Economists Argue That Giving Gifts Is An Inefficient Reallocation of Resources

Yet another reason why calculating the value of intangibles deserves greater respect.

Merry Christmas. JL

Josh Zumbrun reports in the Wall Street Journal:

Anyone who has had microeconomics knows that an income transfer, as opposed to a gift in-kind, gets you to a higher level of utility. Putting theory under the tree is another matter.
Economist Sean Snaith believes deeply, along with many in his trade, that gift-giving represents an inefficient reallocation of resources.
“Anyone who has had microeconomics knows,” says Mr. Snaith, who directs the University of Central Florida’s Institute for Economic Competitiveness, “that an income transfer, as opposed to a gift in-kind, gets you to a higher level of utility.”
Putting theory under the tree is another matter.
Mr. Snaith says his two daughters “have about a one-minute tolerance for any sort of lesson on the economy.” His 10-year-old, Parker, agrees and adds that she likes getting presents whatever the theory.
“I wouldn’t like to go to the mall for five hours” to pick them out herself, she says.
Around Christmas, pure-minded economists like Mr. Snaith cringe at profligate spending untethered to expressed need or desire. They cite principles laid out by Adam Smith and scholarly studies on present-giving.
Liquid assets, they generally argue, are the most efficient gifts.Economists have acted on that theory elsewhere on the calendar. Chad Moutray, chief economist for the National Association of Manufacturers, once bought his wife shares of the Dow Diamonds exchange-traded fund for Valentine’s Day.
There is little romance about the fund, which mimics the Dow Jones Industrial Average. But it was an efficient gift, he says—highly liquid; low expense ratio—and his wife liked the Diamonds.
“She appreciated the joke,” he says of his late wife, “and benefited from the rising stock value.”
But he experienced what economists call an unanticipated externality: “My female work colleagues were less impressed. They thought that I should have given the real thing.”
Economists’ arguments against presents have deep roots. Some evoke Adam Smith, who espoused rational self-interest, or Milton Friedman, who praised the efficiency of spending money on oneself.
A 1993 paper, “The Deadweight Loss of Christmas,” gave the notion its first real academic ballast. The author, Joel Waldfogel, then at Yale University, calculated yuletide waste by asking 86 students to estimate the cost of presents they received. Average answer: $438.
He asked how much they would have been willing to pay for the same gifts. Average answer: $313. Recipients valued gifts at 71.5 cents on the dollar, a significant economic inefficiency.
Gifts, Mr. Waldfogel wrote, “leave the recipient worse off than if she had made her own consumption choice with an equal amount of cash.”
Since then, economists have enriched the Grinch school of economics.
A 2009 Journal of Socio-Economics paper measured gifts across the holiday catalog, from books (which recipients valued at 74% of the amount spent) to footwear (92%) and kitchen gadgets (77%).
“We find no evidence of significant welfare gains in any gift category,” the paper concluded, calling gifts a “considerable market failure.”
Sung Won Sohn, an economist at California State University, Channel Islands, got burned ignoring sober economic arguments against illiquid presents when he bought “what I thought was a very nice necklace.”
His wife wasn’t happy, he says. “She said she never wore necklaces and she was upset because I hadn’t noticed she didn’t wear necklaces.”
Still, he doesn’t buy the economic-inefficiency Christmas critique. “I don’t think we should be analyzing this as an economic subject,” he says. “We’re talking about fun, holiday spirit.”

 

In his book 'Scroogenomics,' economist Joel Waldfogel made a case against buying Christmas presents. Still, he gives and receives holiday gifts. Photo: Princeton University Press

Some scholars have examined which relatives give the worst gifts, economically speaking. Two economists in 2012 surveyed German students on gifts from relatives and on perceived value.
“The efficiency loss of Christmas presents,” they concluded, “is highest for gifts from grandparents.”
The Wall Street Journal’s survey of economists shows they largely don’t practice what the naysayers preach: 51 of 54 respondents said they bought loved ones gifts; the other three initially said they didn’t, but later admitted they did.
Fannie Mae’s chief economist, Doug Duncan, says gifts are inefficient. But “I think about it the way I think about the 30-year fixed-rate mortgage,” he says—a complicated but emotionally-laden tradition most families, including his, are too busy to think much about.
Paul Ashworth, chief U.S. economist of the research consultancy Capital Economics, also agrees gift-giving can be wasteful. But he has an economic rationale for buying gifts, like for his 10-year-old son who wanted a “cool Lego set” but provided no details.
“In economics we often talk ‘asymmetric information,’ ” he says. The good gift giver is like a clever car salesman, shopping for a spouse’s car, who uses superior knowledge to get the best deal.
“My informational advantage on the universe of possible Lego gifts,” he says, “means that I can identify the Star Wars Millennium Falcon as the joy-maximizing gift.”
Mr. Waldfogel, now a University of Minnesota economics professor, in 2009 published “Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays” and continues such research. His phone rings every December with requests he explain his thesis.
Gallup predicts Americans will each spend an average of $830 on gifts this holiday season. Mr. Waldfogel expects about 20% of that to be wasted.
But he has been shopping for presents, too, while paying attention to odds they could represent waste. He accepts presents, enjoying books and music he might not otherwise have encountered.
“What people should do is think: ‘Do I know what these people want? Do I have even a sporting chance of buying something they might like?’ ”
Don’t know? Give cash, he says, or gift cards.
Mr. Snaith, the University of Central Florida economist, said in the Journal survey he avoided giving gifts, but he admits he does buy and accept presents. “It was tongue-in-cheek,” he says of his survey response.
He discusses economic theories with his daughters, but “a lot of the things he talks about I don’t really need to know right now,” says his elder, 14-year-old Spencer. “Every time he talks about it I pretend I’m listening, but I’m not listening.”
Still, she concedes the allure of Dad’s economic-inefficiency-of-presents argument.
“Sometimes I would rather have money,” she says. “I’m not complaining about getting gifts. But my dad, he’s a guy. He’s really not that great with makeup and clothes.”