Consumers: Diving the economy or swept up in the business cycle?

Economics textbooks have all kinds of concepts that make consumers sound really important. They talk about aggregate demand curves, and consumer price indices, and disposable personal income, etc., etc. They talk about supply and demand with a reverence befitting a couple of cosmic powers. Indeed, to some extent, the laws of supply and demand are so cosmically obvious they must be true. Consumers differentiate between various products competing for their attention and their dollars, and determine of which products they want more and which fewer. It’s a pretty efficient way to decide the allocation of effort and resources.

However, once you add the element of time, supply and demand starts to look like much more of a consequence of economic trends than an antecedent of them. I remember, at the beginning of the current recession, starting to hear news reports of the “Global Financial Crisis.” Sounded scary. But also sounded a little ridiculous. It was like hearing tornado sirens go off when there’s not a cloud in the sky. In such a situation, since I don’t happen to be equipped with my own personal meteorological radar system, I, average everyday tornado fodder, have to decide whether to trust the experts’ warnings of impending doom or to trust my own common sense appraisal of the situation. Unfortunately, in the case of the Global Financial Crisis, the meteorologists were right. Impending doom was on the way even though the sky was blue.

My point in belaboring this metaphor is that I and presumably all the other average consumers out there who don’t have our own sensitive prediction models or devices were the last ones to know that something seriously nasty was headed our way. We were happily spending and borrowing and spending and borrowing like nothing at all was going on. But something was going on. And soon the effects started getting a little more obvious. Soon we knew people who were being laid off. Soon our retirement accounts weren’t looking so peachy. Soon a neighborhood business shut its doors. And then, when the sky was distinctly darker and the trees had started creaking, we realized it was definitely time to do something. And what does one do in a tornado? Well, one either takes a video of it on their camera-phone in an attempt at YouTube stardom, or one hides in a hole. And that’s what people did. They started hiding from the economic whirlwind, and stopped spending and borrowing and spending and borrowing. Then supply and demand showed up and became the justification for businesses to scale back production, which cost jobs, which gave people less to spend, which scaled back production…

To return to the very beginning of this blog and of the economics textbook, we learned that the basic economic questions are about goods and services. What, how and for whom will we produce goods and services (p. 17)? But if that is truly the center of our economic system, why is it that the production of goods or services can be so dictated by financial forces so totally beyond the scope of the average everyday consumer of goods and services? Isn’t the consumers’ interest in stuff, the aggregate demand of an economy, a fairly stable thing? And yet somehow we end up with a business cycle that everyone regards as inevitable as warm and cold fronts. The cycles move in and drastically affect families’ economic outlooks, while they sit huddled in their basements waiting out the storm. Something seems very off to me. It sure feels like I, as a consumer, am much more like tornado fodder than I am a cosmic force. Why?

Downey, Matthew. Contemporary’s Economics. Chicago: McGraw Hill Wright, 2007.