Spending does not ‘stimulate’ the economy

Jess Irvine* has an op-ed about the economics of Christmas.

ECONOMISTS hate Christmas; and not just because of the plunge in personal productivity that occurs this time each year (hello couch!).

I know what you’re thinking: shouldn’t economists love Christmas? Isn’t Christmas a massive boost to the retail economy? Doesn’t it boost spending and create jobs?

Well, in a sense, yes.

Retail sales surge in December. The crucial Christmas and New Year’s sales period can make up half of a retailer’s profit for the year.

But what really matters to economists is not just that you spend money, but that you get something you really want for it.

Re-read that last sentence. It is exactly correct. What is amazing is that many economists would agree with that sentence and also think that stimulus spending ‘saved’ the economy from recession during the GFC.

In a famous paper titled “Scroogenomics”, economist Joel Waldfogel first explained the “deadweight loss” of Christmas.

An economics professor at the University of Pennsylvania, Waldfogel ran a series of experiments with students asking them to assign a dollar value to gifts they had been given.

A consistent gap was found between the dollar value the purchaser paid for the gift and the dollar value perceived by the gift recipient. This gap could be as large as a third of the purchase price, and at least 10 per cent.

This gap – money spent but not enjoyed – represents a deadweight loss to the economy. The gift giver could have spent less to achieve the same result. And the gift receiver could have bought more of what they’d really like for the amount spent.

Apply this gap to the total value of all Christmas spending, and you soon get billions of dollars of deadweight loss.

Now consider the deadweight loss associated with pink batts, school halls and the like. What would the deadweight loss of the stimulus spending be? Small wonder economic growth is sluggish.

* – this is not an invitation to launch into Jess. Her views are entirely mainstream.

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30 Responses to Spending does not ‘stimulate’ the economy

  1. ChrisPer

    And consider WHO should determine the value to the receiver.

    For the school halls, its the school – Principal, staff, school building committee, parents. For the pink batts, the occupants and owners of the homes. For the Plasma TV Bonuses, the recipient would be a good start, but the actual payers – us taxpayers that didnt get the education bonuses, plasma tv payments but could have used the money to pay our OWN bills.

    Notice who was better placed to decide where the money should be spent! If the Government had made a ‘return of you own income’ to the actual taxpayers, there would be no deadweight loss.

    Its as though our national government were made up of Bruce Wilsons, Julia Gillards and Craig Thompsons. Creating deadweight losses is euphemism for misappropriation.

  2. I look forward to reading Ms Irvine’s next article on the dead weight loss of the Trade Union Party forcing the poor to subsidise rich people’s solar panels.

  3. Rafe

    I bet Jess gives ebooks as presents because they are very cheap (minimum deadweight loss) and also have practically zero carbon footprint.

    It is truly beautiful the way Sinc demonstrates the spirit of charity and generosity of our Judeo-Christian heritage with his exhortations to refrain from rude comments on social engineers and airheads.

  4. entropy

    Too late! I had already bagged out Ms Irvine last night on the speaking Freely Thread.

  5. Paul

    I always thought that the scam called “stimulus” was nothing more than a project to get prosperous Australia into the same debt crisis as the US and Europe. It now appears to have worked as planned.

  6. .

    In a famous paper titled “Scroogenomics”, economist Joel Waldfogel first explained the “deadweight loss” of Christmas.

    An economics professor at the University of Pennsylvania, Waldfogel ran a series of experiments with students asking them to assign a dollar value to gifts they had been given.

    A consistent gap was found between the dollar value the purchaser paid for the gift and the dollar value perceived by the gift recipient. This gap could be as large as a third of the purchase price, and at least 10 per cent.

    This gap – money spent but not enjoyed – represents a deadweight loss to the economy. The gift giver could have spent less to achieve the same result. And the gift receiver could have bought more of what they’d really like for the amount spent.

    Apply this gap to the total value of all Christmas spending, and you soon get billions of dollars of deadweight loss.

    Helloooo stated and revealed preferences.

    Jess would have learned about these in a real economics degree, or even in psych.

    If the gift giver gave less, then gaps of similar proportions would still exist in the valuation.

  7. entropy

    To be fair, everyone will hold inconsistent views on something. Usually however, it isn’t something related to your job.
    Anyway, manufacturers produce something and importers import in the expectation the goods will be bought at Christmas. That is what generates the economic activity that keeps the world going around, and thus the relative worth of the good to the gift giver compared with the gift receiver isn’t that relevant.

  8. entropy

    Dot,

    Jess would have learned about these in a real economics degree, or even in psych.

    I think you might be onto something there.

  9. jupes

    … airheads.

    LOL

    I do believe that young Jess has the part of airhead nailed down in her cameo on the Drum when Tim Wilson hands Liz Broderick her arse on a plate.

  10. Tel

    I have noted that family members tend to buy me shirts and fashionable hats, ties, handkerchiefs and stuff like that. It is evident that their preference for seeing me dress sharply is greater than my preference for wearing all that.

    But what about the greater good???

  11. ChrisPer

    Its an interesting point entropy made:

    thus the relative worth of the good to the gift giver compared with the gift receiver isn’t that relevant

    The person who earned the money and bought the gift has their own satisfaction, even if they ‘didn’t want to’ do it they satisfied social pressure or offspring blackmail by diverting the money to christmas gifts. That opportunity cost in marginal satisfaction for the person who earned the money could be far higher than the marginal satisfaction of the recipient, that ungrateful brat or sister-in-law.

