On Christmas and economic stimulus

Published 11:31 pm Wednesday, December 23, 2015

Christmas generates significant economic activity.  The American Research Group estimated that Americans would spend an average of $880 on gifts this season, which implies total gift spending of at least $100 billion.  We spend almost $10 billion annually on decorations and Christmas trees.  Our Christmas economy exceeds the year-round economy of Ecuador.

Economics blogger Matt Yglesias reports further that 2 to 3 million Americans lose their jobs each January after the holidays.  This job loss does not show up in the unemployment rate due to seasonal adjustment.  Although the end of the Christmas season is not responsible for all January job losses, the Christmas economy employs hundreds of thousands of Americans.

The jobs and economic activity Christmas currently generates are great, but perhaps we would do even better by making this stimulus larger and deliberate.  Mr. Ygelsias has even proposed having a second Christmas with a similar level of spending in the spring as an economic stimulus.  Alternatively, the government could just mandate that Americans double their Christmas spending.

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An intentional Christmas stimulus, however, would make our nation worse off.  And the case illustrates why government stimulus efforts offer so much promise and yet fail to improve our well-being.

A stimulus promises sales for businesses.  Consider the situation of a Christmas tree farm.  Trees take years to grow, and any trees cut this year will be lost if they do not sell.  The seller must not only decide how many trees to cut this year, but where to send them: too many trees in Troy also results in unsold trees.  Poor sales mean no return on the costs, time and effort invested growing the trees, and reduces employment in shipping and selling trees.

The Christmas tree seller will consequently be delighted when people buy all of his trees.  The seller will still be happy even if a buyer was wavering about getting a real tree this year.  And here we see why an economic stimulus appears to be such a wonderful idea.  If we can just keep sales from falling, sellers will continue to make profits and won’t have to lay any workers off.

But merely spending more money will not increase prosperity.  To see why, suppose that the government ordered people to spend $2,000 on Christmas gifts this year.  Americans would buy a lot of extra gifts we really didn’t want to give.  Many of the gifts might be returned or put in the attic.  The mandated, extra gifts will not generate benefits similar to the gifts we willingly buy.

Nor would the extra employment from the mandated spending make up for this.  We live in a world of scarcity, meaning that our wants and desires exceed our capacity to produce goods and services.  Work has never automatically produced prosperity.  People have worked hard throughout human history, but prosperity is a recent phenomenon.  We become prosperous by using our scare resources, including labor, more wisely and efficiently.  Mandates direct scarce resources to make extra fruitcakes, blenders and sweaters instead of things we value more.

The same lesson applies to economic stimulus measures, like the 2009 American Response and Recovery Act.  Government can use resources, benefiting certain sellers in the process.  But a government stimulus is like a meal that looks great but is neither nutritious nor delicious.  We feel cheated somehow, because we did not get what we were promised.

Consumer spending is the final step in the market’s process of value creation.  Spending divorced from this process ultimately fails to generate prosperity.  Christmas illustrates nicely the subtlety of value creation.  We spend money to buy gifts for others, not ourselves, and we give gifts for many reasons, including in some instances obligation.  Gifts will sometimes get returned, collect dust, or be regifted.  But willingly purchased gifts create value because they reflect our values and choices.

Christmas is big business.  The economic magic of Christmas arises because the trees, decorations, and gifts we choose to buy enrich our lives as well as the experiences we share with family and friends.  For the economics of the holidays, it is the thought that matters after all.  Merry Christmas, everyone!

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision.  Respond to him at dsutter@troy.edu and like the Johnson Center on Facebook.

About Dan Sutter

I am the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

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