22 Days To Go: How Christmas Caused the Financial Crisis

A little over a week ago, I asked, "What...is the lesson from the financial crisis for Christmas? What is the connection between this economic shortfall and our moral heritage?" The best answer came from someone who wasn't actually trying to answer the question. Yesterday, Wharton professor Joel Waldfogel, of Scroogenomics fame, spoke at LSE. His lecture added another dimension to the deadweight loss of Christmas. The following charts are not included in his book; this is a Trading 8s exclusive...  First, let's start with the fact that we spend a lot of money on Christmas presents. Just look at how much higher retail sales are in December than the rest of the year:Now here's what it looks like over time, where every spike you see is another December:Don't worry, we didn't invent the "vulgar commercialization of Christmas," as Waldfogel calls it. Here's a measure of the "December excess" sales over November and January over the past 70 years:You can go all the way back to 1919, and you'll still see a big December spike:So we spend a lot of money during the holidays, and it's nothing new. In fact, we spend less nowadays that we did back in the olden days (relative to the economy as a whole):If greater consumption isn't a problem, then what am I making a fuss about? Well, it seems we have invented something that affects both Christmas and the financial crisis: a new way to finance that consumption. In a chapter titled "Have Yourself a Borrowed Little Christmas," Waldfogel writes:

Remember "layaway"? How about "Christmas Club"? These are words not often heard these days, but they were once important retail institutions. Both allowed consumers to pay for Christmas gifts in advance of obtaining them, making them the polar opposite of today's preferred time pattern of buy now, pay later, using credit cards. Layaway programs allowed customers to reserve their desired items, pay when they could, then take their desired items home when they had paid in full (foregoing interest all the while on the money paid to the store).

I'll be honest, I'd never heard of Christmas Club, but several decades ago it was a popular bank account where folks could deposit a little money each week to save for Christmas. Behavioral economist Richard Thaler is always telling us how people are myopic and don't save unless there is a specific vehicle to remind them, and fellow behavioralist Robert Shiller wants to solve that by "democratizing" finance---that is, giving low- and middle-income households new ways to save and invest. But as Richard Bookstaber and Arnold Kling have pointed out, part of the problem with our brave new financial world is the trouble we have wrapping our arms around its complexity. Maybe the answer in many cases isn't to create new vehicles but to look back to simpler days when we took more time to protect against risk and care for our future. Especially in light of the new vehicles we have been using lately:Which wouldn't be a problem if we were using that debt responsibly. Unfortunately, in January we still haven't paid back almost half what we charged, and in February we still owe 20%:Clearly, as a society, we are spending above our means. As I've written before, this phenomenon was at the heart of the financial crisis. No, of course Christmas didn't cause the crisis. That title was intentionally provocative and half-joking. But they are both related to the overconsuming, undersaving culture we have become, and it is imperiling both imprudent households and innocent bystanders. So the lesson from the financial crisis for Christmas is glaringly obvious: Stop wasting money!Now is a dangerous time for consumers to stop spending. It is better for the economy that consumers ramp up spending as it's coming out of a recession and only focus on saving when an expansion is in full-swing. We're not there yet. But it's equally dangerous for consumers to charge money they can't repay; the economy can suffer early next year if banks and credit card companies have to report lower-than-expected earnings when we can't pay them what we promised.We need to encourage wiser spending---which is just another way of saying, prevent the deadweight loss of Christmas---and when the economy is finally chugging along at full speed again, we need to encourage more saving, less debt, and a more balanced economy.Note: All of the above graphs are from Dr. Waldfogel's lecture, but none of the comments represent his views. He mentions similar issues, but to read his words, you'll have to buy his book.