Does Christmas really matter to the economy?

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Christmas shopping season starts on “Black Friday” in the United States, the day after Thanksgiving. But here in Canada, things don’t get serious until after the first snow falls. As a result, the white stuff that was dumped all over central Canada this month is great news for retailers, who generate a significant portion of their profits during holiday season.

So it should come as no surprise that newspapers, websites and broadcast media have been filled with stories and advertisements hyping the Christmas season. It’s a circuitous relationship; the more holiday shopping stories the media produce, the more it reminds retailer clients to boost advertising budgets.

But the media aren’t alone. Many people use the holiday season as an excuse to spend money on things. These range from taking a Christmas vacation to holding parties and buying friends and family a “little special something.” With all of this spending, if you believe the hype, the holiday season must be great for the economy. Or is it?

Stimulates economic activity?

Arguments that the holiday season is good for the economy are pretty convincing. After all, the money that Canadian consumers spend on gifts helps stimulate job creation in businesses that make, market and deliver the products to stores. According to the Retail Council of Canada, or RCC, as much as 10 per cent of jobs in many communities are tied to the retail industry alone.

However, the benefits of Christmas spending go far beyond the direct jobs that are created. That’s because those manufacturing workers, truck drivers and store clerks will spend much of the money they earn. This, in turn, will recycle that cash back into the economy. Furthermore, the taxes that workers and businesses pay help fund government jobs and services. This means that much of those funds will also recycle back into the system.

Arguments against

That said, there are those who argue that much of that Christmas spending is vastly inefficient. For example, last year Joel Waldfogel, a professor at the University of Pennsylvania’s Wharton School, released his book “Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays.” In it, Waldfogel argues that much of the Christmas-gift spending is utterly worthless. For example, a $50 sweater is worth $50 to the consumer who buys it for himself. But if he gives that sweater to someone else, that person may not like the colour, fabric or size, and it will thus be worth much less to him.

Furthermore, whatever positive economic benefit that the holiday season once generated 30 or 40 years ago, when Canada had a strong manufacturing sector, has been vastly reduced if not wiped out since then. That’s because almost all of those television sets, laptops, iPods and clothing that Christmas shoppers will be splurging on this year will have been made overseas, and that in turn is where a good chunk of the profits will end up.

According to polling organization Gallup, the current weak economy will likely also lessen the “holiday effect.” U.S. consumers who were polled said they would spend an average of US$715 this Christmas season, down from US$907 in 2007. In Canada, where times are tougher too, the forecasted spending numbers have also likely shrunk.

Christmas vacations, which represent another big chunk of holiday-season spending, are also not as good for the economy as one may think. That’s because many of the holiday trips Canadians will take will be to the southern U.S., Mexico and the Caribbean — all overseas markets — and any spending there will go into those respective economies.

As if that weren’t enough, according to the RCC, Christmas shopping is only good for the Canadian economy if Canadians do their shopping here — not in the U.S. That’s where more Canadians have been heading in recent years, lured by savings stemming from the cheaper U.S. dollar. “Canadian retailers are at the heart of your community,” argues the council. “Fewer sales (here in Canada) mean fewer hours of work available for your neighbours, including young people looking for the experience that provides them with invaluable career skills.”

If it gets you to like snow …

That said, the facts are far from clear. Many economists would say the Christmas season encourages people to buy items they ordinarily would not, so shopping is actually a good thing during tough economic times. In this way, some people at least have jobs. If nothing else, holiday-season statistics form a great indicator for overall economic demand.

The bottom line, however, is that whatever its economic effect — in a northern country like Canada, where the cold weather keeps us inside for a good part of the year –anything that makes people cheering for snow probably isn’t such a bad thing.