Positive Liberty

Family plans this year have been particularly complex, as well as bittersweet owing to the loss of a relative. Blogging has been and will be light for a while yet.

Something to consider in the meantime, though: Blog neighbors at In the Agora have long complained of the deadweight loss of Christmas — that is, the economic inefficiency of giving gifts. The argument is simple enough:

How can exchanging gifts destroy value? A typical illustration goes like this: Your Great Aunt spends $20 to purchase a Widget for you as a Christmas gift. You, on the other hand, would only be willing to pay $15 for that same Widget. Therefore, that extra $5 is lost value. Ah well, a lost $5 on one gift from one relative is no big deal. But what about the aggregate of all those exchanged gifts on Christmas?

Data on these losses were first published by Prof. Joel Waldfogel, then of Yale University, in “The Deadweight Loss of Christmas” (American Economic Review, December 1993, vol 83, no 5.). Waldfogel found that recipients valued their gifts an estimated ten percent to one-third less than what the givers had paid for them. This represents a tremendous amount of destroyed value, at least $4 billion in 2003. I would further add that there is a destruction of value in the time and resources expended to return or sell unwanted gifts, often for merchandise vouchers or prices even further below the sale price. And Waldfogel stipulates that the deadweight loss extends to “Hanukkah and other holidays with gift-giving rituals.” The potential loss to our economy from all such rituals must be huge.

It’s got that wonderful everything-is-counterintuitive feel of recent trendy economics. But I don’t agree with it.

First off, there’s a clear revealed preference for giving and receiving gifts. People always say that they like it. More importantly, they keep doing it, even though it’s socially acceptable to ask loved ones to donate to charity instead. (I’m actually doing just this for two of the regulars on my shopping list this year; they’re well off and have insisted that they don’t need anything. So I’m donating to an institution we both value.) But for the most part, this revealed preference runs strongly in the other direction.

So why do we keep doing it? To paraphrase what I wrote back in 2005,

I think that there is an enormous deadweight loss in all the money that is spent on religious ritual in the United States. People just don’t get any economic value out of it.

Or rather, the deadweight loss from gifts is illusory for exactly the same reason that the above appears absurd — When we exchange gifts, we receive a happiness that exceeds the retail value of the gift, had we bought it for ourselves. Gifts turn money into satisfaction more efficiently than personal shopping sprees can do, making the transaction a sound one overall. Exactly the same is true of spending money on otherwise nonproductive religious rituals.

Have a merry Christmas, everyone.

Oh, and while we’re on the subject of “Christmas Greatest Hits,” here’s my personal favorite. It’s as timely as ever, apparently.

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