Irish Mail on Sunday, December 27, 2009
There is a good economic reason for not giving Christmas presents according to an eminent American economist, Joel Waldfogel. He holds the chair of business and public policy at the University of Pennsylvania so his views carry some weight. Heâ€™s been capitalising on this particular nugget of wisdom with a book â€œScroogenomics: why you shouldnâ€™t buy presents for the holidaysâ€. He has been getting plenty of publicity for it in recent weeks.
Sorry about the timing but bringing you this news sooner might have upset your Christmas spending and that wouldnâ€™t have been good for the economy. In any case, the Professorâ€™s assertion that presents are a waste of money is a load of nonsense. Itâ€™s based on an over simplistic view of the value of economic transactions.
Itâ€™s only worth refuting because, if accepted, itâ€™s faulty logic can be used to make the case for minimal government spending. If you accept the simplistic premise that the consumer knows best, then the Government should tax and spend as little as possible. Thatâ€™s nonsense too.
Professor Waldfogelâ€™s case is easily stated.
If you buy something for yourself for â‚¬50 then that is what itâ€™s worth to you. But if you spent â‚¬50 on a present for someone else, there is every possibility that it wonâ€™t be quite what he or she wants, or needs. Therefore it may not be worth â‚¬50 to them.
On average, he claims, on the basis of some surveys, it is likely to be worth 20% less.
Itâ€™s a neat argument that fits in nicely with the common experience of unsuitable presents that never get used. But it ignores the fundamental fact that if someone spends â‚¬50 on an item either for own use or as a present, then at the time of purchase that item was worth â‚¬50 to the buyer.
That buyer got â‚¬50 worth of satisfaction from the item either as a result of using it or giving it. The recipient had the satisfaction of getting it, knowing that he or she was thought of, irrespective of whether or not it was something needed or wanted.
Of course, it would be better if it was the ideal gift but the same type of argument can be applied to all spending. We donâ€™t only waste money on gifts.
Almost a hundred years ago the British neo-classical economist Alfred Marshall advanced the notion that all lotteries involve a loss of human satisfaction. His argument went something like this: if a million people put up â‚¬1 each to produce a prize of â‚¬1 million, the value of that prize to the winner is worth significantly less than the sum of all the â‚¬1s put up by the other ticket holders. That has to be true. The last euro of that prize was certainly worth more to the person who put up the stake than it is to the winner â€“ one euro out of a million wouldnâ€™t be missed.
But Marshallâ€™s argument missed out too crucial point. Each of the stakeholders enjoyed the hope of winning. That in itself was worth the euro stake even accepting that it might be offset, to some extent, by the disappointment of not winning. So lotteries actually create value.
The hope value that lotteries create is similar to the intangible satisfaction of giving or receiving a gift, a satisfaction that Professor Waldfogel argument ignores.
So you neednâ€™t feel guilty if the presents you gave were not the items or services that the recipients would have spent their own money on. You got a satisfaction from giving and they got a satisfaction from receiving. And, as a bonus, you helped to keep the economy ticking over. You helped add to that other intangible, consumer confidence.
The anecdotal evidence suggest that consumer spending was higher than expected this Christmas. It seems that consumer confidence got a boost from the fact that the budget was no worse than anticipated and also from a belief in Brian Lenihanâ€™s claim that the worst is over.
There was a note of optimism in the latest ESRI Quarterly Review published on Wednesday. The expectation is for a return to economic growth in the second half of 2010 with a quickening of pace in 2011. Export sales is benefiting from the quicker than expected recovery in Germany, France, Japan and the U.S. and while demand at home will continue to decline, the drop in consumer spending is levelling out. The expectation is that it will fall by only 1% next year with some draw down of savings compensating for lower incomes.
Much depends on how fast confidence returns. While questioning some of the detail, the ESRI takes the view that Brian Lenihanâ€™s general budgetary stance has been right.
But the worst isnâ€™t over for everyone. Jobs will continue to be lost although at a slower pace than was feared earlier in the year. But even this latest more optimistic forecast envisages the average number at work next year will be down 76,000 on the 2009 level. Even assuming that a net 40,000 people will leave the country, the number unemployed is expected to rise by 40,000 to 298,000.
These are the people most affected by the recession and the Governmentâ€™s effectiveness in 2010 must be judged primarily on how they fare during the year.
Keep an eye on the interest rate you are getting on your savings in the New Year. Itâ€™s all too easy to shop around for the best rate when putting money on deposit and then to forget that interest rates do change. Banks make a lot of money from their customersâ€™ inertia. Rates have been particularly volatile in recent months and the trend is sure to continue, maybe even intensify.
Regular Savers accounts were offering very good rates earlier in the year. Some offered guarantees that expire either after twelve month or at a set date. Donâ€™t assume that you are still getting the rate you first signed up for. Check what you are getting now.
The rates payable on demand deposit accounts are seldom guaranteed and can change overnight. Irish Nationwide and Halifax are both paying 3.75% on deposits. The Irish Nationwide pays that rate, which includes a bonus of 1.25% on sums up to â‚¬20,000. That bonus is guaranteed to continue until the end of 2010. Halifax pays that rate on the first â‚¬10,000 and it is guaranteed for 12 months from the time the deposit is made.
If you have a deposit with Halifax when does your guarantee run out?
Anglo Irish Bank was offering one of the highest rates earlier in the year. But at 3.1% it is not longer the best.
Donâ€™t forget that DIRT is now charged at 25%. For those liable to pay DIRT, that higher rate adds to the attractions of Post Office Saving Bonds and Certs, the returns from which are paid tax-free.
And if you can put your money away for a few years watch out for the launch of the new Government Solidarity Bond that was promised in the budget.