Idle Thoughts

Barely a day has gone by over the past couple of months in which I haven’t read about some company or other downsizing their workforce, cutting services or otherwise attempting to lower costs. Everyone knows that companies have to tighten their belts to get through a recession. Well, not everyone.

Andy Liu wrote a post the other day questioning the wisdom of such a response. He suggests that a recession is the perfect time to expand, when everyone else is contracting. Unfortunately, by using an analogy of a lemonade stand, he misses the key problem of his suggestion: it’s expensive to run a business during a recession.

If you’re business has very low overhead, or you have a lot of money banked away, it makes sense to expand; when everybody else is slimming down their business, market share can be bought relatively cheaply. But don’t fool yourself into thinking that this market share is going to pay for itself in the short term. You expand during a recession by accepting financial burdens that your competitors would rather avoid; if market share expansions paid for themselves, everyone would be growing.

While there is plenty of opportunity to expand during a recession, this isn’t helpful to the majority of startups. A site can only be run cheaply so long as it has comparatively few users. As soon as it begins to expand, hosting costs rise and staff need to be hired to maintain the system, all while earning next to next to nothing from it’s newfound user base, since the advertising market shrinks and users stop spending.

So if you think you have enough in reserve, go for it, grab every last customer you can, but be careful what you wish for: no-one yet knows when this recession will end.

Economics

America’s unemployment rate is the highest it’s been in sixteen years. It sounds terrible when you put it that way. And it is, but not as bad as you might think. 92.8 percent of people who wish to work are currently employed. In the best of times, that figure can rise to 96 percent, a 3.2 percent difference.

People don’t live on their savings, they live on their incomes, so lost wealth, while significant, shouldn’t have a strong effect on people’s day-to-day lives.

This means that, besides a slight real difference in wages this year brought about by smaller raises, 96.8 percent of people will be in the same financial position they were in at this time last year.

By extension, 96.8 percent of people should be spending about the same amount this year as they did last year. While not insignificant, most businesses would be able to withstand a drop in revenues of 3.2 percent (this is lazy maths, but you get the picture).

Unfortunately, they’re having to face a much more significant problem than this. In addition to those who have lost the ability to pay for services, many who would otherwise continue to patronize businesses have started saving instead, in preparation for possible worse times ahead, when they too might lose their job.

This isn’t an unreasonable concern, but it is relatively unlikely; even less so if they would continue spending, since businesses would perform better and hence be less likely to lay off employees. This a a perfect example of the prisoner’s dilemma: everyone would be better off if nobody saved money, but each person can maximise their personal wellbeing by hoarding as much as possible.

The root of this problem, though, is the news. If people didn’t insist on being so well informed of what is happening around them, they wouldn’t be aware of the recession. They would therefore have no reason to stop spending, which in turn would minimize the recession, if not avert it altogether.

I’m not saying we should avoid news, it is significantly more beneficial than it is detrimental, and avoidance would be impossible anyway given the ease of information dissemination today, but it is worth noting that the economy isn’t in an inherently poor position. While some wealth has been lost, the majority of the effects of the recession are a result of people’s responses to the news of impending economic turmoil.

Economics