    Now if we factor the deadweight cost in marginal satisfaction into the Gross National Happiness…

  12. martin

    I think Jessica just dusts off the same article each year. The Professor reviewed one such article in 2011.

    http://bunyipitude.blogspot.com.au/2011/12/silly-gift-that-keeps-on-giving.html?m=1

  13. H B Bear

    I’m still trying to use Jessica Irvine and deadweight loss in a comment without causing offence to the powers that be.

    Watch this space.

  14. James of the Glen

    “I look forward to reading Ms Irvine’s next article on the dead weight loss of the Trade Union Party forcing the poor to subsidise rich people’s solar panels.” – Forester.

    Well said.

    And the far, far greater scam of wind “farms” and their Renewable Energy Certificates. Australia’s shame.

    Will “Jess” ever be able to think on it? Will “Jess” … no, forget it, it’s Christmas time.

  15. Rabz

    Her views are entirely mainstream.

    And utterly wrong.

    Oh well.

  16. Ellen of Tasmania

    We just don’t know how to give and receive gifts anymore.

    I have gifts from members of my family who have died. The value of those gifts – which reflect something of the giver in them – is very sentimental.

    Gifts are a language between people – more than just the economic or usefulness value. We need to relearn the language, IMHO.

  17. Eddystone

    this is not an invitation to launch into Jess. Her views are entirely mainstream.

    Ok, put her on the Protected Species list along with fellow nutters John Kwiggen and Andrew Leigh.

  18. Infidel Tiger

    A dead weight loss. Isn’t that what occurs when News Ltd poaches staff from Fairfax?

  19. Tom

    this is not an invitation to launch into Jess

    Doomlord’s untouchables:
    1. Andrew Leigh, Labor totalitarian.
    2. Jessica Irvine, Green Left airhead.
    3. Monty, professional pond scum.
    4. Sfb, shemale valet to the Lying Slapper.

  20. blogstrop

    I was going to say that there’s no need to launch any derogatory attack on the lady, as Bunyip does that pretty well on his own – and there he is! Thanks, Prof. B.
    I make the additional observation, however, that despite The Australian employing a cartload of lefties, they are still attacked as being the right-wing hate media. Balance gets you nowhere with the left.

  21. Tom

    Like a dog unto its vomit….

    I detect the twitchy writing hand of Bunyip out of water.

  22. Token

    * – this is not an invitation to launch into Jess. Her views are entirely mainstream.

    Ignore the fact people make informed decisions with their own money is presented as another opportunity for the lunar left to say people should not be trusted with their own money.

    Jess will not get a pass for this overt political message.

    The blonde economist is ensuring the lefty march to higher taxes continues.

  23. JohnA

    ChrisPer #1121220, posted on December 23, 2013 at 8:49 am

    Creating deadweight losses is euphemism for misappropriation.

    Bit of a soggy comment, I’d say.

    Once people have earned their money, do we talk about the deadweight loss of their spending on eccentric, frivolous, useless stuff like private car museums, matchbox collections, world cruises, $10,000 diamond-encrusted watches and other self-indulgences?

  24. Token

    Originality isn’t the poor girl’s greatest strength

    It’s called “staying on message”.

    Pity that is what crusaders do, not journalists ( or rather what Journo-Listers do)

  25. Irrelephant

    We just had our sons year 6 leaving ceremony at our local public school. The entire school of 500 kids and parents were under the old parent funded shade shelter. Our new 3 million dollar school hall was locked up, unused and unloved. Thanks Kevin. We could have used that 3million for support and special Ed teachers, a safe drop off zone for the kids, anything really. What a disgraceful waste of money.

  26. David Brewer

    Great to see the spirit of Christian charity activating us all as this festive season.

    Seriously, Jess’ return unto this subject is a promising sign in my view. She is drumming it into her own head and those of her readers that spending for spending’s sake gives poor value. It is surely but a short step to realizing that government stimulus spending – indeed, all government spending on our behalf on things we could have decided whether to buy ourselves – is going to provide poorer value than leaving us with the money to make our own decisions. Therein lie the seeds of wisdom…

    While the general point is valid, its specific application to Christmas presents is invalid, because two factors have been left out of the value calculation. One is the value to the giver of offering a present, as entropy and ChrisPer observe. The other is the value to the receiver of the knowledge that the object is a gift from a loved one.

  27. JC

    A consistent gap was found between the dollar value the purchaser paid for the gift and the dollar value perceived by the gift recipient. This gap could be as large as a third of the purchase price, and at least 10 per cent.

    This gap – money spent but not enjoyed – represents a deadweight loss to the economy. The gift giver could have spent less to achieve the same result. And the gift receiver could have bought more of what they’d really like for the amount spent.

    Apply this gap to the total value of all Christmas spending, and you soon get billions of dollars of deadweight loss.

    How on earth is this woman allowed to write about economics? Of course gift giving wouldn’t match the dollars paid by the giver and the value perceived by the recipient. It’s a freaking gift, you moron and a gift by definition is a bet on what one person believes the other would like. These two things often don’t match and hence the reason for the differential.

    The less I read from her the better.

    Here’s another deadweight loss which doesn’t match perceived value. Her writing for News limited. I’m paying for her horse shit every time I pay for a news limited product.

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