behavior and recovery

I become very skeptical when I see industry leaders asking consumers to switch back to their previous boom-period consumption habits. The arguments are devilously one sided.

Consumers' thrifty behavior feeds on itself by worsening the crisis. That is true, but companies are not innocent neither. They are also over-panicking and acting in stingy ways. Costs are being cut and investments are being shelved. Even if money starts flowing from consumers to companies, there is no guarantee that the companies will not use it to increase their cash position or to pay down their debt.

Let's build a toy model. Assume that the economy does not recover without both companies and consumers going back to their previous spending habits. Hence consumers will hold on to their money until they are sure that companies will cooperate in case they start spending again. (If consumers spend and companies do not, then the economy will not recover and consumers will be left with insufficient savings.) The pay-off structure looks as follows (Red=Downturn persists. Blue=Economy recovers.) :

There are two Nash-Equilibriums here: (Win,Win) and (Lose,Lose). Today we are trapped in the latter. If consumers (companies) think that companies (consumers) will spend as before, then they will spend as before too. If consumers (companies) think that companies (consumers) will stay thrifty, then they will also stay thrifty.

The skeptic inside me says that the companies will not cooperate. (The industrial leaders on TV act brave but in reality they are probably very conservative.)

Today's consumer savings will play an essential role in tomorrow's recovery. They will make the industrialists that survive the current crisis very rich. Will those on TV be among this privileged class? I doubt that. The reason why they are on TV is because they doubt it also.