Renewal – Recycling Products – Does the secondary market hurt economic growth?

contributed by John E. Rice, CFA, CFP®

graphe2In 2013 nobody really has to buy new stuff. Everything, from cell phones to used cars, is available in more venues than ever before. This is, in my opinion, the principal reason why economic growth is slower in developed counties than developing ones.

Let’s take cell phones as an example. In the past, if two people needed new cell phones they would both purchase new phones. One may have been looking at the more expensive, high-end phone and one may have looked at the lower priced phone with less features. Today, the second buyer may prefer to buy a used high-end phone instead of a new phone because it offers a better value. This creates one less transaction for the companies selling cell phones. A vibrant secondary market is a natural evolution in a developed market-based economy.

Well-Established Secondary Markets

Some products, like cars and houses have always had strong secondary markets. Many people prefer used cars because new cars depreciate so quickly in value. But now it is easier than ever to get a used car due to increased transparency in pricing, shrinking transaction costs, and reduced risk of buying a “lemon” with services that offer reports on the history of your chosen vehicle.

What are the long-term implications of a vibrant secondary market? One of the implications is that it leads to lower measurable economic growth. Each new product only counts once in economic output. There are different ways to calculate economic output, but one thing most economists agree on is that secondary market goods are not fully accounted for in the measurement of economic output. So when one less new iPhone is purchased, you have lower quarterly earnings for Apple and lower GDP for the US economy.

The interesting question here is … are we better off when there is more efficient allocation of goods and services in our economy? In the short-term it will be seen as declining corporate profits = declining stock prices = lower values for stock markets = lost money in savers’ pockets = harder to retire.

Are Secondary Markets Harmful?

But does a more vibrant, transparent and easily assessable secondary market really hurt our economic growth? If the value was not really there in the first place, then are we harmed as an economic unit whether it be a family, country, or world, if people have easier access to secondary markets and find better values in buying hand-me-downs? My intuition is that it is not bad. In fact, it’s good. As my grandmother might say…”People should not buy things that don’t improve their lives (my addition – by a greater margin than the cost they have to pay for the items.)” 

So what is economic growth anyway? And why should we care about it? It is important for an economic unit to grow at a relatively steady pace so the fewest number of people suffer hardships. But growth for growth’s sake is not a good reason for an economy to continue to produce. If China, or another country, grows faster than the US it is mostly because their consumers are buying basic things they need to function in a modern economy. Many US consumers already have these basic goods and are upgrading their standard of living by buying the latest version. Technological obsolescence drives much of the economic growth in a developed country.

Good News

A sailboat runs most efficiently when the sails are positions to catch the best wind. An economy runs most efficiently when companies focus on the benefits they can deliver that bring value to consumers.

By traditional economic standards, our country is not doing well because our GDP is growing at a lackluster pace. But if our consumers are better off than they were in the past, then we have generally improved the lot of the average person in our country. So set aside the pessimism about what is not working and focus on the things you can control in your life that will provide you value above and beyond the costs, whether or not you buy second hand! 

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