Tuesday, September 14, 2010

Waiting for Better Prices

According to economic theory, one of the ways an economy in recession can right itself is by people buying things at discount prices, even if they can’t use them right away. That works to an extent, but sometimes it works in reverse. When prices are noticeably higher during a slowdown, people are better off postponing purchases if they can, hoping to get the lower prices that come with boom times. Two current examples are computers and book printing.

Book printing prices have increased noticeably during the recession, in spite of the lower prices for paper. The reason? Book printing plants have large fixed costs that they have to cover, even though fewer books are being printed. That means that each customer has to provide a larger share of the fixed costs than usual. It’s reasonable for a book publisher to guess that book printing prices may fall again when the economy picks up — all the more reason not to print extra books right now. This could change if many book printing plants shut down, but that’s not expected, and it would occur only with a proportionate loss to lenders or investors — not a scenario that benefits the economy as a whole.

The last five years have seen only marginal technological advances in the world of computers. Selling fewer computers, computer manufacturers have less money to spend on the research and development that creates the new technology that keeps driving computer prices down. People who can wait are assured of lower computer prices after the industry’s fortunes improve.

In these two areas, and in countless others, the bad times of a slow economy also make it a bad time to buy. We can’t look to these areas to fuel an economic recovery.