Is Christmas Bad for the Economy?

The first installment of Santanomics: Our special series on the surprising (and only occasionally forced) connections between economics and the holiday season.
615_Santa_Money.jpgShutterstock/PoznyakovClose your eyes and imagine a totally make-believe world where families just like yours have a long wish list. But in this fantasy universe, they spend the whole year not buying what they want. Rather than spread their purchases evenly, they wait until the last six weeks of the calender to do half of their shopping. They accumulate unwieldy towers of goods from overstuffed malls in a graceless display that involves rushing into an electronics aisle, shoving aside a small mother, and excavating a cardboard box, like a vulture swooping over a crowded carcass. Half of the purchases are gifted to friends and family in a show of love, but a great deal of the recipients hate their presents, anyway. It doesn't work out much better for the stores, who encourage this sordid behavior by slashing prices at the same time that they have to hire additional workers to clean up the mess. What civilized society would ever go through with this parade of indignities year after year?

Ours, naturally! So, Merry Christmas.

***

Welcome to Santanomics, our new December series on the intersection among markets, behavioral economics, and the holiday season. We begin with the most basic question about Christmas and the economy: Is Christmas bad for the economy?

Of course not! would be a reasonable reply. Yuletide sales account for $400 billion in economic activity. Holidays hires at retail stores lift employment and stimulate the economy. For many shops, this season accounts for nearly half of their annual revenue. If you lopped December off every shopping calender, the U.S. retail industry would be in a permanent depression.

Just because stores and shoppers rely on year-end sales doesn't mean they're a healthy tradition. As the "totally make-believe" paragraph tried to show, there's a lot about Christmas shopping that doesn't make any sense. Wouldn't we be happier if we bought what we wanted when we wanted it? Wouldn't stores have smoother earnings and more confidence to hire and expand if their income were spread evenly across the year rather than pinched like a hose that explodes every third week in November?

These are just some of the reasons why Christmas "brings out the Grinch" in economists, Mark Whitehouse wrote in a superb 2010 article for the Wall Street Journal:

In the latest Wall Street Journal forecasting survey, more than two of three economists opined that if Christmas ceased to exist as a holiday, consumers would either spend more on themselves or spread their gift purchases more evenly across other events such as birthdays. That, in the view of some academics, would put more goods into the hands of people who truly value them and improve social welfare as a result.

Ah, the gifts. The candle sticks that gather dust in the attic, the microwaves your in-laws already have, the picture frames you really, truly do not need.

"In the standard microeconomic framework of consumer choice," Joel Waldfogel begins merrily in his classic paper The Deadweight Loss of Christmas, "the best a gift-giver can do with, say, $10, is to duplicate the choice the recipient would have made." But many gifts don't duplicate the choice the recipients would have made. Waldfogel calculated that "between 10 percent and a third of the value of gifts" is a waste, or what economists call "deadweight loss."

If one-third of gifts are unwanted and a waste, then simply wrapping checks to your friends and relatives to let them buy what they want would introduce tens of billions of dollars worth of satisfaction. I hear what you're thinking: So, Christmas killed the recovery!

Except, not at all. In a weird way, the inefficiency of gift giving might be good for a weak economy. It's not efficient for you to buy your mother a $50 bag that she values at $20. But a weak economy isn't concerned about efficiency. It's concerned about activity.

If every retail store could get away with selling their $20 products for $50, that's better sales, higher earnings for stores, and more retail hires, who can now spend their cash. Put another way, if I get $100 worth of Channukah gifts this year and hate all of them, I'll either re-sell them online (another round of economic activity) or I'll buy the things I want on my own (yet another round of activity).

The upshot: Christmas is no economist's idea of an ideal holiday. But Santa can be stimulative.

Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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