As we’ve seen, the high volume of spending on Christmas is not a new phenomenon. But what about the way we pay for it? Americans have become debt junkies in the past half century. Has this changed the way we finance Christmas expenditures? And can we actually afford contemporary Christmas?
Remember “layaway”? How about “Christmas Club”? These are words not often heard these days, but they were once important retail institutions. Both allowed consumers to pay for Christmas gifts in advance of obtaining them, making them the polar opposite of today’s preferred time pattern of buy now, pay later, using credit cards. Layaway programs allowed customers to reserve their desired items, pay when they could, then take the items home when they had paid in full (forgoing interest all the while on the money paid to the store). These programs had been a staple of shopping, particularly for low-income shoppers, and stores like Wal-Mart angered many of these customers when they shuttered their layaway program in favor of more profitable store credit cards. They may have acted too soon; the Panic of 2007, and its ensuing credit crunch and subsequent recession, paved the way for increased demand for layaway plans at discount retailers like Kmart, just in time for the 2008 Christmas shopping season.
Christmas clubs, first offered by the Carlisle Bank of Carlisle, Pennsylvania, in 1909, were bank accounts in which customers could deposit a little each week so they could afford presents come Christmas. Of course, any account—or the mattress—could serve this purpose. But just as Odysseus had the foresight to tie himself to a mast, some people appreciate help overcoming their problems with self-discipline.
A 1927 scholarly treatment of Christmas club accounts described their basic features. Members promised to contribute weekly, frequently as little as $0.25 per week. Accounts paid little interest (1 or 2 percent rather than the 3 to 4.5 percent then available to depositors generally). Around December 10, the banks disbursed the savings to participants. The scholarly article attributed the clubs’ popularity to participant ignorance as well as the participants’ understanding that they lacked self-discipline: “The realization on the part of many persons that they cannot, without real or apparent compulsion, withstand the temptation to spend from time to time for unwarranted luxuries.” Bank employees “and members of their families ‘signed up’ in Christmas clubs because they realized that otherwise the money would be ‘frittered away.’” And, finally, the “Christmas club member promises to deposit a specified amount each week during the fifty-two week period. There is no legal compulsion, but there is a very real compulsion. It consists of suffering the disapprobation of the person in charge of the Christmas club if the pledge is not maintained.” This despite the fact that “the person in charge is frequently only a very subordinate bank official.”
Data on Christmas club accounts are scant, but the Federal Reserve reported Christmas club deposits, roughly quarterly, between the Depression years of 1933 and 1941. Sure enough, these deposits follow a “sawtooth” pattern. Deposits rise through the year, then fall at year-end. For example, Christmas club deposits stood at $18 million on December 31, 1933. In March of 1933 they had risen to $36 million. They climbed to $59 million in June; and in September (the last time we see their value before Christmas) they reached $80 million. Just after Christmas (December 31, 1934), they had fallen back to $19 million. It’s likely that deposits continued to rise into early December, but we can conservatively say that consumers withdrew at least $61 million from Christmas club accounts—their October value less their value at New Year’s—to buy Christmas gifts in 1934. Similarly, in 1935—the first year we have systematic retail sales data—the holiday withdrawals from Christmas club accounts were at least $63 million. Calculated by our usual method, Christmas spending totaled $647 million in 1935, so Christmas club savings financed about a tenth of Christmas in 1935. Prior to 1933 Christmas club accounts were tallied, along with other kinds of savings accounts, under “open accounts.” These, too, fell substantially in each of the Decembers, by about $100 million in 1929 and by almost $300 million in 1930.
While Christmas clubs still exist, they are far less prominent than they once were. The reason, of course, is the widespread availability of consumer credit. For example, revolving credi—credit card debt—has grown from under $20 billion in 1970 to nearly a trillion dollars in 2008. Total consumer credit, including installment loans, stands at $2.5 trillion. Much of this trend growth is simply the growing use of credit cards rather than checks or cash for payment generally. Consumers regularly use credit cards at the gas station, the grocery store, and almost everywhere else. But apart from the trend growth in the use of credit cards as a payment mechanism, is there evidence of heavier reliance on debt at Christmas?
A comparison of nonseasonally adjusted retail sales and credit card debt for 2006 and 2007 is telling. Each series has a systematic annual pattern. Retail sales jump in December, then fall below their usual levels in January and February. Credit card debt has a strong upward trend over time, but it also has a seasonal pattern: it increases faster in November and even faster in December; then it actually coasts back toward its long upward trend in January and February. In March it has arrived back at the trend line it seemed to follow prior to Christmas. What does this tell us about how Christmas is financed?
Some consumers use their credit cards simply as charge cards. They charge their purchases, then pay them off within the month without incurring interest charges. The way the Fed calculates credit card debt, however, those consumers’ balances appear as debt. So even if every user paid off her card the month she made the purchases, credit card debt would appear to swell each December (simply because of the high volume of sales and therefore of credit card charges). But debt isn’t above trend only in December. Instead, it stays above trend in January and February as well, even though retail sales (and therefore new credit card charges) are well below normal in these months. This means that consumers are financing Christmas with debt paid off, typically, one to three months after the holiday.
We can roughly estimate how much of Christmas is debt-financed by comparing debt’s excess, over its long-term trend in the months following Christmas, to that year’s Christmas spending. We can calculate the monthly ratio of excess debt in December to holiday spending back to 1943. The share jumps around from year to year, but it averages about 40 percent between 1945 and 1980; then it rises from 40 to about 65 percent over the past twenty-five years. It looks as though two-thirds of annual holiday spending goes on plastic in December. Again, because credit cards are also charge cards, this does not necessarily reflect consumers taking on debt.
