It’s Time for “Trickle Up” Economics

The business landscape right now is hardly a happy place. Beyond the dead bodies in the mortgage business, malaise dominates the business environment. Dreary sight. But why should things look so dark, when most major businesses hold strong cash positions, have low inventories and have already trimmed off lots of organizational fat, at least in manufacturing?

Until recently, strong business fundamentals like these would have “trickled down” to consumers and driven the storm clouds away, at least in theory. But life has changed. And good business fundamentals are no longer a match for the lousy consumer fundamentals created by the mortgage mess—as well as predatory lending practices in general.

Why the change?

We have to go back 25 years to find the answer. Although in hindsight, most business pundits recognize that the early- to mid-1980s gave birth to a fundamental economic change. Fueled by new production and engineering technologies, aggregate marketplace supply in developed countries gradually started topping demand. On a market-by-market basis, supply-demand vectors began crossing over in the ’80s and continued into the ’90s, with very few left to cross today. And so ended decades of suppliers’ markets, and so began the new era of buyers’ markets. Along with this transition, customers became the primary driver of economic growth and health, replacing business.

Viscerally, rapidly increasing customer empowerment has grabbed most of the attention paid to the buyer-seller role reversal. Armed with expanded supplier choice and increased leverage over sellers battling for their business, customers are exercising more control over buyer-seller relationships. Companies accepting this new balance of power and adapting business models accordingly are reaping handsome rewards. However, those resisting change are paying steeper and steeper prices by the year—occasionally the ultimate price. All before our very eyes

However, creating marketplace winners and losers represents only a portion of the impact of the supply-demand cross-over. In fact, the entire hullabaloo about buyers’ markets, increased customer power and customers holding company fates in their hands has masked an even greater change affecting business and customers alike. Today, economists estimate that consumer spending drives an unprecedented 70 percent of U.S. economic growth—a direct outgrowth of the change from a supply-side to customer-side economy.

But just as consumers drive economic growth, they also drive economic slowdowns or outright contraction—as we see in vitro today in the aftermath of the financial harm to consumers caused by the customer-unfriendly mortgage business and nefarious other lenders. Now, I’m not forgetting caveat emptor. But when business plays the pied piper leading customers off a cliff, business needs to own up and accept responsibility.

When individual companies hurt consumers, they actually hurt the economy as a whole—if only by an imperceptible, infinitesimal amount. But when a whole industry hurts whole classes of consumers sufficiently, the economic damage starts showing. And when business inflicts egregious financial pain on a broad swath of consumers, as in today’s mess, the resulting economic damage nicks almost all of us.

Considering this dynamic, I would argue that a very symbiotic relationship has evolved between treatment of consumers and the state of the economy. When business offers consumers true value and helps them make appropriate decisions, consumers flourish—and then spend. When they spend, they not only boost the retail sector, but also they help pump money up-line, right up to makers of machinery that makes the goods and to raw material suppliers. And I would argue the very same point on the B2B side. When sellers help their customers succeed, customers have more money to buy and more reason to, which similarly pumps money all the way up the supply chain.

So, if my argument is valid, how did we ever get to “trickle down” economics in the 1980s? Politics aside, in a sellers’ market with an overall imbalance of demand over supply, one could craft an economic rationale for trickle down. Building up the supply side helped increase production of goods that met waiting demand, which created economic growth—in theory, at least.

But today, our economy doesn’t need more supply. It needs cash-in-hand demand, which is especially lacking because the mortgage and housing disaster has left consumers with reduced discretionary income, which means much less money is trickling up. Without in any way discounting the importance of oil prices and monetary policy, a robust, “trickle up” economy is a must for repairing the damage done by customer-unfriendly lending practices and the resulting credit crunch. To right the economy, we don’t need to stimulate capital formation. We need to get discretionary spending dollars into consumer hands. And that brings us right back to putting customers first.

Customer-centricity does feed individual seller bottom lines. But just as importantly, it creates upstream revenue flow that continues recirculating—and strengthening our economy. We just have to get used to thinking “trickle up”—with customers now the primary driver of a healthy economy.