Is Christmas efficient?

by on December 23, 2013 at 7:29 am in Economics | Permalink

As you all probably know, the demand for retail goods and services goes up a lot after Thanksgiving, giving rise to the seasonal business cycle.  Most large economies have a major gift-giving holiday in or near December.  The result is that fourth quarter output and employment expand significantly, and the first quarter of the year brings an inevitable contraction.  Usually we seasonally adjust the data, but seasonal business cycles are not small relative to regular business cycles, for more information see here.

But are these seasonal cycles efficient?  Let’s say that the Grinch really were to steal Christmas, would that be a Kaldor-Hicks potential Pareto improvement?

I can think of a few reasons why seasonal business cycles might be inefficient:

1. Retail workers would prefer to smooth their labor supply, having more relaxed hours in mid-December and no layoffs in January.

2. A lot of Christmas gifts are bought under duress and by definition there is third party payment.  The economy might be losing information about “real consumer demands,” just to “show that we all care,” etc.

3. Too many products are bunched for October-November market introduction, with the goal of rent-seeking to capture part of the big Christmas spending boost.  For instance I would rather have more “must read” books come out in January and fewer in October.  A similar point can be made about movies and various other forms of entertainment, including new toys.

4. Since many retail products either “catch on” in the fourth quarter or not, the seasonal clustering of demand may increase income inequality to the detriment of social risk-sharing.

These are a few reasons why such a strong seasonal component to demand might be efficient:

1. The strong cyclicality of demand might help introduce some new products to market which might otherwise be stifled by fixed costs (Shleifer’s “implementation cycles” point).

2. The strong cyclicality of demand may help pull some workers out of long-term unemployment, because Best Buy simply has to hire some retail help this time of year.  Once these workers get used to having a job again, and have something new on their resume, their future labor market trajectory improves.  These gains may exceed the losses from having a less efficient smoothing of labor across the quarters.  (By the way, if you don’t think the seasonal business cycles is picking up many of these workers, why would most other forms of stimulus?)

3. The institution of presents helps break an economy out of status quo bias when it comes to consumer purchases and that encourages innovation, even though a lot of the money spent is wasted.

4. Clustering a lot of the buying and marketing at the same time may lead to a better matching of purchases and products, a bit like “speed dating.”

More generally, you can debate whether the existence of Christmas increases the total amount of money spent, or simply sloshes demand around across the seasons.  I suspect the total amount spent goes up, and you can debate whether that is good or bad, depending on whether the savings rate should be higher or lower.  Note also that the strength of a seasonal business cycle in a country will influence the ex ante technological flexibility of business firms, which in turn will shape the volatility of non-seasonal business cycles.

What do you all think?  Thumbs up or down to the Grinch?  Or should we, as Matt Yglesias suggests, introduce another major gift-giving holiday in June, for the purposes of stimulating aggregate demand?

Ed December 23, 2013 at 8:04 am

Fascinating piece suggesting that Christmas, or at least “Christmas”, is a fairly recent invention:

http://ordinary-gentlemen.com/blog/2013/12/19/sarah-palin-clement-clarke-moore-and-the-villainous-hordes-of-thuggish-carolers-the-story-of-the-real-war-on-christmas

So we don’t necessarily have to do this, though the holiday it replaced seems to have been less focused on stimulating demand and more focused on forced redistribution.

Z December 23, 2013 at 8:52 am

Fascinating in that dullards like yourself recycle this stuff every year thinking it is new. No single cultural tradition existed since the dawn of time. All of them came into being at some point in the past after the big bang. That’s not proof that Christmas is inauthentic. It is proof that the supply of stupid people ranting against Christmas is not yet exhausted.

Easter Island Sally December 23, 2013 at 9:16 am

What a pity Z. wasn’t writing for the New York Sun in 1897: “Virgina, your little friends are stupid dullards…”

Ted Craig December 23, 2013 at 9:11 am

While this piece makes some valid points, it overlooks one major factor – Christmas was a Catholic holiday in 19th Century America. Emerson once wrote in his diary for Dec. 25 how the only people in town celebrating the holiday were the Catholics. One of the byproducts of the Industrial Revolution was a massive surge in the Catholic population of the U.S.

ohwilleke December 23, 2013 at 9:57 am

“Forced redistribution” seems like a pretty negative way to describe the way that people who are outside the paid work force or are receiving pensions based on that based work force participation (children, homemakers, retired homemakers, and other dependents) receive the bulk of their goods and services via intrafamily transfers.

