The Parable of the Earbuds: The Tension Between Consumption and Investment*

You have some extra cash. What should you do with it?

There are those Earbuds you’ve been coveting. Apple makes the coolest ones, but you recall that Apple’s Earbuds are manufactured somewhere in Asia and wonder whether you shouldn’t choose a brand that’s manufactured in the U.S. America First, right? Why should you buy something made in another country when buying American would be better for the U.S. economy? That’s the right way to think, isn’t it? On the other hand, Apple is the prototypical American company, the quintessential American brand. Wouldn’t buying from Apple be even more America First despite the fact that Apple manufactures its products outside America? Apple could use that money to create more innovative products and more jobs, at least somewhere … so buying from Apple would be good for America and for the world. Moreover, your consumption will feed America’s consumer economy.

That additional dose of consumerism decides it. Apple it is!

Having resolved a complicated economic problem, you set your feet on the path to the Apple Store.

As you walk, you recall something you recently saw on television. It was a warning that unless you save, you won’t be able to support yourself in retirement. That gives you pause. Maybe buying Earbuds at this time in your life isn’t the economically prudent thing. Maybe you should be focusing more on your future. Hmmm. Spend now or save now? Maybe consumption should take a backseat, at least for a while? Perhaps, instead of spending your money on Apple’s Earbuds, you should invest your cash in Apple stock? Doing so might be even better for Apple and it surely would be better for your future, although it wouldn’t be as much fun. Buying stock increases stock prices and a rising stock market also is good for America. You wonder whether saving and investing instead of consuming might be the wisest choice. How should you make the correct economic analysis?

Overwhelmed by economic complexities and fearful of the future, you stop to collect your thoughts. That’s when you spot your favorite bar across the street and decide that it would be best to think this through over a drink … or maybe a few drinks….

This Parable of the Earbuds frames the tension between consumption and saving. For the individual, resolving that tension requires balancing immediate gratification and future security. Current prices and projected investment returns are indispensable components in striking that balance – that is, finding the answer requires an economic analysis and a comparison of the alternatives. This is not necessarily a simple task. For example, if the Earbuds are “cheap” and investment returns are “poor,” consumption normally would win out. Conversely, if the Earbuds are “overpriced” and investment returns “significant,” saving would prevail. It would be wonderful if the analysis were that simple. It isn’t. Not surprisingly, such individual economic balancing has a macroeconomic counterpart.

Consumption boosts economic activity … at least, up to a point. With today’s supply chains and multiple technological and tangible components, the economic benefits of consumption disperse in multiple directions. Unless buying products that are made 100{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} in America with 100{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} American raw materials provides American consumers with the lowest price and highest quality, American consumers get shortchanged. They would be overpaying for what they’re buying, in effect decreasing their standard of living and quality of life. The reality of the 21st Century is that different resources can be sourced and different levels of labor can be performed more efficiently in different parts of the world. That maximization of efficiency (properly defined as the invisible hand of capitalism) means that globalized supply chains benefit consumers – including American consumers – by maximizing resources and human labor and minimizing prices, thereby leaving more money in the pockets of consumers and creating a larger global economic pie. Everything can’t be produced best and cheapest in the U.S. Picking and choosing which is best and which not – picking winners and losers – is a task performed in a centralized, controlled economy. That’s not how America and American industry have thrived. That’s the way socialist systems work although picking winners and losers is a philosophy being advocated and executed these days by formerly free-market Republicans pursuant to a way of thinking that previously was the domain solely of union-supported Democrats.

The harsh reality of globalization is that it’s an evolved form of capitalism. And capitalism indeed is harsh. Capitalism creates winners and losers through raw competition. There are many who claim to be capitalists and nevertheless argue that the outcome of globalization is bad for America. They argue for nationally-imposed limits on foreigners and foreign products, a larger application of America First. There are others who argue that globalization creates a rising tide that raises all boats, but that its benefits take time to trickle down. During that trickle-down period, populism normally surges as it is doing now and as it did in the late 1930s. They urge patience. And there are still others who argue that it’s not globalization that has created a crisis but America’s brand of capitalism. They believe reform is necessary in order to preserve both capitalism and democracy. Their focus includes increased educational expenditures, microfinance initiatives, infrastructure spending and legislation to incentive public-private partnerships.

But I digress. Let’s return to consumption versus saving.

Consumption never economically benefits the buyer. It creates a psychic benefit and, in theory, the economy as a whole derives the economic benefit … at least up to a point. Too much consumption, unfortunately, can overheat and unbalance an economy … and an individual’s quality of life. Savings, on the other hand, provide an economic benefit to the saver and, through successful investment of the savings, also provide a psychic benefit. Further, invested savings deliver an economic benefit to the local, national and global economy … at least, up to a point. Too much saving, unfortunately, can act as a brake on an economy … and on an individual’s quality of life. The key is to strike the proper balance between consumption and saving.

The same tension between consumption and saving is true at the governmental level. Elected officials have the same push-pull between spending locally to get re-elected provide constituents with benefits – referred to as “earmarks” or “pork barrel spending” – and ensuring the future of the country.

Returning to your sojourn at the bar, let’s suppose that when you walk in you’re buttonholed by your Congresswoman. Already into her third martini, she pumps your hand and ushers you to an adjoining bar stool while explaining how much she values the input of her constituents. Before you can order a drink, she asks whether you would support spending $5 billion to build a wall to prevent Central Americans from illegally entering the country. Before you can answer, she asks whether you wouldn’t rather see the government use that money to reduce the costs of prescription drugs. [Which of these is consumption and which saving? Should the goal be to benefit the country in the long-term at the lowest possible cost? If not, what should the goal of good government be?] You smile politely and hold up your hand to give yourself time to think while the bartender takes your order for a double scotch, neat. Without waiting for your answer, she then asks whether you would want Congress to allocate $20 million to preserve historic sites in her district or use that $20 million to pay down Federal debt. As you take a quick gulp of scotch and search vainly for an appropriate response, she places her hand on your arm to make sure she has your attention (leading you to consider whether such physical contact is appropriate) and fires a third question. As a constituent, which would you favor: $10 billion to purchase a buffer zone around her district to prevent over-building or using that $10 billion to repair local highways and bridges?

Earbuds are a consumer item and Apple stock is an investment. Labeling them is a simple task. Such labeling is not so simple when it comes to government spending. Is building a wall for $5 billion consumption or an investment? That question can be asked in multiple different ways many of which would prejudice the answer. At bottom, however, the question can be framed in bald economic terms: “What is the economic effect over the next X years of having a wall?” and “What are the economic alternatives and their costs?” These are not simple economic determinations and trained economists can reach different conclusions, but those economic analyses at least would provide a basis for rational discussion. Similarly with respect to subsidized prescription drugs. On the other hand, it’s easier to deal with pork barrel budget proposals, like spending Federal monies to preserve local historical sites or purchasing land to restrict, rather than enhance, local economic activity. There can be no Federal economic justification for such earmarks.

Just as the goal in balancing an individual’s consumption and savings requires a hardheaded economic appraisal, so should the government’s budget determinations be driven by hardheaded economic analysis. Successful capitalism requires nothing less.


“Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.” – Otto von Bismarck

“[W]e shouldn’t try to protect every single institution. The ordinary course of financial change has winners and losers.” – Alan Greenspan

“The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty.” – Winston Churchill


*┬® Copyright 2019 by William Natbony. All rights reserved.

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