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How Economists View Christmas

Economic Trends


Some say gift-giving `wastes' billions

Only practitioners of the dismal science could pose such a niggling question: Although Christmas gift-giving greases the wheels of commerce and warms the hearts of givers and recipients, is it really economically efficient?

Along with many economists, Joel Waldfogel of the Wharton School thinks not. A few years ago, he asked several groups of college students to estimate both the actual costs of the Christmas gifts they had received and the prices they would have sold or paid for the same items, excluding the gifts' sentimental value. His results indicated that on average the group valued their gifts at 10% to 25% less than the estimated prices paid by givers, which suggests that billions of dollars in value were lost via such exchanges--value that could have been saved or enhanced through more judicious gift-giving.

Fortunately for Santa Claus, not everyone agrees. In a similar study involving students, college staff, and the general public, economists Sara J. Solnick of the University of Miami at Coral Gables and David Hemenway of the Harvard School of Public Health found that recipients valued their gifts at as much as twice their estimated costs. (A person may place a higher value on a gift for a variety of reasons, including the fact that it took a lot of time and effort to find and purchase it.)

One reason for such contradictory findings may be that people have trouble separating sentimental value from monetary value. Thus, John List of the University of Central Florida in Orlando and Jason Shogren of the University of Wyoming recently conducted a similar study with a unique twist, using a random auction method to actually buy Christmas gifts from students.

The result: Knowing they might have to part with one of the gifts they had received, the students on average valued their gifts at close to their estimated costs. So gift-giving, American-style, may actually be more efficient than many economists believe.BY GENE KORETZReturn to top


A study points to sluggish pay gains

It's the best of all possible worlds, and the most puzzling: the confluence of low unemployment, healthy growth, and subdued inflation that has characterized the U.S. economy in recent years.

In past business cycles, inflation followed a predictable course, peaking just after the onset of recession, continuing to decline through the initial phase of recovery, and then gradually gathering steam as the expansion matured. This time around, however, core consumer inflation (excluding volatile food and energy prices) has stayed stable.

The big question is whether this reflects a permanent change in the relationship between economic growth and inflation. Many of those who think so credit the impact of computer technology on productivity, which some say has been understated. Others argue that transitory factors--such as weak commodity prices, falling benefit costs, or temporarily heightened job insecurity--have been at work and that greater inflation risks still loom ahead.

A new study by Cara S. Lown and Robert W. Rich of the Federal Reserve Bank of New York tends to support the latter view. Using an econometric model focusing on inflation and economic growth from 1965 to 1996, the economists found that the close relationship between the two has indeed broken down since mid-1993, with inflation recently running more than two percentage points below its predicted level. Once they added unit labor costs (which have been surpisingly sluggish) to their model, however, the mystery of lagging inflation was solved.

Because sluggish unit labor costs can reflect either low compensation growth and/or rising productivity, the researchers then looked at compensation growth itself. They found that its unusual slowdown in the early 1990s appeared to fully account for the divergence between economic growth and inflation. Reported productivity, on the other hand, did not accelerate during this period, but if it had been seriously understated, says Lown, "we should have experienced even lower inflation."

The analysis also shows that compensation growth has recently trended higher, closer to its traditional path in line with the economy's trajectory. Thus, its downside aberration in the early 1990s may well have been temporary--and claims that the economy has entered a new era of inflationless robust growth appear decidedly premature.BY GENE KORETZReturn to top

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