Gift giving is greatest within households, is next greatest within extended family units, and is next greatest within close friendships that are family-like. The tradition of gift giving, whenever conducted, calls attention to the importance of stable intrafamily and near family transfers for the well being of most people for some of their lives and many people for almost all of their lives. Gift giving outside these love and affection networks is modest and really consists of marketing or bonus giving with touchy feeling labeling.

Unless one thinks that every man, woman, child and senior is an island, redistribution is not the exception, but the rule for decent people and mediated by a completely different set of rules than the market economy.

Ed December 23, 2013 at 10:02 am

“Forced redistribution” is a reference to the wassaling described in the linked article. Christmas caroling was quite different in the past.

Marie December 23, 2013 at 11:02 am

What an asphyxiatingly narrow view of the world that article represents.

Anyone who can only see Irish brawling Christmas drunken revels as proletariat mob social activism must have a hard time seeing any color in life at all.

Anthony December 23, 2013 at 12:45 pm

Except red.

Frederic Mari December 23, 2013 at 3:29 pm

If they were really extorting money then it wasn’t exactly your standard drunken-revelry….

OTOH, it still wouldn’t be a new tradition… Ever heard of Saturnalia? http://en.wikipedia.org/wiki/Saturnalia

Rajesh December 23, 2013 at 8:10 am

I feel the market is always right. If it has decided to exaggerate and intensify the influences and effects of Xmas, then there must be a logical basis for it. Had the reverse been true, the market would have decided that Xmas was inefficient, underplayed it and just got on with it. Like Doubting Thomases you skeptics might be interested in Netting the Pro & Con Effects. Great! However, many others would Profit simply by Keeping the Faith in the market. And Xmas!

ohwilleke December 23, 2013 at 10:01 am

Perhaps this is behavioral economics at work. It is easier for people with limited brainpower and information to make most major purchases in one go so that the decisions made approximate a values driven budget process that weights all major purchases requirements against each other at once, rather than trying to do so throughout the year on a spread out and ad hoc basis that is less suited to keeping track of budget constraints and not overlooking major necessary purchases – particularly for people whose incomes are not very stable who make up a decent part of the households in the economy.

Bill Harshaw December 23, 2013 at 8:19 am

Based on a sample of 1, no. 3 in pros is valid. How many Kindles and tablets have been purchased for gifts–they hit the sweet spot–something the recipient wouldn’t likely buy for themselves, but something with a good chance* of being valued.

* Note the contribution Christmas makes to optimism and animal spirits.

anon December 23, 2013 at 8:28 am

I have not given “stuff” at Christmas for a long time. The “commercial Christmas” of making people feel an obligation to buy lots of crap for other people does not for me fit into the spirit of celebrating Christ’s birth.

And as far as MY’s suggestion goes, a good name might be the “Rational Sheeple Holiday”. Let’s see what kind of uptake he gets.

Doug December 23, 2013 at 8:28 am

Coordinating to throw a lot of of parties, get togethers and family time right around the shortest day of the year seems like an efficient way to smooth out some of the depression associated with so little daylight.

ohwilleke December 23, 2013 at 10:01 am

+1

Ivan December 23, 2013 at 11:22 am

Insert obligatory comment about we irrational sheeple in the antipodes celebrating Christmas at the same time of the year as those in the Northern Hemisphere.

Carleton December 23, 2013 at 8:32 am

Analyzing Christmas as a possible distortion in the “efficiency” of the American economy… ignores all the other (much bigger) distortions.

How about April 15th and the joyous “Tax Season” ?

anon December 23, 2013 at 9:35 am

+1

Ted Craig December 23, 2013 at 8:48 am

If Yglesias were right, Japan wouldn’t have had a lost decade.

The Only Jim December 23, 2013 at 9:06 am

Just because Yglesias suggests something doesn’t automatically mean it’s insipidly stupid. But in this case it is, and it’s more revealing than usual.

He wants a gift-giving holiday in June so that there will be “jobs for new grads.” That’s right, folks. We’ve had five years of Obama, and now his biggest partisan cheerleader has a plan for all those who just spent 100K on a bachelor’s degree – six weeks as a Target cashier!

