Christmas is a time of relaxing with family, culinary excesses, and financial extravagance as friends and loved ones splurge on gifts. 

Except for these delightful chaps, they're not wasting a moment

Not known as the ‘silly season’ for nothing, Christmas is, of course, also the season of specious economic arguments. Exhortations for Australians to spend up big this time of year to stimulate the economy are a good example of the ‘broken window fallacy’, christened thus by French liberal economist Frederic Bastiat in the 19th century.

Bastiat pointed out that a broken window pane might bring cheer to the glazier, but the money spent on replacing the window is income lost to the tailor, the book shop, and ultimately every other business in the country.

Christmas is the same: extravagant spending at department stores, whether paid on credit or from disposable income, is ultimately a loss to other parts of the economy.

To the extent extra Christmas spending more than offsets belt-tightening in later months, it implies a reduction in saving. Less saving means less money for banks to lend to businesses and less money for consumers to spend at some point in the future.

A good economist should observe both what is seen – happy retailers – and what is not seen – the voiceless remainder of the economy. But this fallacy has infected a sizeable chunk of the economics profession, which is often caught trying to assuage the personal pain wrought by earthquakes and floods by pointing to their ‘beneficial’ impact on economic activity.

Some Keynesian economists still note how the Second World War was the ‘stimulus’ that ultimately ended the Great Depression.

But calls to spend around Christmas are even more damaging than the ‘broken window fallacy’ might suggest. One would naturally be as determined to get good value for money when replacing a window as when shopping for any other good or service.

Milton Friedman once famously spelt out the four ways of spending money, each having profoundly different implications for economic welfare. First, one can spend money on oneself, which is most likely to produce the best value given individuals will weigh up both the costs and benefits of their purchase.

The second and third ways are more inefficient, equally so. One can spend other people’s money on oneself. The ensuing spending is likely to be excessive but at least it will match up with the buyers’ preferences.

Christmas is the best example of the third way: spending one’s own money on others. That way, costs are contained but the quality of the purchases can leave a lot to be desired.

Shoppers buying for themselves are typically willing to pay more for their purchases than they actually pay, carefully concealing their maximum price. The difference between the former abstract amount and the actual invoice is known as ‘consumer surplus’ – the size of any ‘bargain’. A surplus is guaranteed because no-one would head to the checkout with a negative consumer surplus.

But receivers of gifts might attach less value to those gifts than their purchase price. One might call this difference a ‘consumer deficit’. As economic growth furnishes even poor people with every conceivable luxury, the aggregate ‘consumer deficit’ on Christmas day is likely to be growing.

So it turns out that far from being an economic boon, Christmas is also a festival of economic waste. 

The fourth way is spending other people’s money on other people. The spender has the least incentive to watch over costs, and naturally can’t know the preferences of the recipients either.

The further the distance between the real payers, the decision-makers and the recipients, the more disastrous the economic consequences: a local charity is more likely to spend donations wisely than a distant parliament is likely to spend taxpayers’ money.

For all the waste and inefficiency of Christmas giving, it is still a vastly superior way of allocating resources than what occurs in government. The waste is hard to quantify because national income statistics treat a dollar of private spending the same as a dollar of public spending.

Government is not something that happens once a year, but every day of every year. It is therefore crucial that politicians and bureaucrats pay particular attention to the inherent value of their expenditures. The Labor government’s recklessly wasteful spending on school halls in the wake of the GFC – to list just one isolated but colourful example – should be a reminder that they still are not. 

Comments on this post close at 8pm AEST.

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    • Extra Anchovies says:

      05:18am | 21/12/12

      No one stopping you from keeping your wallet in your pocket.

    • acotrel says:

      05:29am | 21/12/12

      I refuse to worry about money - life is too short.  I intend to enjoy my christmas and forget that the LNP even exist. They are such a waste of space , I think I’ll write to Santa and ask him to remove them from the face of the earth.
      I’m sorry, but I am totally sick of negativity, and your article is just that - negative AND depressing.

    • Michael says:

      06:58am | 21/12/12

      His is the voice that wakes you in the night, beads of sweat cover your brow and you gulp as you sit up, heart racing, your senses so alive it’s almost painfull.  What started as a whisper is now a freight train bearing down on you, your mind thumping as your blood pressure rises.  Wincing with every heart beat, it cannot be!, louder and louder,  frantic now, let me sleep, please, Tony please, let it be over.

    • Penguin says:

      07:37am | 21/12/12

      Merry Xmas Acotrel !

      Wow,,I am amazed by your confession, “I refuse to worry about money-life too short”,,,apply this to the ALP and the PM Gillard and Swan Govt,,,it sums it up all.

    • Extra Anchovies says:

      07:38am | 21/12/12

      The Labour party don’t seem to worry about money either.

    • 3D African Wizard says:

      09:55am | 21/12/12

      Extra Anchovies, if you’d like to take part in partisan politics, it’s useful to learn how to spell Labor Party.

