If Christmas didn’t exist as a holiday what would happen to consumption and production?  I can think of several hypotheses.

1)  Consumption would remain the same but people would spend more on themselves and less on others.  Would deadweight loss be reduced enough to make such a move wealth-enhancing?

One also wonders how much Christmas spending within the family is actually spending on oneself?  Did that catalog on my chair just happen to fall open to the page with the black pearls?

2)  Consumption would decline and savings would increase.  Many people go into debt to buy Christmas presents.  Does Santa Clause reduce the rate of savings?  Scrooge says yes!

3)   Other holidays would become more important and total consumption and giving would remain the same.  Is there a Coase theorem for holiday gift-giving?

Increased giving at other holidays, such as birthdays, would help to smooth production and consumption.  Consumption smoothing is welfare enhancing in partial equilibrium but not necessarily in general equilibrium.  I want my consumption smoothed but I’d like to get all my gift giving done in one big batch thank you.

Production smoothing is also generally welfare enhancing in partial equilibrium but not necessarily in general equilibrium.  In general equilibrium, a big push may be necessary to cover fixed costs.  The seasonal cycle may be an implementation boom.

Comments are open.

One of my favorite Friedman papers is "The Effects of Full-Employment Policy on Economic Stability: A Formal Analysis" which you can find in Essays in Positive Economics.

Friedman sets up a very simple model, Z(t)=X(t)+Y(t) where Z(t) is income at time t, X(t) is what income would be if there were no counter-cyclical government policy and Y(t) is the amount added to or subtracted from X(t) by the history of government policy.

You wouldn’t think that much could come out of such a simple model but Friedman takes the model, notes that the formula for the variance of two random variables is V(Z)=V(X)+V(Y)+2 r(X,Y) Sd(X) Sd(Y) (where V is variance, r correlation and Sd is standard deviation) and proceeds to show that:

In order to cut the variance of income fluctuations in half (which would cut the standard deviation by less than a third), r(x,y) must exceed .7.

The result is powerful because once you start thinking about the correlation coefficient, r, it’s hard to see how it could be as high as .7.  Very few government actions taken in time t have an effect in time t – there are lags between recognizing a problem, deciding what to do about the problem and implementing a policy.  Once the policy is implemented there are lags before the policy takes effect.  All of these lags are of uncertain and changing length so actions taken in t-5, t-4, t-3, and t-1, may influence Y(t) making a high correlation between X and Y unlikely.  Moreover, Friedman’s bound is an upper bound, requiring optimally sized interventions – when we recognize that the size of the intervention might be too little or too much and that in both cases this will reduce the decrease in variance we have a strong case for skepticism about the efficacy of counter-cyclical policy.

But was Friedman right?  In the thirty or so years after he wrote, when counter-cyclical policy was in vogue, the variance of the US economy was much lower than in the pre-World War I years.  Reality it appeared, refuted Milton Friedman.

Friedman, however, lived to see his simple model proved correct (Essays in Positive Economics!).  In a series of papers beginning in 1986, Christina Romer showed that the pre-WWI volatility was an artifact of the way the data was collected.  Once the pre-WWI and post-WWII data were collected consistently, using the same methods, the post-WWII economy showed no big drop in volatility.

Almost nothing in, a surprising and powerful result out, and an implicit prediction proven correct after thirty years.  That’s the Friedman magic. 

Emily Oster is featured in Esquire discussing her research on Aids in Africa.

Hat tip to Greg Mankiw. 

Great economist by day and crusading public intellectual by night, Milton Friedman was my hero.  Friedman’s contributions to economics are profound, the permanent income hypothesis, the resurrection of the quantity theory of money, and his magnum opus with Anna Schwartz, A Monetary History of the United States, 1867-1960, all stand as great achievements.

But Friedman did not restrict his genius to the academy, he used economics to forcefully argue for a better world.  Friedman was a key player in ending the draft, he championed school choice and drug legalization.  He not only wrote about floating exchange rates he helped to bring them into being.  The end of welfare as we know it?  Friedman’s negative income tax was an inspiration.

Milton Friedman loved liberty.  Even today, chills run down my spine whenever I read the slashing opening to Capitalism and Freedom. 

President Kennedy said, "Ask not what your country can do for you – ask what you can do for your country."… Neither half of that statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society.

Damn right.

On a personal note, Friedman inspired my book, Entrepreneurial Economics: Bright Ideas from the Dismal Science, in which I said Milton Friedman was the greatest entrepreneurial economist of the twentieth century.  It was thus a real thrill for me and a bringing around of the circle when I sent him a draft and he wrote back praising the book (see the back cover!).

He will be missed.