Forward!

Urso December 23, 2013 at 9:16 am

Economists love to dust this argument off every year, and every year they completely miss the mark. This post treats Christmas as if it just a dfay where people trade gift, full stop. Like people get together on the 25th, after work, hand each other presents, and then quickly go back to their business as if nothing else had happened.

You would think that, of all people, tenured economists could figure this out! I mean, jeez, how long did you & your students get off for this Christmas, two weeks or three?

asdf December 23, 2013 at 9:45 am

Economist tend to be damaged spergs who can’t understand normal human emotions or social interaction. Economic action and calculation dominate their extremely limited understanding of the world.

ohwilleke December 23, 2013 at 10:02 am

+1

Nikki December 23, 2013 at 5:31 pm
Claudia December 23, 2013 at 6:00 pm

And it gets even better: The modal response of the economist experts in this survey was that holiday gift giving is NOT inefficient (relative to giving cash): http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_1z4X7kmHnVYo28d

Now signaling may strike you as just as dorky, but in more normal person-speak, holiday gifts are a way to show others you really care (or not), and to really show it sometimes takes a big or time-intensive gift. If you spread the same big gift out over the year in small packages or god forbid an impersonal gift card it may not be impressive enough to send the message (signal) you want to send. See economists are not that dense .. for bonus points read the comments, e.g. from Goolsbee.

Still I like the point in this post about the impact of seasonal cycles relative to stabilization policies on the labor market. I think the signaling aspect in gift giving might well apply to macro stabilization policies too.

whatsthat December 23, 2013 at 10:47 am

At most places you can take time off whenever you want – assuming your job is such that it allows holidays.

I’m not sure what your point is: that’s what people do, get together on the 25th, and the remaining weekend perhaps, then back to work after new years. Am I missing something?

dearieme December 23, 2013 at 9:18 am

“introduce another major gift-giving holiday in June”: I should have thought that weddings in May and June might supply some of that want. Only idiots get married in winter. (Well, idiots and us, admittedly.)

Doug December 23, 2013 at 9:37 am

Plus people move (including buying new furniture and appliances) and go on vacation a lot more around June. That involves a lot of consumer spending.

Anthony December 23, 2013 at 12:47 pm

Do European economies benefit from the consumer spending of the August holiday?

Ted Craig December 23, 2013 at 1:41 pm

There’s also the very grads Yglesias would hire. Sounds like the English majors would be selling gifts for the engineering majors.

anon December 23, 2013 at 9:38 am

Happy Festivus Tyler

http://festivusweb.com/

Brian Donohue December 23, 2013 at 9:40 am

Hmmm, once again, as with your time zone article, you neglect the Hayekian rhythm of life.

Once upon a time, you would have been an enthusiastic supporter of esperanto.

ohwilleke December 23, 2013 at 9:49 am

While “Christmas” is new, the notion of a consumption splurge after the fall harvest, followed by a lean late winter-early spring season (Lent/Ramadan) before the spring harvest is deeply rooted in pre-modern agricultural reality. When you have an abundance of perishable goods it makes sense to consume them before they go bad, and then to string out the more limited supply of durable foodstuffs when fresh foodstuffs are scarce. In the same way, summer vacation is rooted in the need to free up children for agricultural labor at times of peak demand. As noted above, spring weddings supply a consumption boost after the Spring Harvest and also are timed to minimize the likelihood of critical parts of a first pregnancy taking place during the lean late winter-early spring (although these days it has more to do with the end of the school year).

Only with cheap and fast trans-hemispheric shipping (together with a lack of significant piracy for most of that trade), and advances in food preservation and refrigeration in the last half century or so, have those agricultural considerations become irrelevant (although, of course, excess and lean times should fall at different parts of the year in the Southern hemisphere and in places like Southern India, the Sahel, and the tropics of Asia, African and South America that have different seasons).