If consumers are actually taking on more debt—not simply charging more purchase—then their debt would remain above trend in January. Prior to 1980, the January ratio of excess debt relative to spending on the immediately preceding Christmas averaged about 15 percent. Since 1980 it has risen steadily to nearly 50 percent. That is, a month after Christmas, the holiday is now only halfway paid off. Of the component that was charged to credit cards in December, about three-quarters is not paid off.
February tells a similar story. Prior to 1980 there was no excess consumer debt in February. Since 1980 it has risen to 20 percent of preceding Christmas sales, or nearly a third of the amount going on the card in December. That is, a third of the money borrowed for Christmas spending is still not paid off two months after the holiday.
Although the volume of spending on Christmas was already high a few generations ago, the way we finance Christmas has changed substantially. Shoppers used to save up for Christmas, scrimping through the year so they could pay for their December splurge. The last thirty years have witnessed an explosion in the availability of credit. Shoppers now splurge in December and scrimp through a late-winter debt hangover.
Many normal people would view Yuletide borrowing dimly, as yet another example of profligate American consumers living beyond their means. Because, of course, Americans do live beyond their means and consequently owe $584 billion to the Chinese for their inexpensive products, $170 billion to oil exporters for gasoline, and $504 billion to the Japanese for their cars and electronic toys. But debt is not necessarily bad. It’s customary to borrow money to buy houses and cars, big-ticket items that generate a long-term service flow—and retain some value—long after they are purchased. It makes sense to borrow money to buy a house. If you waited until you had saved enough to get one, few people would live in houses until they were ready to retire. And durable assets (like houses or cars) are normally safe investments from a lender’s perspective as well, since they retain value even if the borrower blows all his money at the track.
But most Christmas spending is for goods that are considerably less durable—and less easily resold—than housing or even cars, raising a question about whether it makes sense to go into hock for Christmas.
To an economist, the growth of credit—that is, the growth in the opportunities to borrow—is an unambiguously good development. Walking around with a credit line expands the set of opportunities that a consumer can seize. Maybe you’ll encounter a great deal on something that is beyond your means today but inside your means next month. Access to credit allows you to take that advantage. Given that access to credit is helpful, it’s hard to argue that the exercise of the option—to consume now and pay later, with interest—is bad.
That said, anything that you’d be embarrassed to tell your mother is probably not entirely good. You, into the phone: “Mom, Wendy and I still owe a thousand on our Christmas presents.” You listen and fidget; then you say: “Yes, I know it’s February.” You listen some more and squirm. “No, I haven’t set up the kids’ college funds yet.” Mom: “Why couldn’t you have saved up for Christmas? That’s what Dad and I did when you were kids. You make a good living. Where does it all go?”
Mom’s got a point. It’s one thing to use credit to take advantage of an unexpected great deal that your future self can afford—and surely wants—even though your present self cannot. But it’s another thing to borrow at 18 percent interest, rather than save, to pay for a fully anticipated expense. Christmas arrives on December 25 every year. It’s fully anticipated by even dimly sentient beings. The need to begin spending the day after Thanksgiving does not come as a surprise. So why would a sensible person need to borrow for it?
True, there could be sensible strategic reasons to borrow to finance Christmas. One, from the Ronald Reagan playbook, is called “starve the beast.” Reagan cut taxes even as he increased military spending as a cunning strategy to raise the federal deficit to the point that future “Democrat lawmakers”—the beast in this metaphor—would be forced to shrink the nonmilitary government. Translated to the domestic front, you and your spouse—the beast in the scenario—disagree on what to buy. You want a large new television, and your spouse wants a new roof. In November, you make the first move, and you charge a seventy-inch flat-screen television on the family credit card. Come January, you need to begin making payments. Because your family’s income isn’t going up, the only way to make ends meet is to not buy much of anything else. So your new TV crowds out the new roof. Beast starved. Maybe this is what explains American households’ Yuletide borrowing. But if so, I think couples should sit down and talk more.
The more plausible explanation for this borrowing is what I call the “Homer Simpson theory of behavior.” Why do people do things? According to Homer, “It’s because they’re stupid, that’s why. That’s why everyone does everything.” Behavioral economics presents a similar theory using the more dignified, but equivalent, explanations that people procrastinate, have difficulty remembering what they like, and so on. Much of the use of credit by consumers at Christmas arises simply because, in short, they’re as dumb as a box of hammers.
Skeptics need stronger evidence that Yuletide borrowing hurts borrowers to be convinced that the consumers are spending beyond their means. If consumers did terrible things to finance their Christmas presents—selling their children or robbing people at gunpoint—even traditional economists would come around to conclude that Christmas was putting stress on their budgets. But borrowing at 18 percent is not quite homicide.
Does Christmas spending strain households to the breaking point? We get some evidence from the fringe of the financial world. “Payday lenders” are financial institutions that allow consumers to borrow against their next paycheck, at 18 percent for a loan lasting two weeks. That’s an annual interest rate of about 7,300 percent. While it’s possible that you might stumble across a buying opportunity so good that it’s worth paying 7,000 percent annual interest, it seems more likely that this kind of borrowing follows some stupid and overextended spending.
And when does this kind of borrowing peak during the year? Shortly after Christmas. The volume of loan applications processed on January 2 is three times the volume on a typical day. Can we afford Christmas? Be honest. Remember, you’re talking to your mom here. Let’s just say that there’s evidence of some strain on household finances produced by Yuletide borrowing.