advertising investment levels for your own businesses and clients. Have confidence! Reorder those priorities and invest NOW in your better future. Increase those ad budgets and drive us out of these doldrums we are still in. But, know that it will be a lonely cause you are fighting and many will doubt you. Just don't let them get you before the upturn in your companies fortunes proves that you were right.

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