Sunday, December 6, 2009

Karen Dynan's Shopping Myths

Media Myths - Ho, Ho, Ho

Tis the season for the obligatory newspaper columns that total up the price of items found in the song "Twelve Days of Christmas." Instead of researching the price of French hens and calling birds - not to mention the fluctuating price of gold, we decided to share a column by Karen Dynan. She is vice president and co-director for economic studies at the Brookings Institute. This year Ms. Dynan discusses media myths and partial truths about Christmas shopping. She can be reached at Read and enjoy...

By Karen Dynan

Every year, TV coverage of the holiday shopping kickoff takes on the sort of breathless urgency typically reserved for hurricanes or car chases. We’re told that fate of the nation hinges on the contents of our shopping bags. Historically, we’ve obliged by overstuffing them: Bankruptcy filings tend to surge early each year as consumers struggle to pay their post-Christmas credit card bills.

But if one of this season’s hottest gifts — an $8, battery-operated toy hamster — is any indication, we seem to be scaling back a bit this year. And that might be all right, since much of the conventional wisdom linking holiday spending and the health of our economy turns out to have been, in many cases, myth.

Myth one — Most retail spending occurs around the holidays. With so much attention focused on shopping and sales during the holidays, people often assume that the vast majority of our spending takes place around this time of year. But over the past decade, only about 19 per cent of each year’s retail sales were in November and December — just a bit higher than the 17 per cent of total days in a year that fall in those two months. Of course, the holiday season’s importance varies by type of store, with those that sell nonessential goods more dependent on holiday cheer (and the spending it inspires). Toy stores and jewelry shops rack up about a third of their sales in November and December, whereas supermarkets and hardware stores see a much smaller blip in demand.

The winter holidays do beat out other much-hyped shopping seasons. For example, while sales at apparel and department stores tend to be stronger during the back-to-school season than they are early in the year, they’re a good deal more substantial in the weeks leading up to Christmas.

Myth two — This year’s holiday sales will tell us whether the economic recovery is real. Retail sales during last year’s holiday season were pretty much abysmal, with what economists call the “core’’ category (which excludes spending on cars) falling eight per cent compared with the 2007 holidays. While most analysts don’t think we will see that kind of decline this year, they aren’t expecting a blockbuster season. The consensus view is that consumer spending will rise only slowly in coming quarters, held back by weak labour markets, high consumer uncertainty and the big hit that households have taken to the value of their stocks and mutual funds, including those in their retirement portfolios.

Although consumer spending accounts for about 70 per cent of U.S. economic output, it has rarely led the way out of past economic downturns. Such spending doesn’t usually increase until income and overall economic activity do.

Myth three —The hoopla over electronic shopping notwithstanding, online sales made up less than four per cent of fourth-quarter U.S. retail sales last year. Although this represents a big increase since earlier this decade, online shopping remains a modest part of overall spending.

5. From an economist’s perspective, cash is the best gift.

Economists are known for arguing that giving your loved ones cold cash is better than giving them presents because people can spend the money on items of their own choosing. In “The Deadweight Loss of Christmas’’ — a famous article published in the American Economic Review in 1993 — Joel Waldfogel, a professor at the University of Pennsylvania’s Wharton School, presented evidence supporting this point. He’s now updated and expanded the argument in a book called “Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays.’’ (Waldfogel may be arguing against gifts, but with this book, he’s also ready to profit from them: “Scroogenomics’’ is packaged as the sort of small, stocking-stuffer-ready book sold next to bookstore cash registers.)

Waldfogel surveyed college students and found that they valued the Christmas gifts they received at between 75 and 90 percent of their original price. Consider fruitcake: Is it worth as much to you when you receive it as it cost the giver to make or buy it? A strict interpretation of Waldfogel’s results implies that the difference between the price of a gift and the value its recipient attaches to it — which can add up to tens of billions of dollars a year nationally — is essentially wasted money.

But this logic misses the point of exchanging presents. Gifts have more than monetary worth; the effort and care involved in their selection gives them sentimental meaning. If what mattered most were their cash value, we wouldn’t exchange presents at all — we’d simply let whoever was going to give the more expensive gift pay the net difference to the other person. But even most economists will be found at the mall sometime in the coming weeks.

A little blogging music Maestro: "Its Beginning to Look a Lot Like Christmas," by Perry Como.

Dr. Forgot

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