Saturday, April 21, 2007

Irrational consumers

One of the reasons that the economy continues to be stronger than expected, with no sign of a recession, is that consumers are simply being irrational, at least relative to how classical economists would expect them to behave.

Look at the price of gasoline. It is through the roof again and is not slowing consumer spending in a significant manner. Consumers are taking the price rise in stride and continuing to spend anyway.

Where are consumers getting all of this money?

Basically what this "episode" tells us is that traditional economists simply do not have a comprehensive model for "The Modern American Consumer."

It may be true that income levels in the middle class have "downshifted", but the simple fact is that people have in fact done the rational thing and adjusted to the new realities of the Post-New Economy.

One simple fact is that there had been a huge growth in dual-income families in the 1970's, 1980's, and 1990's, so that even a moderate level of layoffs and under-employment simply reduced the "saving power" of the average household, but so many households still have more than enough income even in single-earner mode to support reasonably comfortable lifestyles, even with high gasoline prices.

These are not your grandfather's consumers.

-- Jack Krupansky

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