Japan and China use end of year bonuses (often as 6-12% of annual compensation) as a significant part of annual compensation as a way to share rather than leveraging macroeconomic risk for firms and the economy as a whole. In good years, when there is more supply, lots of people get big bonuses; in bad years, scarcity is widespread. The main virtue of this approach is that it makes firms more robust and puts them under less pressure to engage in cyclic layoffs but making labor costs look more like equity and less like debt. This too was well suited to an agricultural tradition rooted in sharecropping or the equivalent that was once widespread in all feudal economies as well as in neo-feudal economies in places like the American South. This isn’t a strategy limited to the orient. It is also the quintessential Wall Street economy model utilized by major financial firms like investment banks and the large law firms that serve them.

The pressure from the “real economy” – both the goods and services supply side and the labor demand side – to have punctuated consumption is much weaker now than it once was, particularly in economies or sectors of economies without the strong annual bonus tradition. The largest sectors of the modern economy that are both strongly cyclic in terms of business cycles and very seasonal within each year, are construction and real estate – and these cycles also drive a fair amount of durable goods consumption. Both construction and real estate are weakest in the winter. Agriculture’s share of the economy is now much more stable from a consumer’s perspective and much smaller as a percentage of the total economy. Real estate handles cyclic shifts by being largely commission based. Construction relies on highly fragmented project specific team building through networks of general contractors and subcontractors rather than integrated firms (a pattern also common in the film industry and theater industry).

Bottom line: The finance oriented macroeconomic models obsessed with interest rates, inflation, GDP growth rates, unemployment rates and size of the public finance sector are ill suited to analyzing optimal seasonal business cycle patterns. A more fruitful analysis looks at the roots of current seasonal patterns in economic history and at the way that the “real economy” has changed with technology to see if those patterns still make sense, perhaps for new reasons.

Alex' December 23, 2013 at 1:01 pm

Nitpicking here:

I’m not a farmer, but I’m pretty sure that the peak demand for agricultural labor is in the Spring (planting) and Fall (harvest).

Benny Lava December 23, 2013 at 1:52 pm

Depends on what sort of farming you do. Animal husbandry has different rhythms. For example sheep shearing or cattle gelding.

ohwilleke December 23, 2013 at 10:03 pm

Usually, there are multiple crop seasons per year. You harvest spring wheat and plant fall wheat in the summer – anyway, the summer is the busiest time of year for my farmer cousins in Northern Ohio and Eastern Colorado.

Spencer December 23, 2013 at 10:04 am

In the US economy, since WWII, mild recessions did not include X-mas while severe recessions included Xmas. The 1974-75 recession included two Christmases..

RayLopez December 23, 2013 at 10:21 am

This point makes a lot of sense to me: “The institution of presents helps break an economy out of status quo bias when it comes to consumer purchases and that encourages innovation, even though a lot of the money spent is wasted ”

In my professional capacity I helped a client become a household name selling certain seasonal goods. I wish I could tell you more but it would compromise this alias, which I use for flaming.

In other news: I beat board #1 of a major college here in the Philippines, who is of candidate master strength, playing black against his pet e4 opening, in blitz, his specialty. I’ve become a chess monster after taking lessons from GMs here, which you can hire for peanuts. I used to fear playing strong players but now I can beat them. I am legend! (http://en.wikipedia.org/wiki/I_Am_Legend_%28novel%29)

Cliff December 23, 2013 at 10:40 am

Yes, it’s very difficult to type a different name in the “Name” field

RayLopez December 23, 2013 at 9:13 pm

No but anybody who reads this post and who knows this client would know it was me who made him or her famous. Surely you don’t think my real name is Ray Lopez do you? I am legend…

Ian R December 23, 2013 at 10:34 am

Peakiness would seem to be inherently inefficient. Businesses either have to have sufficient capacity to deal with the peak demand which then sits under-utilised for the rest of the year and also incur hiring costs for temporary staff, or they spread output over a much longer period but then have capital tied up in inventory.

Jimbino December 23, 2013 at 2:13 pm

Shopping for and giving gifts is never optimal, since the gift is more often not what the recipient would choose for himself. It’s far better, of course, to give cash than a fruitcake. Families who put their wishes in a drawing to be gifted by one family member to another mostly escape the inefficiency.

But also inefficient are Christmas trees, creches, genuflection, fiddling with rosaries, circumcision, confession and communion, as are all kinds of religious nonsense, whether at Christmas time or not.

