Saturday, June 2, 2012

Spend or We Resort to Human Sacrifice

We could try sacrificing some
virgins to appease an
Angry Economy.

I hate to admit this. But I happen to agree with George W. Bush's advice after 9/11, that the most helpful thing we can do right now is to go shopping. Sounded shallow and insensitive at the time. But he was right. About that anyway. He wasn't right about going shopping for WMDs in Iraq. But he was right about going to the mall.

Okay. Okay. But let me finish:  In my book, The Unbreakable Rules of Marketing, and in past blogs, I have repeatedly urged companies to spend more on marketing during economic recessions, not less. Unfortunately, the first impulse of so-called prudent CEOs has been to ease off on marketing spending during tough times--not pour it on--as if it were a luxury not a necessity. But that is the worst thing they can possibly do. It's equivalent to the medieval doctor's practice of bleeding the patient when they're sick (and if they get sicker; well, bleed them some more). Or it's like jettisoning the wings to make the plane lighter. Pick your simile. It's just bad, bad, bad to stop spending during a recession. During fat times is when you can (and probably should) slow down. But when the economy itself slows down, that's the time to spend. I shall explain.

Yes, I Base My Economic Theories on a Cartoon

I recently saw a four-year-old rerun of a South Park episode (Margaritaville) in which the town's chronically silly adults decide that The Economy is angry at us for spending so much and decree that everyone should stop spending in order to appease The Economy, so it will smile at us if The Economy were some pagan god. So they impose a regime of austerity on the town and anyone caught spending anything is "dealt with" as a heretic.

Guess what happens? (In case you haven't seen this episode). Yup, the town's economy gets worse. Nobody is buying, nobody is shopping, nobody is working, and the economy (as opposed to The Economy) gets worse. That's because it isn't some supernatural deity, it's the very act of everybody spending, working, buying, making, selling, consuming, living, and keeping goods and services and MONEY flowing.

The economy is flow. If you stop the flow, there's no economy. It turns into a stagnant that eventually dries up (the metaphors never stop).

At the end of the episode, Stan, in a heroic act of self-sacrifice... But that would be spoiling. Suffice it to say that it involves spending.

As old as this satire is, it seems to apply even more today, almost four years later, with The Economy still angry at us. Though it has been manifestly proven, beyond a shadow of a rational observer's doubt, that austerity policies have been worse for the economy than spending, the blind faith in these "belt-tightening" measures seems stronger than ever (see my previous blog post on irrational beliefs). Economist and Nobel Laureate Paul Krugman describes this as belief in "The Confidence Fairy," another mythical being whose magical powers get an economy moving again because austerity policies somehow create "confidence" in investors. But even though we've been savagely slashing public and private spending for four years now, The Confidence Fairy still hasn't delivered.

Maybe we just need to bleed the patient more. Or we need human sacrifice.

The Maxwell Equations and the Economy

Don't worry, there's no math, and just a tiny bit of physics.

An old and astute friend of mine, William Glenn, once told me of his theory of the economy (get ready for another metaphor...I've got a million). He said that money was like light; it has to be moving to exist. A photon doesn't exist at rest, since its mass is zero (here's where the Maxwell Equations on the propagation of electromagnetic energy come in). It can slow down, but never stop, because when it stops, its mass goes to zero and, poof, it disappears. It's no longer a photon. It's gone.

(Don't believe me? Do this experiment this at home: Take a photon and put it in the freezer until it slows to a stop. When you open the freezer, it'll be gone. Try it.)

A dollar bill, by analogy, is like a photon. At rest it's just a piece of paper, representing the potential of what a dollar can buy, but it's essentially worthless until it starts moving; that is, until you spend it. The economy, according to Glenn, is the aggregate flow (or current, in Maxwellian terms) of all dollars (and euros and yen  and schlobotniks) in motion. When those dollars get stashed in mattresses, cash funds and freezers, they stop moving, and the current of the economy drops to zero. All that saved money becomes worthless, just paper. Photons at rest.

Spend Like the Wind

So while saving money might be considered virtuous--in moderation--it can be unhealthy in excess, and downright disastrous in an unhealthy economy. Every dollar you or your company saves, is a dollar that is not being spent. And the size of the economy shrinks and shrinks. So you end up with, as the genie in Aladdin says (I do love cartoon wisdom), "Unlimited power! Itty bitty living space."

That's why it's important to spend, not just on marketing (if you're a business), but on goods and services, on employees, on making things to sell, on all of that. Spend, spend, spend. Shop, shop, shop.

We're all part of the same super-organism that's the world economy, and unless we keep the blood flowing (can I pile on the metaphors, or what?) we'll all die. Of course, it's important not to be profligate, and to spend prudently, but in slow economic times, I'm afraid Bush was right (and you don't know how it galls me to admit that); go out and shop. You're keeping businesses in business, employees employed, and The Economy appeased. So it will stop being angry with us.

Or we could try human sacrifice. I live near a volcano.

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