    • ramases says:

      10:14am | 21/12/12

      3D African Wizard, maybe Extra Anchovies is right in his spelling as we have all been labouring under the misapprehension that someone in the Government knew what they were doing, but sadly we were mistaken.

    • Eskimo says:

      10:20am | 21/12/12

      Extra Anchovies may well have been referring to the British Labour Party, in which case the spelling is correct.

    • b2 says:

      10:25am | 21/12/12

      Acotrel, how could you possibly be “totally sick of negativity” when you write a negative comment about the LNP in almost every single thread, regardless of the original topic. 

      You always have some way to link the the current topic to some rant about how bad the Opposition is, generally parroting the Labor Party’s spin doctor’s bullshit about misogyny or sleaze and smear.

      I’ll tell you what, I for one am sick of the Labor party bullshit excuses and unfounded character assassination of the Opposition leader, and I’m sick of your pandering comments.  Why don’t you do us all a favour and take a couple of weeks off over Christmas?

      Merry Christmas, and Happy New year.  I can’t wait to see how you justify your beloved Labor losing the election in the New Year!  (That might actually give you something to blame on TA!)

    • Penguin says:

      11:36am | 21/12/12

      @ Eskimo . Rather curious why ALP is A Labor P rather than A Labour P as labour is spelled in Oz the way the Brits do. Anyone care to explain this?

    • Extra Anchovies says:

      12:04pm | 21/12/12

      @3D African Wizard

      If you knew ANYTHING about political history, you would know that the Labor party was originally called the Labour party.

      If you are going to advise on other people’s spelling, it’s useful to be right.

    • Better says:

      12:07pm | 21/12/12

      Maybe you should “work harder”! The economy and money are the most important things in the whole world!! The economy is far more precious than people. When Abbott is back we can live in an economy again! Hooray. Listen to your d head Liberal betters! They know it all!

    • 3D African Wizard says:

      01:14pm | 21/12/12

      Extra Anchovies, my apologies. Given the context of the article, I didn’t know we were meant to be discussing Australian political history pre-WWI. Thanks for letting me know, however.

    • Jay2 says:

      01:24pm | 21/12/12

      Bw ha ha ha ha, ahhhh ...ohhh lordy….Merry Christmas to ya’ acotrel, you are hilarious!

      First, you say how you REFUSE to worry about money (but mentioned it anyway…), followed closely by expressing a desire to have the entire LNP removed from the planet ....then, after these darkly negative comments, FINISH by saying how sick of negativity you are!

      Brilliant!!  grin ha ha ha, you are if nothing else, a very interesting case to study! Cheers !

    • acotrel says:

      04:13pm | 21/12/12

      ‘unfounded character assassination of the Opposition leader’

      Impossible - his character is already dead, and it wouldn’t be unfounded anyway.  Claim that he is ‘decent’ ? - in comparison with whom ?

    • Blossom says:

      06:20pm | 21/12/12

      Careful what you wish for, curses come home to roost.

    • Bertrand says:

      06:07am | 21/12/12

      Money multiplier. Look it up. Have a read.

    • John Humphreys says:

      11:39am | 21/12/12

      Money multiplier works irrespective of who spends the money. To continue with the broken window example… spending money on fixing a window does not have a higher multiplier than spending the same money on books, bread and bras. So Creighton’s point holds.

    • FlyOnTheWall says:

      06:31am | 21/12/12

      I love a good economist argument, I also love anyone who points out flaws in Keynesian theory… but dude, it’s Christmas!
      Go spend a bundle on your friends and family, enjoy the gift of giving! Trust me, it’d effing brilliant!

    • marley says:

      07:30am | 21/12/12

      Well, I dunno.  I"ve got a relative in the surf business - and he needs a good Christmas season to keep on the right side of the ledger sheet.  But it’s not all inefficient spending on gifts for others - a lot of his sales are that highly efficient spending on oneself the author commends, because Christmas coincides with holidays, families at the beach and people needing swimsuits, board wax, sunnies, t-shirts and the like.

    • acotrel says:

      08:15am | 21/12/12

      I really hope your friend makes a good dollar over christmas.  We all need our retail sector doing well.  I just hope he stocks some Australian made goodies .

    • Super D says:

      07:40am | 21/12/12

      What a pleasant surprise. From the title I was expecting some sort of misanthropic diatribe about how people are just mindless fools at Christmas. While there was some of that at least it was tempered with an acknowledgment that government planned economy spending is even worse. I really wasn’t expecting that and it has brought me some Christmas joy.

    • David Johnson says:

      10:12am | 21/12/12

      Super D,

      I concur entirely. I think most people posting here didn’t even finish the article, as it was, in the end, a positive story about Christmas spending vs. Government spending.

    • Shane From Melbourne says:

      01:35pm | 21/12/12

      Damn those Chinese with their government planned economy spending, they must be doing crap while those free market Americans….oh wait…..

