Wednesday, June 25, 2008

Are we in a recession? M&M's and jetBlue say no

I look around and notice that firms have not cut back on their advertising and promotions. During a recession, the economic slump would feel quite pronounced, i.e., incomes would be falling, people would be losing jobs left and right, corporate profits would be tanking, and the economy would feel, well, depressed. In a recession scenario, it would not be the best time to throw advertising dollars to the wind in order to promote products like candy bars and plane travel.

I deduce that since many firms are engaging in heavy advertising schemes, then we are likely not in a recession.

As you know, I live and work in Boston, MA as an Economist. I enjoy walking around town in search of clues that tell me about the health of the economy. Today I was sitting outside of the Prudential Center eating my lunch when I noticed a large crowd. Everyone was walking around with M&M ice cream bars – orange, red, blue, you name it – they all had one. M&M was giving out the bars for free as in order to promote the bars. Then, I spied a rather grand eye sore that was a JetBlue advertisement plastered across the side of the building above the M&M truck. Immediately, I thought that advertising is wasted money when the economy is doing well, but extraneously wasted money when the economy is in a slump.

As an economist and based on my anecdotal evidence of the continued flow of advertising dollars, I deduce the U.S. is not in a recession.

Econ 101 teaches us that advertising is a sunk cost. It does not buy anything except possible market share, or new customers, but that is certainly not guaranteed. You will see big giants like jetBlue advertising incessantly in order to steal customers from Southwest. Certainly if corporate profits were falling precipitously, then managers would be more concerned with paying their employees, rather than buying advertising rights.

Oh, oh, I shan’t forget the Democrats…of course. I think that this is a great opportunity for some good old government intervention led by John Kerry, the Chairman of the Senate Committee on Small Businesses and Entrepreneurship. He should be appalled that the small guys, JP Licks (local Boston ice cream shop) and Cape Air (New England airline), are losing market share from the needless advertising by corporate advertising on behalf of M&M and jetBlue. Just like limiting speculation in the oil markets (see related blog The Saudis know their limitations, why don’t the Democrats?), John Kerry should definitely spend time and effort drafting a bill that would reduce the amount of corporate advertising in any city with small business competition.

I wish to hear your thoughts and opinions, so please leave a comment. Best, Nontruths

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