Economists Do It With Models

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From The Overthinking It Department, Billboard Edition…

July 30th, 2009 · 10 Comments
Advertising · Macroeconomics

Those of you who have been with me for a while may remember that I wrote a while back about the misleading nature of Allstate’s television ads. Today I came across a less detailed but still somewhat inaccurate bit of advertising from State Farm, courtesy of This Young Economist:

So many things to think about here. In no particular order:

  • The title of my site is pretty appropriate since I am apparently good at making everything dirty. (Click here if you don’t believe me.) As such, my first thought was something along the lines of “If I could stimulate my own economy, what would I need models for?” *rim shot* I would never stimulate my own economy- I think my grandmother told me that would make me go blind or something. (Perhaps that’s only true for boys, I don’t really know the details.)
  • As This Young Economist points out, Tyler Cowen just came out with a book entitled Create Your Own Economy. If I were him, I’m not sure how I would feel about my book seeming closely tied to a cheesy advertisement for an insurance company…
  • I even kind of object to the message in the advertisement. Ok fine, saving 40 percent on auto insurance would free up household resources to either save or spend on other things. Does that really count as a stimulus or just a shift? Also, from the perspective of the overall economy, it’s actually potentially counterproductive as a stimulus. Why? Let me point you to my brief foray into talking about the concept of a spending multiplier. Remember that? The basic idea is that spending money is a good thing in terms of economic stimulus, since that money goes to other people who spend it and so on and so forth. Therefore, if people take their 40 percent savings and spend it elsewhere, the economy is back where it started, and if they take the 40 percent savings and put it under their mattresses, it’s actually causing contraction rather than stimulus.

I hope this discussion has been, um, stimulating. 🙂

Tags: Advertising · Macroeconomics

10 responses so far ↓

  • 1 Krzysztof Wiszniewski // Jul 30, 2009 at 5:01 am

    Funnily enough, my first reading of this ad was: “Give the finger to everyone who tells you to spend! Save your cash for a rainy day.” – which just goes to show I’m probably thinking too much like an economist again.

  • 2 Matt // Jul 30, 2009 at 11:09 am

    Personally, The first thing that comes to my mind when I see insurance ads like this isn’t the main tagline at all. I see “up to 40%” and think to myself…”Hmm, well one person might have gotten 40% off a huge policy, and the rest is a skewed bell curve with a mean of like 5%-10%. “And doesn’t that statement really apply only if comparing precisely similar policies, because likely one company has policies segmented so that one level covers $250,000 and another company has a similar level that covers $225,000. That’s a significant difference if you actually have a big accident.”

    Although, admittedly I did get the innuendo in the tagline immediately as well. 🙂 Those dirty advertisers knew it when they approved that ad too. Sex sells even with models not involved.

  • 3 Lawrence M // Jul 30, 2009 at 12:17 pm

    It makes complete sense! If I crash my car and burn my house down, I will help both our auto AND housing industries! Er…I mean somehow my car got totaled and someone left the stove on in the kitchen.

    But all kidding aside, I don’t need to stimulate my own economy. I’m what you call a growth industry and lemme tell you – demand is inelastic.

  • 4 SteveO // Jul 30, 2009 at 12:18 pm

    I disagree with the principle that savings leads to contraction. This sounds like Keynesian nonsense to me.

    It’s very difficult to hide your light under a bushel in monetary terms. If you save, that money is going toward increased liquid capital for those starting or expanding their enterprise.

    Even if you bury your money in a hole, then the reduction in public liquidity strengthens the dollar by that amount.

    The old saying is that you can only do two things with a dollar, spend it or save it. But I think there’s really only one. It all amounts to spending it.

  • 5 Dmitriy Y. // Jul 30, 2009 at 12:43 pm

    I must disagree as well. Savings (in a bank, not under a mattress) will lead to an increase in wealth.

    Simply stated: savings > investment > capital accumulation > productivity > standard of living.

  • 6 Matt // Jul 30, 2009 at 1:57 pm

    In regards to the previous two comments, what does lead to a contraction in your mind then? I assume you don’t subscribe to the belief that spending stimulates the economy, otherwise we’d never stop growing? The banks would have to be required to spend the money wouldn’t they? Couldn’t the banks just horde the money to better capitalize their positions, particularly in many banks current circumstances?

    Penny for your thoughts.

  • 7 Tony // Jul 31, 2009 at 11:36 am

    Ha… I love the innuendo-laden interpretation of the billboard. I should have seen it coming.

    Maybe I was blinded by the fact that I’m anxiously awaiting for “Make Your Own Economy” to show up on my doorstep.

    On the spending multiplier discussion, I don’t have much to say, except that a guy by the name of Frederic Bastiat had some interesting thoughts. “What is seen and what is not seen” is worth a careful read:

    http://www.econlib.org/library/Bastiat/basEss1.html

  • 8 Mike N // Aug 5, 2009 at 5:07 pm

    Yup, I’m going to disagree as well. Assuming that it is 40% off for everybody and the 40% is because state farm can provide this good for 40% less, the economy will grow. If the savings is entirely consumed, then the economy will be the same size and it will amount from a pure transfer of utility from the poor saps at the expensive insurance company to the new state farm customer. If it’s entirely saved (read: invested, as someone above noted), then it will be used to produce goods for the rest of the population that make them better off (otherwise they would not buy them), so social wellfare and the overall economy will grow.

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