Christmas produces some interesting economics.
Like the famous analysis of gift giving, which deduced that much of Christmas gift giving was a dead-weight loss, based on an estimate of how much less people value the presents they receive than the givers paid. Maybe this year this analysis needs to be suspended. One of the problems with the U.S. and other developing economies is a shortfall in aggregate demand as people hold back on spending.
Christmas forces open their pocketbooks in sort of the way Keynes suggested that governments, faced with an economic depression, ought to pay people to dig holes and then fill them up again.
But even in good times, the deadweight loss theory ignores the broader social aspects of gift exchange: its symbolic nature, the signaling effects it has, and how it engenders social cohesion, particularly between generations.
The pure valuation approach to gift giving then starts to look rather Scrooge-like.
Other things matter.
And that may have been the biggest economic realization of 2011. It’s not just growth that matters for economies. It’s the distribution of wealth as well.
The leverage boom of the past 30 years has created a small but fantastically wealthy minority. As long as the middle classes could borrow to maintain consumption, that didn’t matter so much. But now that there’s a general deleveraging trend, the vast majority are starting to realize they’re not as rich as they once thought they were.
And yet, at the same time, the huge volumes of stimulus pumped into their economies by governments and central banks have ensured that the very wealthy have remained largely insulated from the downturn.
The result has created extraordinary anomalies. U.K. prime real estate is at record highs. Equity markets are on rich valuations. Corporate profit margins are at historic highs even as unemployment remains persistently strong. Demand for luxury goods is booming like never before.
Next year should start to see a reordering of these anomalies. Rescues of banks will be accompanied by much stricter conditions on banker remuneration. Government cutbacks and tax rises will hit corporate margins. Tax rises will increasingly be focused on the rich. The leverage boom that created so much wealth is reversing.
Whether the U.S. economy continues to grow or slows again, the government will be forced to readjust who takes the pain. And that means taking more from the top end of the income and wealth distribution.