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?