Economists often fail to get holiday party invites for serving up so much humbug during the year. One example of economic reasoning which never wins us friends involves the costs of Christmas presents. The case also provides a lesson about how to do economics the right way.
The cost of Christmas presents follows from the economic model of consumer choice. The same argument shows the inefficiency of food stamps, which provide recipients with money which can only be spent on food instead of cash.
The argument goes as follows. Suppose that your Aunt buys you a new blender for $30. You are duly appreciative when opening the gift on Christmas morning, but might already own a Ninja blender. So the present could gather dust on a shelf. Or you might return it and get $30, but only after waiting in line, and time is money. Either way the present is worth less to you than $30; you would prefer for your Aunt to give you $30 in cash.
The reduction in value here is called a deadweight loss. This term refers to a loss that does not benefit anyone else. Deadweight losses occur elsewhere in the economy, and always indicate inefficiency. Economist Joel Waldfogel found that the deadweight loss of Christmas might be 30 cents of every dollar spent. With Americans projected to spend about $90 billion this Christmas, the lost value could exceed $25 billion.
Economists’ reaction to the deadweight loss of Christmas is also revealing. Gift exchange has emerged spontaneously in society – no law makes us give gifts – and yet appears to involve considerable loss. How do we explain Americans wasting billions of dollars every year?
Some economists might write this off to stupidity and custom; those who do so also typically argue for government regulations to curb our waste. Interestingly, no economists seem to advocate allowing only cash gifts on Christmas.
Other economists believe that a practice which has persisted for generations should be afforded the benefit of the doubt, meaning that we must examine what purposes gift-giving serves.
Gift-giving might serve as a type of signaling. Signaling is when we take a visible act which provides evidence of something else, namely that you care about someone. A present signals that you care precisely because it is costly. Relatedly, you might want to show someone special that you know what they really want. A deadweight loss also applies to Valentine’s Day presents. But I warn students when we cover this in class in February about the risk of applying this lesson. Giving cash on Valentine’s Day may be good economics, but it will leave their sweetheart unimpressed.
People also give presents for the joy that they bring others. One of my favorite scenes in the movie “A Christmas Story” is Ralph’s Dad’s reaction to his son’s joy upon receiving a Red Ryder air rifle. This present created a joyous moment that Ralph will always remember and value far in excess of its price.
Economists must recognize that people do not give gifts simply to transfer wealth. This highlights the second lesson from Christmas presents, namely that good economics involves viewing activities as the participants do, which is called subjectivism. Professor Waldfogel’s argument isn’t wrong, just not relevant; if Christmas were about transferring wealth, cash would be the way to go. Of course, pointing out the costs of presents could help make gift-giving more efficient.
Subjectivism has far-reaching applications. For instance, I mentioned the inefficiency of food stamps relative to giving cash. And yet the program has persisted for decades. Some public choice economists might credit the farm lobby for this. I believe that Americans want to ensure that their fellow citizens do not want for food, and not just have more money to spend.
The holiday shopping rush and the long return and exchange lines after Christmas certainly entail costs. But before economists rain on the Christmas parade, we must understand exactly why people give gifts. And learning about good subjectivist economics is a gift that gives back throughout the year!
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.