Sunday, December 21, 2008
As for many things, economists have a theory to explain the irrationality of modern gift giving. In any act of trade there is a loss and gain of utility on either end of the transaction. If I give you something worth $50, I have lost $50 of utility because I no longer have that $50 to spend on something else. If you believe that what I gave you is something you would feel good spending $50 on, you have just gained $50 in utility. In this transaction, there has been no net loss or gain of utility.
However, in gift giving, the value of an item is based on personal preference, and no one knows our personal preference as well as ourselves, except maybe spouses, who often claim they know us better than ourselves (or at least know how we should speak or act!). So, if I buy you a gift I think you'll like and it's worth $50, I've lost $50 worth of utility because I obviously thought it was worth $50 or I wouldn't have paid that for it. When I give it to you, you may very well like it, but maybe you would have only spent $35 on it. Thus, there has been a $15 net loss of utility, making the transaction irrational and inefficient.
So from an economists standpoint, there are two ways to solve this conundrum.
1. Give gifts with more meaning. Put a little personal touch into your gifts like a custom made calendar, a personalized book, or something you make from scratch that you know will mean something to the recipient. You can't just get them whatever they give you on a list and think it will solve the problem. Because if I buy something for you I know you want, I will likely lose utility, because I'll feel that what I'm buying you is not worth what I'm paying for it!
2. Give to someone in need. A tradition my wife and I have started is donating to a charity in the other person's name. It will be something with a personal touch like donating money to stock a classroom in Africa with school supplies if your spouse is a teacher. We also have a Happy Birthday Jesus present we buy every year which in future years will be a charitable gift that the children will have to brainstorm and put under the tree to be revealed to us on Christmas morning. In this case, utility should be gained. Even if the recipient does not feel the cause as worthy as the stated value, the ultimate recipient of the charity will certainly feel that the gift is worth many times more what was paid for it. Plus, for those more utilitarian folks out there, you get a tax receipt that can be claimed at the end of the year, thus adding more utility.
3. A very quick and easy way to solve the problem, even if little thought may be involved sometimes, is giving a gift card. There should be no net change in utility unless of course you boo boo and buy someone a gift card for a store they don't care for!
Thursday, December 18, 2008
Oct 7: "Our position is this election is we're not going to run deficits"-Stephen Harper
Oct 10: "This country will not go into recession next year and will lead the G7 countries."-Stephen Harper
Oct 12: "If you don't want a carbon tax and tax increases and a deficit and recession, the only way to ensure that is the case is to vote for the Conservative party."-Stephen HarperOct 6: "I know economists will say well, we could run a small deficit but the problem is that once you cross that line as we see in the United States, nothing stops deficits from getting larger and larger and spiralling out of control."-Stephen Harper
Oct 9: "We will not run a deficit."-Finance Minister Jim Flaherty
Today: “Some people are talking in the neighbourhood of a $5- to $10-billion deficit. Our own assessment is frankly that will not be sufficient given the challenges we're facing. I think what will be more realistic in terms of the kind of stimulus our economy is going to need is going to be in the $20-billion to $30-billion range.”-Stephen HarperAnd yet he harps on and on about the impact of financial stimulus for political parties that he tried to take away which triggered a parliamentary crisis. How much money would the removal of subsidies supporting Canada's political parties save the government? $20 million. So he is eyeing a $20-billion deficit stimulus but makes it sound like $20 million is the end of the world. What an idiot.
Friday, December 12, 2008
Anywho, I read a great article in Moneysense magazine (which is the greatest magazine ever published for personal finance nerds) that spoke of the current middle class squeeze. Namely, the argument goes, the Canadian middle class is finding it harder to make ends meet than the generation of 25 years ago. At first, I was skeptical, namely because I see how much people spend on garbage they don't need where I work. But turns out the data doesn't bear out my hypothesis.
Allow me to pull some tidbits from the article. From 1980-2005, adjusted for inflation, the median annual salary for a full-time Canadian worker rose a fat $53. $53. Yes, indeed, $53. I'll let you dwell on that for a moment......Okay, enough dwelling. And do we get that $53? Not really. 25 years ago, the average Canadian handed over 36% of their income in combined taxes (income, property, sales, etc.) It's now 9-percentage points higher at 45%. Home prices and education prices have surpassed inflation. Do we spend more money on stuff we don't need though? Doesn't seem so. The data show that in real terms our generation spends less on clothes and food than the last generation.
But surely the economy has improved more than a measly $53 per year for each worker since 1980. Even though our wages have gone up less than 1% in 25 years, the amount we are producing per worker has gone up 44%. So if each worker is producing 44% more, why are we not making the extra $10000 per year that added effort would deserve? Well, it seems its going to the bottom lines of the companies we work for: corporate profits increased $153% in real terms since 1980.
Another interesting point raised in the article is that consumer savings rates and government financial health seem to be negatively correlated. In the 80s even though the feds were hurtin' because of the recession, Canadians were putting away 20% of their income. Today we're putting away a miserable 3% of our savings, but the government has been awash in surplus for years. Why? They have downloaded much of the financial burden to us, the taxpayers. So as we pay more tax and load up the coffers of government, we have less to put aside for ourselves. Wouldn't be bad if it meant we had more government services and less to pay for out of pocket, but it doesn't seem to be working that way.
A couple of potential solutions mentioned in the article are worth noting. One would be to increase corporate taxes to allow a corresponding drop in income taxes. Of course, if Harper hadn't been so politically expedient and lowered GST, thus encouraging higher consumption, rather than lowering income tax, a move that stimulates the economy more, maybe we'd be on our way. Even though corporations would be spending more on taxes, the increased savings abilities of Canadians would cause greater investment in the market for retirement which goes to purchasing shares in these very companies. Another idea presented was to set up a supplementary government pension plan that would be available to those without a company pension (10 million Canadian workers). You could invest in the plan and the government would match your contributions, just like a company pension plan. All great food for thought, if nothing else.
What are your feelings on the issue? Do you think the middle class is really squeezed, or are they just spending recklessly?