A Consumer Economy

October/13/2009 18:21PM
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USA Today ran an article that said consumer spending is now 71% of GDP. The long-term average has been 65%. Yet, US consumers are buying less and saving more. Should this be a concern?

America buys too much and produces too little, and China buys too little and produces too much. Which problem would you rather have? What does this country look like when it produces almost nothing? When consumer spending is 80% of GDP? As China consumes more, and it will, they will depend less on us for exports. Prices will go up on our products we buy from them.

When I was in Ted Levitt’s Marketing class at HBS, I remember a case study. A guy started making rocking chairs. His business was growing and he kept expanding. Sears started buying his rocking chairs. That let him expand his plant and double his production. Soon Sears was 50% of his production. The buyers from Sears came in and wanted to double their purchases. That would basically take 100% of his production and the price was fair. What should he do?

Ted asked how many would sell 100% to Sears? How many 75%? How many keep it at 50%? Has anyone not raised their hand? I said I hadn’t. After the normal insults from Ted, he asked why? My answer, I would stop selling to Sears. Why? My rationale was that once Sears had 100% of my business, they would squeeze me on price. I would have no customers, no sales force, and would have no choice but to take the squeeze. The actual case went almost that way. It may have been my only correct answer in Ted’s class while I attended, but it made sense to me.

Later, in the real world I experienced the same situation. I managed the lube business for an oil company. We made 100% of the front wheel drive grease for GM. They kept squeezing us on price and demanding more and more R&D. Finally I went to Saginaw, Michigan and told GM we didn’t want their business any more. Go ahead and buy from the other guy. The other guy kept running them out of grease and cutting their lines and they wanted to come back to us, but I refused. We had found other buyers for much of that volume, multiple customers who paid us a fair price and bought more specialty products for higher margins.

The moral of all this. We are quickly losing much of our capacity to make things to sell here. We will be able to buy those goods elsewhere. But, at some time we will pay and pay dearly. In WWII who would have made our tanks and planes? Some historians have said we won the war by out producing our enemies. Who sells us crude oil today and at what price? What happens if the dollar keeps falling? Normally that would be good if we exported goods, but with little exports, what premium do we pay for imports?

Was there a grand plan for us to be strictly a consumer society and have the government be our primary employer? I never saw that plan published. Who did this to us?

We did. We have lost all common sense. We have a convoluted sense of reality. We want the rest of the world to be a junkyard that supplies our products while we live in a pristine country that runs on wind and solar and makes no smoke. Al Gore, Hollywood, and stupidity have turned us into fools.

Can we recover? If Winston Churchill was right, we might. He once said,” Americans always do the right thing, after they have tried everything else first.” Well, the clock is running out on doing the wrong things. The rocking chair guy ended up selling out to Sears since they had him by the short hair. Do we sell out to China?

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