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What if we abolished Christmas?

One possibility is that the economy would be just fine. This is the classic view of macroeconomics, writes Tim Harford

In 1939, Lew Hahn, the head of the Retail Dry Goods Association in the US, noticed something that gave him cause for concern: Thanksgiving would fall on November 30 that year, the latest possible date. Since it was thought poor form to start hawking Yuletide goodies before Thanksgiving was over, this would mean a brief Christmas spending season.

Hahn was concerned that consumers would spend less, damaging an already weak economy, to say nothing of the prosperity of the members of the Retail Dry Goods Association. And so he had a word with the secretary of commerce, Harry Hopkins, who had a word with President Franklin D Roosevelt, who had a word with the nation. He explained that as Thanksgiving was a federal holiday it was the president’s job to select the date — and he was choosing November 23 instead.

The move was controversial. Alfred Landon, the Republican who had been defeated by Roosevelt in the presidential election of 1936, compared FDR’s high-handedness to that of Adolf Hitler, thus beginning a hallowed valium tradition in US political commentary. For a couple of years, half the country celebrated on the old Thanksgiving date while the other half marked the new “Franksgiving” instead; a couple of states sat on the fence and made both days a holiday.

All this raises a deeper question: what are the macroeconomic consequences of Christmas? The answer depends on your politics. Economic conservatives, from Rick Santorum to Alf Landon to George Osborne, believe Christmas has little effect on the health of the economy; liberals, from Ed Balls to Franklin Roosevelt to Paul Krugman, believe Christmas is macroeconomically invaluable.

I should emphasise that I am making assumptions here. I have not approached any of these people to ask their opinions about Christmas. But the views I am speculating that they hold seem a logical extension of their views on government stimulus spending.

Allow me to explain. Imagine that this Christmas day, the Queen, the Pope and even Oprah Winfrey announced that Christmas would be a purely religious occasion from 2015 onwards. There would be no presents and no feasting. If people respected this declaration, about $75bn-$100bn of extra consumer spending in the US alone would simply not materialise next December. What then?

One possibility is that the economy would be just fine. This is the classical view of macroeconomics: nothing significant would change after the abolition of Christmas. We would retain the same labour force and the same skills, the same factories and the same power stations, the same financial sector and the same logistics networks. The capacity of the economy to produce goods and services would be undiminished, and after a period of adjustment, during which tinsel factories would be retooled and Christmas tree plantations replanted, all would be well.

What would replace nearly $100bn of seasonal consumer spending? Nothing noticeable, but the replacement would happen just the same. The productive capacity freed up by the disappearance of Christmas could be turned to other uses; prices would fall just enough to tempt us to spend our money at other times of the year. Indeed, cancelling Christmas might even provide a modest boost to our prosperity in the longer term, as bunching up all that spending into a few short weeks strains factories and supply chains. Smoothing out our spending would be more efficient.

This classical view of how the economy works is also the view taken by Mr Osborne, the UK chancellor, and by Republicans in the US. Their view is that government stimulus spending does not work; cut it back, they argue, and the economy would adjust as the private sector took up the slack.

On the other side of the debate stands Mr Balls, the UK’s shadow chancellor, as well as American stimulus proponents such as Mr Krugman and Lawrence Summers. Mr Krugman once commented that panic about an attack from aliens would help the economy because it would get the government spending money again. Since aliens are not available, Santa Claus will have to do.

This Keynesian view of how the economy works differs from the classical view in one crucial way: it argues that supply does not always and automatically create demand. When Christmas is abolished (or a financial crisis devastates people’s confidence and their spending power), consumers will plan to spend less. And if consumers plan to spend less, price adjustments may not induce them to change their minds; the price adjustments may not even happen. If Christmas spending disappears, it may take many years for the economy to replace it. Those factories will still be there and the workers will remain available — but they will stand idle.

Who is right? I should confess a bias. I am sceptical about the efficiency of many government spending programmes and of many Christmas purchase decisions. In both cases, too much attention is lavished on appearances and too little on what the recipient might truly want. In the long run, then, I should hope both for a smaller state and for a smaller Christmas.

But that is a matter for the ghost of Christmas yet to come. Despite my own biases, I have to acknowledge that this Christmas interest rates are still close to zero. Until that changes, the liberals will have the better of the argument. Stimulus spending remains effective, regardless of whether the stimulus comes from the Treasury — or from the North Pole.

Written for and first published at ft.com.

24th of December, 2014Other Writing • Comments off