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Monday, June 15, 2009

The Paradox of Thrift and An Ad Recovery

John Maynard Keynes, later Lord Keynes, was one of the famous and most influential economists in history. He developed a theory that Paul Samuelson, whose text you may have read in school, dubbed "The Paradox of Thrift."

It flies a bit in the face of wisdom such as Ben Franklin's "a penny saved is a penny earned" and other such homespun advice. Basically, Keynes said that savings were great during times of expansion and low unemployment but during a deep downturn such as we have today, strong saving can only hurt things.

Back when Keynes developed the theory in 1936, the western world was highly industrialized. Today, the US economy is not a manufacturing base but one in which 70% of the action comes from consumer spending. So, today's situation may be more exaggerated than ever before.

Right now, unemployment stands at 8.9% nationally. Recent data on the savings rate has it at 5.7%, the highest rate in 14 years. This time last year, the savings rate was zero. So, it appears that people who are still working full time are saving more than they have in decades. Those out of work obviously cannot save at all. So, the paradox of thrift comes in. As long as people remain fearful of their own jobs going away, they will be a huge drag on this consumer driven economy. And, if unemployment creeps up any more, the fear factor may grow and people will tighten their belts even more. So, the more people save, the higher unemployment may get and the longer the downturn.

This has strong implications for the advertising industry. Often, when times get tough, marketers cut their ad budgets first. And, they wait for very clear signs of recovery before going back to pre-recession levels of spending. Only a brave few have the guts to stay the course through a downturn and, depending on the category, that does not always make sense either.

Now, were Ben Franklin and fellow conservative advisors wrong with their advice to save? No, certainly not on an individual basis. We all have a responsibility to take care of ourselves and our families. So, paying off debt, delaying purchases of big items, and saving more is a great way for us to clean up our own PERSONAL balance sheets in these uncertain times. But, as marketers, we have to pray that not everyone does the same thing or it will be a long time before the good times roll again in the advertising world.

For thirty years, I have looked at debt levels grow like crazy in this country while savings rates evaporated and always thought that there would be a day of reckoning. Now, finally, many people may have become sufficiently afraid and are doing something about it. So, we are in the odd position of doing what is right for us personally but bad for our industry and our country.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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