The Future of the Consumer-Driven Economy: a Preview

Author Lizabeth Cohen Predicts More Regulation, Difficulty Getting a Mortgage, Changes in How Purchases Are Financed

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The consumer-driven economy will survive the current recession. But it will look different afterward.

How different? For starters, it'll likely be smaller. Home ownership will be less widespread; anxieties about paying for health care, retirement and college will run high; and purchase financing will change.

WILL HISTORY REPEAT ITSELF? Lizabeth Cohen points to the Great Depression and World War II as precedents, and states that the current financial crisis is poised to create a new evolution.
WILL HISTORY REPEAT ITSELF? Lizabeth Cohen points to the Great Depression and World War II as precedents, and states that the current financial crisis is poised to create a new evolution.
Those are the expectations of Harvard University history professor Lizabeth Cohen, who explored the rise of the consumer-driven economy in her 2003 book "A Consumers' Republic: The Politics of Mass Consumption in Postwar America." "Consumers' Republic" is the name she gives to the economy, culture and politics that put the consumer at the center of the economy.

"I think we got to the crisis as an apex of the Consumers' Republic," Ms. Cohen said in an interview. "That private consumption had risen to 70% of GDP, that we had home ownership that had expanded so extensively, that all these people were maxed out on credit cards -- all of that was the nightmare fulfillment of the promises of the Consumer Republic. Now that it's crashed, it will be interesting to see how it's reconstructed."

"Consumers' Republic" traces the origins of the consumption-driven economy back to the Great Depression, when policymakers identified the consumer as the agent for expanding the economy and broadening prosperity. After World War II, government policies (the G.I. Bill being the most famous) and private-sector initiatives made that happen. Consumers were seen as the engine of growth; in the book Ms. Cohen quotes President Dwight Eisenhower touting consumer spending as critical to getting the country out of a recession.

In flux
The Consumers' Republic was a constantly evolving thing, influencing and shaping everything from the civil-rights and feminist movements to the rise of suburbanization to the development of market segmentation.

The current recession, financial crisis and tightening of credit likely will force a new evolution. "It may be less than it was, and it may be more realistic than it was," Ms. Cohen said. "We were in a situation where we would put up a new mall, and one that was open for 15 years would close. There are certainly going to be adjustments."

What adjustments might we see? While saying she's a historian and not a predictor, Ms. Cohen sees potential for:

  • A move away from the exurbs, partly due to rising energy costs.
  • Increased regulation of the financial sector, something we've already seen with credit cards. "In some ways you could argue it was inevitable as people became increasingly dependent on credit, more people became homeowners, more people became stockholders."
  • More difficulty getting a mortgage.
  • Differences in the way purchases are financed.
  • The first challenge is getting off the blocks. The old answer -- get consumers spending -- is problematic in light of the bursting of the housing bubble, defaults and wallets already being stretched. Moreover, people are saving more after watching their retirement plans get whacked. And even people who have jobs are nervous. Indeed, Ms. Cohen said she sees a role for government ­­ in health-care reform -- to make people feel more confident.

    "The economy will start growing again if people feel more secure," Cohen said.

    In any event, Ms. Cohen said she is confident that savvy marketers will continue to find ways to sell in this environment.

    Lizabeth Cohen
    Lizabeth Cohen
    Many marketers are stressing value messages common to the 1930s, Ms. Cohen pointed to World War II as another precedent. The reason: It was a period of low consumer spending and pent-up demand for goods that were either unavailable or out of reach (obviously for very different reasons; it was difficult to buy a car because Detroit was churning out Sherman tanks and bombers).

    Marketers "used advertising in a long-term way to try to build people's appetite, to sustain their appetite for" appliances and other goods, she said, "promising when the war ends there will be homes, there will be appliances. They were really trying to keep delayed gratification fed."

    Her book includes a General Electric ad in which a guy in uniform, sitting with his gal on a park bench, drags a stick through the sand to draw a house. "It's a promise!" reads the cursive headline.

    It remains to be seen what the new Consumers' Republic will look like. But Ms. Cohen said she has little doubt it's here to stay. "I don't know what the alternative is to a consumer-based economy."

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    James Arndorfer, a former Ad Age reporter, now works for MillerCoors.

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