Not So Fugal After All

For some months now there have been reports of declines in credit card debt, which have been interpreted as evidence of greater thrift and caution on the part of American consumers. The economy is in trouble, and in hard times card holders are keeping their credit cards close.

But gradually a different picture has emerged. Much of the decrease in total indebtedness appears to come from bank write-offs. Banks have begun to “charge off” debt they believe is unlikely to ever be repaid. Here Michelle Singletary report on this write-off phenomenon, poking a hole in the early analysis, and in today’s New York Times,Christine Hauser provides more evidence that, rather than a sign of greater self-control among consumers, the decline in credit card debt is an indication of the sad state of affairs at the bank:

A study released last week by Evolution Finance’s CardHub.com, calculated that financial institutions charged off about $20 billion each quarter from early 2009 through early 2010, about equal to the amount of the decline in outstanding credit card debt.

So will we ever learn to be more thrifty? There are plenty of reasons to hold back spending now, but the urge to swipe remains a powerful force. The psychology of spending in the contemporary world is largely unchanged by the current economic conditions. Furthermore, the broad cultural changes that would bring about different attitudes about spending, thrift, and consumption have yet to emerge. I wouldn’t hold my breath.

The Blockbuster Bankruptcy and the Physics of Spending

Today the word came down that Blockbuster Video had filed for chapter 11 bankruptcy protection. A company founded in 1985 and once the dominant video rental company in the country had fallen. The reason, of course, was Netflix and the physics of spending.

In Going Broke: Why American’s Can’t Hold On To Their Money I identified the five most important variables in what I called, The Physics of Spending. Blockbuster became victim to two of these: Time and Effort.

When videos came almost exclusively in VHS format we travelled to the store to rent them. Mailing these bulky tapes would have been difficult, and no company ever attempted that approach. Blockbuster offered us a wide variety of choices and a quick turnaround—a few minutes to the store and back—in return for the effort it took to go out and get the video. Yes, we were sometimes frustrated when we discovered that all the copies of the video we wanted were rented or that the store did not have the movie we were looking for. But often there was something else on the shelf that was suitable.

When DVDs became the dominant movie format and Netflix discovered a simple way to mail disks, Blockbuster’s days were numbered. True, you had to wait longer to receive your video, but it took almost no effort at all. The video was delivered to your mailbox and could be returned in the out-going mail. Furthermore, the selection was much larger than your local Blockbuster could possibly offer, and the frustration of delay was mitigated by offering the option of ordering more than one video at a time. Eventually Netflix made it possible to watch some movies instantly on your computer for no additional cost.

In today’s consumer world, the effort variable often trumps the time variable. People will gladly wait for a purchase that saves them effort. Amazon.com and the entire world of internet shopping is proof of this principle. If you need more evidence, go to your local fast food restaurant at lunchtime. In most cases there will be a very long line of cars waiting to be served at the drive-through window. See, for example, the picture in an earlier blog entry called “Drive-through Windows, the Large Muscle Hierarchy, & Spending.” Many of the people in these lines of cars could get their food more quickly by parking the car and walking into the store. But they don’t. They would rather wait in comfort.

Much has been written about the brilliance of Netflix’s DVD shipping system and its software designed to recommend videos based on your prior ratings, but the primary cause of Blockbuster’s defeat was the ability to mail DVDs and the physics of spending. Less effort is worth the wait.