(I unintentionally buried the lede on this one, so before you read anything, buy this book as a Christmas present for the economics buffs in your life.)
Economists have nightmares about deadweight loss. To anyone else, it sounds like something FedEx screwed up or maybe an unfortunate bridge construction, but in the world of supply and demand, it means a loss of economic efficiency.
Let’s not get into how to define efficiency.* All you need to know is when the market is providing anything less than the optimal output at the optimal price, there is deadweight loss, and somewhere an economist is weeping.
You can see how an economist might want to measure deadweight loss when taxes are imposed on a market or when a monopolist charges sky-high prices. Yawn.
In 1993, Wharton economist Joel Waldfogel published a paper in the American Economic Review titled “The Deadweight Loss of Christmas.” I mention the journal because AER is in the top tier of economic research. This was no silly academic exercise. Waldfogel calculated just how bad we are at gift-giving, and how much it costs the economy. Are you ready for this? The final bill in 1992 came to $4 to $13 billion. That’s not how much we spend. That’s how much we waste.
Here’s how he did it. He surveyed students and asked them to estimate the total cost of all the Christmas presents they received that year. Then he asked them how much money they’d be willing to buy all those items for (if they had to buy them instead of receive them as gifts). In other words, he wanted to know if they valued those items at the same price that the gift-givers paid for them. Here’s what he found:
That “percentage ratio” is the key. People only valued their gifts at seventy to ninety percent of their actual cost. So the gift-givers overspent by ten to thirty percent. That means up to a third of the gifts given at Christmas time are a waste.
It shouldn’t come as a surprise that we get gifts we don’t want. We all know how to fake happiness when the wrapping paper comes off. But no one ever thought to measure how much it costs the economy before.
That kind of cleverness is where Waldfogel excels. He is a friend and former teacher of mine, and I used to tell him that his 2007 book The Tyranny of the Market is the thinking man’s Freakonomics. If only more people read Joel Waldfogel, I’d say, the world would be a much better place. He smiles and shakes his head. He’s about the most humble man you’ll meet, and he has an intellect that few people would be humble about. He was Chairman of the Business & Public Policy Department during my time at Wharton, and I’d see him at research presentations spotting errors and suggesting improvements on work done by the youngest, sharpest minds in the room, in a profession where most folks steadily lose their ability to keep up with the cutting edge with each passing year. And if you ever saw him teach a classroom of freshmen, you’d never think he was one of the top microeconomists in the country. Here’s a man who was so giddy to tell the next economics anecdote, you’d say to yourself, he must have been born to teach, not to do rigorous academic research. Somehow he does both…as impressively as anyone I know.
This year, just in time for Christmas, he has published a book that reprises his 1993 paper and then some: Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays. I haven’t read it yet, but the Wall Street Journal reports that his updated estimate of the deadweight loss of Christmas is $25 billion!
His economics is flawless, as usual, but the Dean of Culture Economics, Tyler Cowen, thinks it’s a bit too much economics. Cowen argues that Waldfogel is missing the whole point of gift-giving:
…the best available defense of gift-giving — namely, that it is a useful form of social theater. His economist biases reveal themselves when he considers only the value of the gift and not how the gift may enhance (or damage) the associated relationships. Don’t we all use gifts to judge who really understands us and thus who is worthy of our time? To put it bluntly, I wouldn’t marry or even continue to date a woman who gave me The Da Vinci Code for my birthday. But if I receive the book, maybe that’s for the best: then I know the relationship doesn’t have a future. In a world where we are looking at a large pool of people for the potential of closer ties, poorly chosen gifts in fact may be the greatest gift we can receive. Using economic terminology, a lot of gifts are about sorting and signaling. A world of perfect gifts is also a world where I don’t meet many new people or take many chances in relationships.
I made roughly the same point a few days ago when I lamented premeditated or unoriginal gifts, either the ones you were instructed by the recipient to buy or cash (and equivalents like gift cards). Waldfogel thinks these gifts are better because they avoid the waste of buying presents that the recipient doesn’t want or won’t enjoy. So do we disagree? Not quite.
Cowen’s point is a good one, and I’d like to see more economists incorporating signalling and psychology into their research. But we shouldn’t let it obviate Waldfogel’s message. It is tempting to take Scroogenomics as an argument to end gift-giving altogether, but I think he’s being provocative and even half-joking with the subtitle. Remember, only ten to thirty percent of the gifts are wasteful. His point isn’t that we should stop giving gifts. That’s like saying the Boston Celtics should stop playing basketball because they lose ten percent of their games. I can’t read Kevin Garnett’s mind, but I’m pretty sure he’d use that as a reason to strive to lose fewer games.
In a recent TIME interview, Waldfogel put it nicely:
I think people are looking for opportunities to do good for the world. I think people enjoy giving; there’s something joyful about giving. And I’m not against that. I’m happy to see the same amount of spending, but if we could just eliminate the really sloppy stuff, and maybe shunt some of [the gift-giving] to good causes, that seems consistent with people’s religious goals, and it might even be good for the world.
Think of it as a $25 billion opportunity. The majority of gift-giving is a valuable part of society and an enjoyable source of happiness for many of us. But let’s not buy crappy trinkets just because we “have to buy something” for so-and-so. Let’s actually put some thought and heart into our gifts this year, and if we can’t do that, let’s not waste our money. It demeans the tradition, it devalues our family and friends, and it takes money out of the pockets of people who really need it.
* Briefly, “equilibrium,” or zero deadweight loss, exists when you are at the point where, if you produce any more, the cost of that extra unit will exceed the benefit, and if you produce any less, you’ll be missing out on units where benefits exceed costs.