The Consumer's Revenge: Can We Beat Corporations at the Efficiency Game?

"The pursuit of efficiency has long been a hallmark of American economic success," Daniel Gross writes in his great new book Better, Stronger, Faster. And he's right. Some of the great triumphs of American wealth, from the Model T to Amazon shopping, are triumphs of an important kind of efficiency: using technology to do more with less.

For much of the last century, efficiency has been the providence of producers. Companies big and small found innovative solutions to complex problems and cut costs to labor, energy, and global supply chains. But lately, ordinary families are evening the score. We're learning to share more (e.g.: cars), buy less (e.g.: movies and music for the house), and live cheaper. Here, Gross and I discuss the future of the efficient consumer.

THOMPSON: For 30 years, corporations dominated the efficiency game via off-shoring and automating. Now consumers are getting in the game by replacing old products with cheap tech or by sharing goods. What changed?

GROSS: Several things changed, and I definitely trace it back to the onset of the Great Recession. If your top line isn't growing, and your net worth is tumbling, and your ability to borrow against your home equity disappears, you have to start figuring out how to do more with less. So the movement toward consumer efficiency was spurred by necessity. The old personal finance advice - stop buying that latte at Starbuck's and start making coffee at home - actually makes a lot of sense. But the nice thing is that new businesses arose to appeal to the new zeitgeist - Netflix allowing for the rental of movies instead of the purchase, Zipcar, Rent-the-Runway, or, which allows students to rent textbooks online. All of these let people get the same utility without having to go into debt to purchase and take ownership of things.

But standards also make a very big difference. The typical car sold today is significantly more fuel efficient than the typical car sold five years ago. And I'm not just talking about luxury goods like the Prius. I'm talking about entry-level vehicles like the Chevy Cruze. Yes, automakers have responded to persistently high gas prices by working on fuel efficiency. But the higher mileage standards promulgated by the Obama administration lit a fire under the carmakers. In the same way, standards for more efficient light bulbs and appliances wind up helping consumers reduce their operating costs, and boost their operating income. Imagine how much better off (and efficient) the typical American homeowner would be if building codes mandated greater use of more effective insulation.

THOMPSON: Do you think the new consumer efficiency revolution could stem from income inequality -- that our wages are falling behind productivity, so we're using technology to make our money go further?

GROSS: There's something to your point. I'd put Groupon and LivingSocial in the bucket of efficient consumer businesses, and there's no question they've caught on because people need to make their dollars go much further. But of course we've always used technology to make our money go further, regardless of where we are in the economic cycle and what's happening with income inequality. I'm old enough to remember what long-distance phone calls used to cost before MCI came on the scene. Now I use Skype, not because my income has gone down, but because it's cool to get stuff for free and I like being able to see the person at the other end of the call. And in many ways, I think it actually think that it works the other way around.

To a large degree, efficient consumption starts as a luxury good and then trickles down to the rest of consumers. There are a few reasons for that. At the beginning, efficient consumption products - the Prius, solar panels, programmable thermostats, LEDs - are niche products and so have a hard time competing on price with mass-manufactured equivalents that have been around for decades. They're artisanal by comparison. Now think about housing. It's more efficient - and ultimately reduces your operating costs - if you can live close to a train or light-rail station, so you don't have to own a car to get around. But we all know that homes and developments close to transit tend to be more expensive than those that are farther away. In Connecticut and New Jersey, real estate in towns that have direct train connections to New York, tends to cost significantly more than houses in nearby towns that don't have them.

THOMPSON: Family consumption makes up a huge part of GDP. Are efficient consumers bad for the economy? Won't we all be poorer if we buy fewer cars, houses, and clothes?

GROSS: No, I don't think that efficient consumers are bad for the economy, any more than efficient companies are bad for the economy. The great problem we've had in the last several years - and we continue to suffer the after-effects - is that millions of our citizens couldn't afford to meet their financial commitments. The inability of people to keep up with mortgages, credit card loans, and other consumer loans has had disastrous consequences for our financial system, for companies, and for the economy at large. Financial failure begets financial failure. Just so, financial success begets financial success. If we buy 500,000 fewer cars, then a bunch of autoworkers and car dealers will suffer. But if 500,000 people are freeing up the $6,000 a year they would have spent on car payments, taxes, and insurance, and using the proceeds to, say, avoid foreclosure, or stay current on payments, or invest in their own education - that's a significant positive.

There was a great story in the New York Times about a small heating oil company in Maine whose poor clients were suffering horribly, and the difficult choices the owner had to make about whether to deliver fuel to people who couldn't pay. People around the country send in tens of thousands of dollars to help out. The money all went to pay for heating oil. Imagine if the money -and all the public aid those customers had received - went to weatherize leaky trailers and do things that would enable them to reduce their annual fuel consumption by 20 or 30 percent. Next winter, they'd all have much more to spend at local businesses, the heating oil company owner would have a more sustainable business and wouldn't face the same number of wrenching decisions.

THOMPSON: Do you see efficient consumption playing into the export game? If we save more like Germans, will it help us export more like Germans?

GROSS: I don't think so. We're actually quite good at exporting. Monthly exports have risen from $124 billion in April 2009 to a record $186 billion in April 2012 -- up 50 percent. Our 2011 exports were $2.1 trillion -- also a record. The opportunity is really more in how efficient consumption can create new businesses that can then be exported. In other words, if a Zipcar can catch on and gain scale in the U.S., it can quickly expand abroad. Groupon and Living Social are now in dozens of countries. In countries where energy is more expensive, energy-saving products -- like, say, the Nest thermostat -- have the ability to catch on.

THOMPSON: Is consumer efficiency a fad? Is the natural state of the American human to borrow and spend, and we're only "pretending" to like efficiency because we're temporarily overloaded with old debt and flat-lining wages?

GROSS: I definitely think it is cyclical. I've reported through three different recessions. And I"ve either written - or read - the same article about how we've learned our lesson, how a nation of spendthrifts is turning into a nation of penny-pinchers and coupon-clippers. Then once growth returns and credit flows, the coupon circulars go straight into the garbage. There are two factors that may lead efficient consumption to last longer this time around. First, if you read your Reinhart and Rogoff, you'll know that recoveries from debt-induced crises tend to be slow and painful. There will be no return to boom times. People will be working out from under their debt load for a long time. Mortgage equity withdrawal [MEW] - i.e. borrowing against your house to go to the Olive Garden - was a huge factor in spurring consumer spending in the 00s. But given where housing is now, there's not likely to be any MEW for years to come. So consumers will have to live by their wits for the next many years.

The second factor is the proliferation of efficient consumer businesses. There are just many more of them, and many more marketers, executives and lobbyists sitting around thinking of ads, financing mechanisms, subsidies, incentives and business models that will rope people in. The best way to get people to save money on vital goods and services is to create businesses that will profit by helping them do so. If I came and changed all the light bulbs in your house and reprogrammed your thermostat, wouldn't you pay me 20 percentage of your annual savings?