    • Super D says:

      03:45pm | 21/12/12

      @ Shane - The US isn’t a free market economy.  Look at the health bailouts, auto bailouts, green investments, farm subsidies and even Obamacare.  Sure its not a centrally planned as a 1970’s communist economy but to claim that the US still embraces pure market principles is way off the mark.

    • A Concerned Citizen says:

      08:16am | 21/12/12

      I think the “broken window” analogy holds the most weight in redundant or worse, privatized infrastructure/services than it does in consumer shopping. In consumer shopping, the only person out of pocket is the consumer, which is fine because the consumer wanted to purchase the item- when the only losers are people selling items the consumer wasn’t interested in (this applies to gifts as well). In paying needlessly for infrastructure’s redundant workers or private buyers, I am going out of pocket for money that could have been spent on businesses and trading (where the economy is stimulated most), but instead going towards a profit for some greedy mug to sit on a road that I’ve always been using. Because the user has no choice but to use infrastructure, the money is automatically deducted, and less is spent on the real economy.

    • Tchom says:

      09:44am | 21/12/12

      But—but—the ecoooonommyyyy….. waaahhhhhhh!!!!

    • Robert S McCormick says:

      09:58am | 21/12/12

      Said like a true believer ‘acotrel’!
      This is exactly the attitude your ALP heroes & heroines Kevin Rudd, Wayne Swan, Julia Gillard & Penny Wong adopted when they were so disastrously elected to run Australia and just look at the mess they have made!
      Please don’t spout “percentage of GDP” crap back at me. The fact, one understood by everyone, is that thanks to your darling ALP & it’s “I don’t care about money” attitude Australia, in addition to the collectively 100s of billions ALP State & territory Governments have run their States & Territories into, just Four pairs of hands, those of Kevin Rudd, Julia Gillard, Wayne Swan & Penny Wong have managed to rack up a massive $152,000,000,000.00 c in Debt & as a direct result of their abandonment of their repeatedly promised “Surplus” - a Surplus any fool, except those four, knew was unrealiseable, that little debt will now blow out to over $170,000,000,000.00.
      You & they must be praying that the Mayan Long Calendar forecast is correct & that the World will end today. It was thought tobe at sunrise this morning but now you’ll have to wait until midnight & when nothing changes you’ll still be faced with over $170 billions of Debts.

    • Bear says:

      12:14pm | 21/12/12

      It’s OK, your numbers are made up.

    • acotrel says:

      04:18pm | 21/12/12

      ‘just look at the mess they have made!’

      You are the one telling the story.  Did the GFC happen?  Did Tony Abbott’s negative idiocy have an effect on what Gillard did in response?

    • marley says:

      06:22pm | 21/12/12

      @acotrel - if Abbott’s negativity determined Gillard’s response, then the fault is Gillard’s.  We can’t control how others behave, we can only control how we behave - and if we let the other guy set the pace, then we’ve basically said, we have no principles to guide us, other than beating the other guy.

    • Kika says:

      11:05am | 21/12/12

      And a Festivus for the rest of us…

      I hope you all have your festivus poles ready and are prepared to start the airing of grievances…

      Wait, that’s everyday on the punch right?

    • Frank says:

      12:24pm | 21/12/12

      I’ve got a lot of problems with you people!!!

    • LC says:

      11:14am | 21/12/12

      Is someone sitting next to you with a gun to your head forcing you to spend exorbitantly this Christmas?

      No? Then what’s the problem?

    • ramases says:

      02:05pm | 21/12/12

      Sheep mentality!

    • Gordon says:

      11:29am | 21/12/12

      Fear not Punchians, the dismal science can show Christmas buying is an unalloyed good in the driest of terms:

      Voluntarily buying anything makes two people better off: the buyer (who wanted the goods more than the money, otherwise they wouldn’t have done it). and the supplier who wants your money more than the goods (ditto). Net wealth has increased: two people have more than they had before.

      This is the basics of non-zero-sum thinking, and is the most basic foundation of any economic system featuring volutary trade. The Author’s quibble about which sort of spending is more or less beneficial might be valid but they impact only at the margin.

      Giving a present makes a third person happy: the receiver, (even if it is a justin bieber CD you could argue they are up a drink coaster or an impromptu frisbee, or,  the item is regifted until it finds a happy receipient, or someone is paid $ to dispose of it).

      The only Christmas spending that is a net loss of wealth is where (like spending on drug addiction, or bankrupting yourself) the spending is non-rational and destroys the earning potential of the purchaser.  So: spend to your budget and be happy thrice.

    • Economist says:

      11:48am | 21/12/12

      I’m always amused by Adam’s anti-government stance in his articles. Yet on The Drum TV show he’s always so timid.

    • Detective Dawg says:

      12:03pm | 21/12/12

      If you hurt or dump your animals I will hunt you down!!!


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