Consumer credits vs. waiting periods: Macroeconomic effect

Md Jamal Hossain The concept of 'waiting period' is as old as the concept of savings in economics. In the past, when credit mechanism was not so widespread, people had to calculate 'waiting periods' in consuming some goods and services, especially consumer durables such as refrigerator. Without consumer credit, the only option was to save and accumulate the sum to purchase such consumer durables because the purchase of such goods entails large cash outlay which is not possible to draw out of current income of consumers. But if there is an availability of credit and consumers can get it, then they will not have to save and accumulate for some specific period of time and they can instantly acquire goods and services that require long waiting period. Now, the question is: how is 'waiting period' determined? This is as simple as one can think of and every person uses it while making the purchase decision of goods and services that entail 'waiting periods'. For example, one person is planning to buy an automobile and the value of automobile is 20,000 dollars. The monthly income of the person is 3,000 dollars and he can save at most 500 dollars out of his monthly income after spending for other goods and services. Assume, just to avoid the complication here, that interest is completely zero. Then the calculation is easy and simple. How many years does the person need to wait to accumulate 20,000 dollars? The person must wait 3.33 years to accumulate 20,000 dollars before he purchases the automobile. So, the total waiting period is 3.33 years in purchasing the automobile. This is the old accumulation methods in which consumers just save before making the purchase. But, the real problem is: how can we determine the macroeconomic effect of 'waiting periods'? For a long time in the economic literature, the concept of 'waiting' is dead and people think that it has no significant economy-wide effect. If one person approaches an economist today and poses the question what kind of difference do you see in the following two choices: (1) consumers save and accumulate to purchase an automobile and (2) consumers don't save and purchase the same automobile using credit? The reply, we guess, would be hardly any difference. If one is to confirm such disposition of economists, the best reference is to consult the consumption loan-model by Samuelson (1958). But in this discussion, this writer will try to show that there is a strong and significant difference between the two choices and that one can't anyway become indifferent between the two choices. Therefore, all we need to digest the content in the later discussion is to keep in mind the concept of 'waiting period'. THE AGGREGATE CONSUMPTION FUNCTION AND WAITING PERIODS: Tracing the macroeconomic effect of 'waiting period' needs documenting the effect of waiting periods on something that can quickly tell us how significant the effect is. In this regard, the aggregate consumption function is the best option to consider. Those who are very much familiar with the macroeconomic consumption hypotheses know perfectly what the Keynesian and the post-Keynesian consumption hypotheses mean. The Keynesian hypothesis is called the current income hypothesis and the post-Keynesian hypotheses are commonly referred to as the forward-looking consumption theory - life-cycle and permanent income hypotheses. The Keynesian consumption function says that consumption is determined by current income and life-cycle and permanent income hypotheses say that consumption is determined by permanent income or life-cycle permanent income. The implication of the Keynesian hypothesis is that the government can influence market outcome; that means it can reduce unemployment using sustained inflationary policies. And the implication of the non-Keynesian hypotheses is that the government can't influence the market outcome and the market is auto-stabilised. So, the debate is whether the government action is warranted or not. The answer to this question depends whether consumers react to current income or not; if they do, then it is warranted, if not then the question remains. The question remains why don't consumers respond to current income? When one introduces 'waiting periods' in the consumption function, one can easily understand why consumers respond to current income and why they don't in case of current income. (See the details in Figure-I). BANGLADESH CONTEXT: What does the above analysis say for the economy of Bangladesh? It says a lot because the aggregate consumption function is the core of the macroeconomics. The lesson is very straight-forward. Those who make policies and implement those should at least be very cautious of the widespread use of credit system and very keen on the fact whether it is wise to push the economy to a path where the possibility of stability is severely bleak. The reason is that the non-Keynesian consumption gives us a false impression and we are bound to be trapped in it. The cruel dilemma emerging from the non-Keynesian hypotheses is that the market is auto-stabilised. But in reality, the story will be different if we include waiting periods in the consumption function. The economy can welcome some fluctuations that are naturally built in and sweeping away these fluctuations means sweeping away the stability as well. ASSET PRICING AND WAITING PERIOD: There is a vast number of literature that has tried to trace out equilibrium path of asset prices in a competitive economy. The most notable is Arrow-Debreu study in which they studied the asset pricing in a competitive economy. Another study in the same direction is Robert E. Lucas's study (1978). Lucas also tried to show asset pricing equilibria in a competitive economy. But what is missing in these well-know studies is 'waiting period'. They assumed that 'waiting period' doesn't influence pricing of assets.