Highgamma December 23, 2013 at 3:29 pm

I definitely agree that there is a value to having a time of year to be a “time of cheer”. Many people (especially ones greater than 30 years in age) have conflicting schedules during much of the year that keep us from having big get-togethers and parties. Kids, work, school, etc. get in the way. We’ve all coordinated to clear the decks and have some fun. (Imagine trying to do that while everyone is going on vacation in the summer.) I like that.

By the way, I strongly like number 4. I spend little time during the rest of the year looking at new products and weighing their vale to me and others. In a few short weeks, I catch up and I don’t need to do that for another year. Search is costly.

Daniel Linde December 23, 2013 at 4:15 pm
Ray Lopez December 23, 2013 at 9:30 pm

Thanks for this essay link. It is scientifically true what it says too: “efforts to describe [or rather, efforts to create Utopias] permanent happiness, on the other hand, have been failures” This is because to produce a constant state of happiness requires a lot of work. Researchers have found that efforts to keep somebody happy follows a power law series. Suppose somebody is happy. To make them more happy, you must double the effort. Then, from that state, to make them even more happy still, you must double the effort again, or four times the original state. Like the proverb of the grains of rice and the chessboard, you quickly run into saturation from exhaustion of resources.

A better solution is as the article describes about the Cratchit family–Christmas is happy for them because it contrasts with their miserable year round life. So the secret to happiness is indeed to make yourself happy only on occasion, not all the time (I don’t feel it follows that you should make yourself miserable just so later you can be happy, though I am aware of the social custom of a ‘lover’s quarrel’ followed by ‘angry sex’). In fact, the only people who constantly try and make themselves happy, that I know of, are fakes or celebrities or drug addicts, or usually all three.

B.B. December 23, 2013 at 4:36 pm

Robert Hall observed that smoothing only makes sense with constant returns to scale. With increasing returns to scale and “thick market” externalities, it makes sense to concentrate production, shipping, and shopping. If Christmas did not exist, we would have to invent it.

Moreover, if everyone wants to have a reunion with family and friends once a year, and people are spread out, the only way that can happen is if everyone takes a vacation at the same time. So the last 10 days of the year are set aside for travel and holiday on a national basis. If productivity depends on team work, then productivity is maximized when all take holiday together.

So, yes, Virginia, and yes George Mason in Virginia, Christmas is effiicent.

Bill December 23, 2013 at 9:13 pm

If you think of Christmas as a game–give, give–dominates over give, dont give or dont give, dont give.

First, its hard to arrive at the dont give, dont give equlibria if there are children in the room. Moreover, you have to negotiate dont give, dont give rules with all your friends, which means that for them, they have to separate you out as someone special to whom they dont give gifts, because you dont want to give gifts. So, they might forget, or cheat and give you a gift, which has its own psychic reward to them both as to giving and as to showing you are a skinflint for not giving them a gift.

So, gift, gift appears to be a dominant strategy.

I follow the tit for tat strategy. If you give me a gift or christmas card, you will get one too.

mulp December 24, 2013 at 1:38 am

Tyler clearly isn’t Christian. Christmas is supposed to be about Jesus and the salvation of his coming. He’s just turned it into a liberal secular big government promotion of consumption with massive redistribution of wealth to people who don’t deserve it.

Seriously, do those brats deserve more than a small lump of coal? Lazy layabout kids getting handouts from the hardworking. And then they whine about not getting enough.

And note that Congress was clearly dysfunctional in failing to change the date of this Thanksgiving to provide a more standard shopping season – the date of Thanksgiving has been set by Washington central planners to maximize GDP in the final quarter of the year, but this year is clearly intended by conservatives to depress GDP because they want Obama to fail.

G December 24, 2013 at 3:31 am

I think the June wedding season, high school and college graduation season, and summer vacation season is a counter-cyclical consumption smoothing opportunity. Why add another holiday mid-year, just account for the other seasonal gift giving and consumer activities.

alex December 25, 2013 at 1:29 am

This is indeed an old rather than new observation and is being ‘rediscovered’ in terms of integration with macro. For instance ohwelleke, witness the current liquidity crunch in China which may be partly seasonal. The same is true in in india: inr depreciates during the same time of year that interbank liquidity loosens and money market rates fall. This process is itself driven in large part by public finance–namely government cash balances with the central bank. This of course ties back to your orignal observations about the agricultural calendar as tax payments swell following the the harvest and the fiscal year and ag calendar are often aligned.

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