The Economics of the Holidays

Most people are probably aware that more money is spent around Christmas time than any other time of the year. One estimate by Joel Waldfogel of the Wharton business school at the University of Pennsylvania concluded that $66 billion was spent by Americans on gifts in 2007. It is also estimated that 135 million Americans participated in Black Friday (the day after Thanksgiving and first day of the traditional Christmas shopping season) in 2007.

Considering the dollars spent and the enormous number of people involved, there are some significant economic lessons that can be learned. I love the holiday season, but like many things, I try to take a practical, analytical view at times and see what I can learn about human behavior.

1) Much of the holiday spending is unnecessary, or at least unappreciated. I don't recommend that everyone think selfishly, but Waldfogel also estimates that $12 billion of the $66 billion spent each year is inefficient spending, or money that the recipient wouldn't have spent on themselves. Gift giving is a wonderful tradition, but gift cards, cash or more educated purchasing can result in a more economically effective Christmas.

2) Consider giving to those who are truly needy instead of excessively giving to those who aren't needy at all. The percentage of GDP produced at Christmas time has actually decreased over time, so maybe we are improving our behavior a bit here.

3) Think about the long term value of Christmas gifts or decorations. Many products are designed for the "wow" factor, but are expensive or underutilized over a longer time period. Artificial vs. real Christmas trees and regular vs. LED Christmas lights have various costs and benefits that should be considered.

4) Certain gifts and traditions are not critical to a good Christmas. The most meaningful things are time together with family and friends and traditions that promote giving, peace and harmony amongst people.

Despite my tendency to focus on the economic side life, I love the positive, uneconomic parts of the holiday season. Like many significant events in life, Christmas provides an opportunity to think about the costs and benefits of various financial decisions and how they fit into a sensible long-term financial plan.