Economics of Christmas

When I was a graduate student in economics, I remember how powerfully I was struck by the demonstration that someone would be made better off by giving them the dollar equivalent of a gift rather than that gift.  I made the mistake of showing my father the wisdom of giving someone $50 rather a gift that cost $50.  He was as forcefully struck by the showing as I had been.  So, every birthday and Christmas thereafter, we all got cash, no presents. 

Today's Wall Street Journal has a wonderful short article -- "How Christmas Brings Out the Grinch in Economists," available here -- that summarizes the cash-is-better-than-a-present view.  The sub-headline is "Holiday is Highly Inefficient, Some Dismal Scientists Say; Analyzing the In-Law Effect."  Christmas is a bonanza for the economy.  "The National Retail Federation forecasts that U.S. consumers will plunk down about $457 billion this holiday season, or about $4,000 a household."  But this lumping of huge amounts of spending might better serve the economy if it were spread more evenly through the year.  The holiday rush makes for logistical problems of shipping, storing, displaying, advertising, and planning that may raise costs in a, perhaps, inefficient way. 

The Journal, in its economic forecasting survey conducted this month, asked 51 economists to speculate on what would happen if Christmas did not exist as a holiday.  45 percent said, "Consumption would remain the same; people would spend more on other holidays[, such as birthdays]."  27 percent said, "Consumption would decline, [and] saving would increase."  16 percent said, "Consumption would remain the same; people would spend more on themselves."  And 12 percent said other things would happen. 

And then there is the fact that a lot of the ties, shoes, pants, hats, and whatchamacallits that people receive are not valued very highly by the receivers.  This is the so-called "deadweight loss of Christmas," to quote the title of a famous article on the subject by Professor Joel Waldfogel of the University of Pennsylvania.  (See "The Deadweight Loss of Christmas," 83 Am. Econ. Rev.1328 (1993) and several articles later in that decade commenting on Waldfogel's classic article.)  Waldfogel estimates that if people bought presents this year only for themselves, they would be $10 billion better off than they are under the present rules of engagement.  To quote the Wall Street Journal story, "He derives the number from a study in which he asked college students to place a value on things they bought on their own and on the gifts they received for Christmas.  On average, they valued their own purchases 18 percent more highly than the gifts."  Among those who give gifts, in-laws are, as a group, the least successful gift-givers: "Recipients tended to value their gifts about 40 percent less than they did their own purchases." 

Economists note that this lost value can be partially recouped by re-gifting (I wouldn't know anything about that) or by selling one's gifts on eBay (nor that). 

One way of avoiding the in-law effect or bad matching is to give gift cards.  The National Retail Federation estimates that $25 billion will be spent on those cards this season and that that amount is $6 billion greater than the amount spent last year. 

In one of the comments on Waldfogel's article, Jason Shogren of the University of Wyoming and John List of the University of Chicago tried to get at the value that gift recipients place on the non-pecuniary aspect of the gifts they receive: "the tie may be ugly, but it came from Mom, and that's worth a lot."  List and Shogren "created an auction in which they offered students money for their Christmas presents, asking them to split their price into material and sentimental value.  The result: On average, sentimental value accounted for about half the total.  That more than offsets Mr. Waldfogel's estimate of deadweight loss, suggesting that Christmas gift-giving might not be such a bad thing when all factors are taken account of." 

TSU