Welcome to the Yolo Economy, where across the world many are living in the moment, for the moment, where economic downturns were predicted but – despite a cost-of-living crisis, war and dwindling pandemic-era savings – people continue to spend, sometimes like there’s literally no tomorrow. Faris Yakob delves into the strange new state of economic affairs and what it all means.
For the last few decades there has been a movement towards re-establishing a scientific basis for marketing, echoing Claude C. Hopkins’ era-defining work Scientific Advertising, which came out exactly one hundred years ago. Hopkins makes grand claims. The first line says the “time has come when advertising has in some hands reached the status of a science” and goes on to maintain that since “we know what is most effective, and act on basic laws” that “advertising, once a gamble, has thus become, under able direction, one of the safest business ventures… Therefore, this book deals, not with theories and opinions, but with well-proved principles and facts.” This is a copywriting trick to gloss over the fact that the rest of the book does not do.
Claude goes on to explain how to A/B or split test response rates on DR print ads or mail, which is fine as far as it goes, and then recounts opinions and anecdotes without a shred of evidence. We are (hopefully) no longer so easily fooled by confidence but it has taken a while to rehabilitate the term. One of the organizers of the first “marketing science” conference at Stanford in 1979 explained that they hadn’t originally considered it: “If we did consider it, we might have rejected it as an oxymoron… it is a controversial expression for both physical scientists and many marketing practitioners.” This tension is inevitable because marketing operates predominantly outside of a tightly measured, semi-predictable environment in the complex messy world of art, rhetoric, psychology, sociology, and culture in service of economic gain.
Economics is pejoratively known as the ‘dismal science’. It got this appellation from Thomas Carlyle who wrote that economics was “not a ‘gay science’, like some we have heard of; no, a dreary, desolate and quite abject and distressing one; what we might call, by way of eminence, the dismal science.” There’s a lot to unpack, but in essence he was complaining the codification of commercial interactions was not uplifting like the rules of poetry (the ‘gay science’) but rather somewhat depressing in “find[ing] the secret of this Universe in ‘supply and demand’, and reducing the duty of human governors to that of letting men alone” or personal freedom. He didn’t like that and was keen to reintroduce slavery to the West Indies to improve productivity.
The term stuck because economics, unlike standard ‘sciences’, is terrible at making replicable predictions. Science, to paraphrase Richard Feynman, is a process in which we make guesses about the nature of reality, “compute the consequences” of that hypothesis and compare those results to nature, through observation or experimentation. “If it disagrees with the experiment, it’s wrong”. Behavioral economics, the hybrid of economics and psychology introduced by Nobel prize winners Kahneman and Tversky and much loved by advertising folk, was an attempt to reconcile the ‘computations’ with observed human behavior to render us ‘predictably irrational’, but many of those canonical experiments have proven impossible to replicate themselves. The experiments no longer seem to agree with many of the theories. Thus does science progress, two steps forward, one step back.
In December last year, economists had come to a firm view about the prospects for the USA and the UK. The signs were clear, inflation was biting and the Fed was going to rapidly raise interest rates. The same played out in the UK and brands, agencies and the IPA began dusting off the standard arguments for maintaining marketing investment during recessions as technology and media companies began making layoffs in anticipation.
“Usually recessions sneak up on us. CEOs never talk about recessions. Now it seems CEOs are falling over themselves to say we’re falling into a recession… Every economist says recession. I’ve never seen anything like it.” – Mark Zandi, Chief Economist at Moody’s.
The ‘science’ says raising interest rates make money (debt) more expensive so people buy less houses, or houses less, and spend less on credit cards, so demand drops, which means that prices will fall.
So what happened? Well, economists are bad at predictions. A meta-analysis in 2018 looked at 153 recessions in 63 countries and found that economists didn’t see them coming. This was even more true in 2008 when the economic orthodoxy simply could not believe what was happening – it wasn’t declared a recession until it had been going for a year, as FiveThirtyEight has observed.
Due to lagging indicators, it is often hard to establish how the ‘economy’ (which is ultimately a fiction, or subjective set of measures anyway) is doing right now or what might explain it, but when has that ever stopped me before?
Economists are also obsessed with finding the right shape, letter or concept to explain economies. According to Nobel prize winner Paul Krugman, the US economy has entered a “goldilocks” phase, not too hot and not too cold, just right for growth. However, while the economy is doing better than it was, Americans believe it is getting worse. “There’s this disjunction between reality and perception that’s as large as I’ve ever seen in my career,” according to Justin Wolfers, a professor of public policy and economics at the University of Michigan.
Unemployment is low and people are reconsidering how they live, so labor seems to still have leverage, which we can see in the prevalence of strikes and rise in inflation adjusted wages. It’s worth considering that the pandemic saw a significant number of people leave the workforce, and has rendered others incapable of many forms of work, so supply has tightened. Inflation means prices overall are nearly 20% higher (USA) than they were in 2019 but despite that personal consumption expenditures are still growing. “So it seems that ‘bad vibes’ are not leading to a lot of precautionary saving” according to Carola Binder, associate professor of economics at Haverford College.
I think that’s a clue. The US economy is almost entirely driven by consumer spending, and people are spending more despite prices being higher, which is not what the ‘science’ says. Though many are struggling with the cost of living, luxury goods sales are up. Travel has been beset by post-pando problems, making flights more expensive and worse, but the TSA screened the largest number of passengers in one day in history in July 2023. Hotels and Airbnbs are 50% more expensive than they were last year, but demand has gone up. Tourists continued to fly into Greece even as previous ones were evacuated due to wildfires and, in analyzing why, a Guardian journalist nails a tension:
“My generation in particular have embraced travelling internationally for “leisure” as almost a right, rather than a luxury; a response I suspect is motivated in part by the “traditional” markers of adulthood and self-actualisation (house ownership, lifelong career, 2.5 children) becoming either more unattainable or less appealing.”
Lots of economic decisions boil down to now or later.
(This is what made the marshmallow test – a 1927 experiment that has failed to replicate – so interesting since it seemed to predict delayed gratification as adults in children’s behavior.)
Why save when inflation destroys the value? Why invest when memestocks cleaned out retail investors, NFTs are worthless and bankers rig the game? Why save for a house you can never afford, no matter how many avocado-toast-lattes you resist? How can you afford to have kids when they, and especially childcare, cost so much and younger generations are less well off than their parents and will face the real impact of climate change during their lives? Why stick at a job you hate in a ‘gig economy’? Why wait until retirement to travel if you are unlikely to ever retire and the climate crises may make many destinations unappetizing in a decade or two anyway?
This is the YOLO economy, where people that can are focusing on the moment because planning for a future requires near-infinite discounting due to perceived maximal uncertainty. Pent-up demand is part of it but it’s also pulling demand from the future. What other evidence do we see of Yolonomics (I’m so sorry you know I had to)?
Despite inflation, or rather it seems because of it, consumer goods companies are enjoying record profits. YOLO! People are increasingly pessimistic about the future but Taylor Swift tickets sold for thousands of dollars and demand is so high the tour is likely to be extended. YOLO! (Bank of America is calling this ‘funflation’, to which I respond “YOLO!”) Alcohol and drug consumption rose significantly during the pandemic and levels have remained high with more people bingeing. YOLO! Saving rates remain low despite the higher yields... Since the cost of living is still getting higher and income growth has plateaued, how is spending still going up?
YOLO! More Americans are pulling money from their tax-sheltered 401k savings accounts in hardship withdrawals than ever before, a double whammy since it pulls money from the future at significant opportunity cost. US credit card and auto debt are at all-time highs ($1tn and $1.6tn) and defaults have only just begun to increase. UK credit card borrowing is at all-time highs. Total family debt reached £2tn this year, almost the same size as the total UK GDP, and all this debt is ever more expensive to service.
Clearly there are distinct consumer segments emerging. Many struggle to make ends meet – food bank usage has soared in the UK – but some are living in the moment, for the moment. A generation is or has put off homes, families and careers because they no longer seem realistic or even desirable. A survey by PwC suggested that “a lack of credit availability is among consumers’ top concerns”. So for the time being brands need to consider how to capture this rampant consumer spending with a cautious eye on the future because the runway is running out.
Obviously doomerism in general is an unhelpful approach. The problem with believing in any kind of end of days is that it renders believers unwilling to invest in the future by acting, or forgoing things, in the present. Keynes pointed out that predicting recessions can be a self-fulfilling prophecy as employers stop investing which slows growth (although clearly not always). I’m not an economist nor so naive as to make a prediction but it’s worth being aware that the USA just experienced its second quarter of negative GDP growth, which is one measure of recession – but not the official one. We have to wait for the National Bureau of Economic Research for that, which is extremely unlikely to happen in the run up to an election because it sounds dismal.