Christmas spirit
Is presentgiving good for the economy?
Mince pies. Listening to The Fairytale of New York on the radio. The Queen’s Christmas message. Turkey. Each of us has memories or traditions for the festive season. But there’s a boring, modern one we’d be better off without: economists lamenting us spending on Christmas presents.
No, I’m not talking about the usual anti-consumerist diatribes associated with the miserablist Left. I mean the annual ritual whereby at least one practitioner of the “dismal science” picks up the baton from the economist Joel Waldfogel, who in 1993 concluded that present giving created vast economic waste.
The author of “Scroogenomics” and “The Deadweight Loss of Christmas” has a simple theory, backed by evidence. We usually only buy things for ourselves when we value them more highly than the price of the product. Yet at Christmas we often receive gifts from others that we’d choose not to buy at their retail value: the jumper we never wanted, those ghastly socks, or maybe chocolates from a neighbour.
Using surveys of Yale students, Waldfogel finds that on aggregate the value placed on gifts received is far lower than the value we’d get if we spent the money ourselves. The “deadweight loss” of Christmas gift-buying, he estimates, can be anywhere between 10pc and 33pc of the retail price.
Given the National Retail Federation estimates American spending alone would be $680bn (£508bn) during the Christmas season this year, Mark Perry of the American Enterprise Institute estimates between $68bn and $227bn could be wasted. In the UK, the average family spends around £475 on presents, implying anywhere between £50 and £160 of deadweight losses. We’d all be far better off, according to this logic, netting off how much we all intended to spend on each other, and transferring cold hard cash. That way, we could all get what we truly desire, without the waste.
The logic of this is clear. But it’s bad economics. It ignores a clear lesson you learn early on in economics classes – that what people actually do (their revealed preferences) is far more instructive than what they say they want (their stated preferences).
Given people have freedom to decide whether to buy gifts, and millions opt to do so, we obviously get value from the activity. To presume otherwise, and that whole Western societies participate in some form of collective irrationality, would undermine the case for economic liberty itself.
Thankfully, most economists reject the Grinch economists’ analysis. A 2015 IGM survey found 74pc agreed with the statement “an annual December spending surge on parties, gift-giving and personal travel delivers net social benefits” against just 12pc who disagreed. In 2013, the same group explicitly repudiated Waldfogel, with 61pc rejecting the notion that “giving specific presents as holiday gifts is inefficient, because recipients could satisfy their preferences much better with cash”, against 20pc who agreed.
Whilst it’s generally true that people spend money more efficiently on themselves (and this can indeed lead some families and friends to give cash gifts), extensive gift-buying suggests Waldfogel’s analysis is incomplete.
But how? First, it seems obvious that he ignores the “utility” or value that givers themselves get from purchasing and handing over gifts. That people buy gifts for very young babies or pets who have no idea of the value or thought that has gone into them shows this most clearly. It is self-evident, in other words, that people’s lives are enhanced by giving gifts, even aside from how the receiver values them.
Yet there are ignored considerations on the receiver side too. Lots of people value surprises, for example. While they may not value specific gifts particularly highly after knowing what they are, not knowing what the gift will be seems to bring some people joy. Similar logic applies to gifts being used as “signals” or “love tokens”. Giving presents in itself can be an expression of thoughtfulness, and they
‘The average family spends around £475 on presents, implying between £50 and £160 of deadweight losses’
can play a useful role for us analysing the strength of the relationship with the giver.
Don’t believe me? Imagine taking Waldfogel’s logic and proposing to a girlfriend, not by purchasing a diamond ring, but instead pulling out an envelope with a cheque or gift card and instructing her to use the funds to buy the ring herself.
If someone misjudges us in this way or gets us something that we might consider offensive (a diet book, perhaps), then that information can help us assess whether that relationship is one we really want. There is also the possibility, of course, that the giver can be somewhat of a gift entrepreneur – usually not finding things that are highly-valued, but using this trial-and-error process to sometimes choose something extraordinary that the receiver did not even know they wanted, but cherishes none the less.
Perhaps most importantly though, Waldfogel ignores that for lots of families, the communal activity of gift-giving is itself a valued shared experience. It combines with other Christmas activities, such as the turkey/goose meal, religious component and other yearly traditions to enhance the day more broadly. It is a very simplistic way of thinking to assume that stripping away one part might not detract from the whole experience.
Now, none of this should be taken as an economist’s advice for buying gifts. All of the above might imply that gifts are especially important for dearly loved ones, but giving cash in some instances can also be highly valued too. The point, though, is that for society as a whole, economic analysis is more powerful when it can explain human behaviour, rather than lamenting it doesn’t conform to some narrow conception of efficiency. That we engage in extensive gift giving shows we value it.
Ryan Bourne holds the R Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute