The Advertizer is a Shmegegge – Is she also bad for the economy?

Note: According to Leo Rosten's, The Joys of Yiddish, a shmegegge is 1. An unadmirable, petty person, 2. A maladroit, untalented type, 3.  A sycophant, a shlepper, a whiner, a drip, or 4. A lot of "hot air", baloney", a cockamamy story (Rosten, Leo, Joys of Yiddish, Pocket Books/Washington Square Press, 1968, p. 358). 

INTRO

With the Superbowl recently finished – one in which 30 sec ad spots went for $2.5 million a pop and up[1] – now is a good opportunity to discuss the roll of advertizing in our economy.

So let’s get right to it.  The advertiser is a person who, on behalf of the highest bidder, uses (mostly mis)information to create demand.[2]  There are three big problems with how advertizing currently operates in the U.S. and the world:


PROBLEMS w/ADVERTISING

          1.       Consumers make bad choices

Advertising, often, encourages consumers to make bad health decisions

 [3],

 bad financial decisions

 and even bad personal decisions 

 2.       Inflation, debt, and investment

Advertizing encourages the purchase of useless crap 

Shake Weight video

[6].  When people buy a bunch of useless crap[7], rather than saving and investing it, more money chases the same number of goods (in the short term, before production is expanded at least), and inflation increases.  And this buying was financed not with money saved or earned, but money borrowed from China (and others) - not to invest, but to consume, and usually to consume a lot of schlok from China[8].  As Martin Wolf described the situation: “The savings glut… might be better thought of as an investment death.”

In addition, advertizing, because it is an expenditure that does not increase output, also contributes directly to inflation.  The more money spent on advertizing, and so introduced into the economy (i.e. wages paid to advertisers enter the economy as consumption and savings and investment demand), without a corresponding increase in production, the more money there is chasing the same number of goods.[9] 

         3.       The efficiency and fragility of companies

As Superbowl advertising illustrates, advertising budgets have ballooned – with important consequences for the efficiency and fragility of companies.

First, advertizing frustrates the gains from specialization.  By specializing individuals and firms can make superior products, but when it is not the superior product that sells, but the product with the superior advertizing, the economy’s production is less efficient than it could be otherwise.  The advertiser uses specialized advertisements to give a non-unique product the veneer of superiority (jeans for example).

Second, advertizing increases the non-productive cost of business.  In most simple models a firm sells a product, then uses that revenue to buy more inputs (raw materials, capital, labor) to produce more of that product.  When you add advertizing (and executive bonuses, and lobbying, and lear jet perks, etc.) to a company’s expenditures, fewer assets are devoted to production, and the overall economy is less efficient (especially when marketing uses misinformation, and so creates demand without increasing information).

Third, because advertizing is expensive and usually contracted out with a longer time horizon, a highly leveraged company (i.e. one with a lot of debt) that needs to meet short term payments will be forced to reduce expenditures on inputs, which will lead to a decrease in production.  Employees will be laid off, capital will go un-purchased, and fewer widgets will be produced – while advertizing (and executive salaries, and lobbying services, etc.) will remain contractually locked in.  This makes a company both less efficient (because production suffers while bloated overhead remains intact, example: http://www.huffingtonpost.com/2009/09/09/blue-cross-blue-shield-ex_n_281282.html) and more fragile (because a company is locked in to advertizing and exec comp payments, it can’t use all its revenue to meet financing payments coming do, and instead is forced to cut down on the production that will allow it to meet future payments).


WHY ADVERTIZING CAN BE USEFUL

Now, this has been 1000 ft view of advertizing, and advertizing is useful in some situations:

                1.       Advertizing can both educate and promote good behavior

Public service announcements (about childhood obesity, for example) can inform the public about a problem, and encourage them to take the right steps to address it (eat well, exercise).  Responsible, for-profit advertizing can do the same. 

Advertizing is not a neutral tool – as discussed above, even when used responsibility it can contribute to rising prices, increased firm fragility, etc. – but there are certainly situations where the advertiser’s direct impact is beneficial

         2.       Advertizing increases revenues

The firm that advertises may not only make a greater profit than its competitors, it may increase consumption in the aggregate (i.e. the scenario facing an industry may move from zero-sum to positive-sum).  Increased consumption will increase revenues, allowing for increased employment, research and development, capital investment, and other socially beneficial uses.


REMEDIES

Advertizing has certain beneficial uses, and isn’t going anywhere anytime soon.  But advertizing can be improved to reduce the negative impact that it has on an economy.  These improvements fall under two headings:

         1.       Regulation

We already have a number of regulations to prevent outright lies and errors of omission from making their ways into advertisements (think the lawyer voice that intrudes at the end of prescription drug commercials for things like ED).   More such regulations are needed, and some are definitely on the way (for example: http://www.one38.org/200911/new-predatory-lending-regulations-go-into-affect).  Of course, this will do nothing to improve non-informational commercials (http://www.youtube.com/watch?v=YsoP6bjADic), which perhaps don’t misinform, but certainly aren’t socially useful (some would no doubt argue that they are entertaining).

         2.       More word of mouth advertizing

Who do you trust more, someone being paid to hock an item, or a fellow consumer with nothing to gain from offering their opinion?   Thanks to technology, you can easily find not just one review of a product while sitting on your couch, you can find hundreds or even thousands (depending on the popularity of the product), both of the product being sold, and of the seller herself.  Sites like Yelp, Amazon, and eBay all allow you to rate pretty much everything and everyone.  Replacing the shmegegge you find on billboards and breaking up an episode of Jersey Shore with this type of promotion should be feasible – at least it’s a start.

So, get yourself a Yelp account and a Tivo and maybe shop at a few more local places with no advertizing budgets and do yourself and the country a favor.



[1] http://www.forbes.com/feeds/ap/2010/01/12/entertainment-telecommunications-no-b-us-super-bowl-advertising_7267880.html – note that $2.5-2.8 million is down from last year’s $3 million average.

[2] I know of no study that gives the ratio of informational advertisements to misniformational ones – and the subjectivity of such a study makes the proposition of conducting one futile.  Case in point: would you classify this commercial as informational, or as containing misinformation: http://www.youtube.com/watch?v=YsoP6bjADic?  Suffice it to say that a lot of bullshit makes its way into advertising.

[4] Read the full post for details.

[5] http://megchandlerdesign.com/Artwork/MegChandler-DigitalPortfolio-1.jpg. 

[6] http://www.break.com/index/hilarious-shake-weight-exercise-for-women.html. 

[7] Exhibit B: http://www.youtube.com/watch?v=PInGBOt0flQ. 

[8] http://www.besttoysoldiers.com/(Couldn't find a great example quickly, but you get the idea - I could also cite lead paint and poison toothpaste stories).

[9] As Hyman Minsky writes: “If the ratio of overhead and ancillary wages [including advertizing wages] to technologically determined wages [those devoted to production] is higher for every output, then the markup and the price of the product will be greater for every level of output than in the absence of such spending.  An increase in corporate advertising, executive payrolls, product research, and so forth will finance consumption demand without increasing the output per unit of labor technologically necessary for production; this will tend to raise prices.  If competition among firms by means of sales, marketing, advertising, and research leads to wage and salary income derived from these functions increasing relative to the wage and salary income derived from labor that is technologically determined, there will be upward pressures on prices.  Consequently, an increasing dominance of markets by firms with market power due to and sustained by advertising, product development, and sales efforts produce inflationary pressures.” (Minsky, Stabilizing an Unstable Economy, McGraw Hill, 2008, p. 174).