Economists never tire of pointing out that gift-giving is economically wasteful. The ur-text is O. Henry's famous short story "The Gift of the Magi." Della cuts off her silky tresses to buy husband Jim a platinum fob for his gold watch. Jim sells his gold watch to buy wife Della tortoise-shell combs to groom her silky tresses. Merry Christmas! Even if Della hadn't cut off her hair, economic theory would demand to know why, if Della really wanted the combs, she wouldn't already have bought them. Or why, if Jim really wanted to replace his worn leather watch strap, he wouldn't already have done so.
But let's consider an alternative interpretation. Yes, Christmas gift-giving will visit upon Della and Jim heartbreak and economic waste. But upon the altar of their sacrifice they create economic stimulus. Jim and Della suffer that the rest of us may prosper. Long live inefficiency!
The economics profession's pre-eminent gift-basher is Joel Waldfogel of the University of Minnesota's Carlson School of Management. Waldfogel is the author of the 2009 book Scroogenomics: Why You Shouldn't Buy Presents for the Holidays. According to Waldfogel, gifts on average "generate 20 percent less satisfaction than items we buy for ourselves." The "deadweight loss" increases in inverse proportion to acquaintanceship because the less well you know the recipient the more likely it is you'll guess wrong about what he or she might possibly want. (The absolute worst givers, according to Waldfogel, are in-laws, a finding long supported by my own field research.) Another important factor is the recipient's grasp of his or her own preferences. The surer the recipient is of what he or she wants, the less likely the giver can improve on a straight-up gift of cash. The ideal gift-giving situation is one in which the giver knows precisely what the recipient would like while the recipient (who clearly needs to see a shrink) has not the remotest idea. The lesson would appear to be that you are likeliest to create value (or at least not destroy it) if you restrict gift-giving to your husband, wife, children, parents, lover, and best friend.
The catch is that only in our most intimate relationships will an ill-considered gift risk inflicting serious emotional damage, which imposes a different type of cost. Give your mailman a Hershey bar for Christmas and the worst he'll likely do is shrug. Give your wife a Hershey bar for Christmas and she may file for divorce. Increasing the gift's value won't necessarily keep you out of the penalty box. If Jim gives Della $100 in cash, she may file for divorce even though he's thoughtfully eliminated any risk of deadweight loss. Harvard economist Greg Mankiw explains this dynamic using "signaling" theory. When Jim chooses a gift for Della, he signals that he spent time on it and utilized "private information" about Della. If Jim chose well, that will tell Della he loves her because it shows "he is thinking about her all the time." If Jim chose poorly, that will tell Della he doesn't love her because it shows he isn't thinking about her very much at all. Parental relationships are intimate, too, but the same calculus doesn't apply because a parent's love for a son or daughter is usually less open to doubt. Jim is less likely to offend Jimmy Jr. if he writes him a $100 check for Christmas, because Jimmy Jr. probably doesn't spend much time worrying that some other young man will displace him in his father's affections. (Literary caveat: In "The Gift of the Magi" Jim and Della are a childless couple with nothing like $100 to blow on Christmas presents.)
In general, men appear (unsurprisingly) to be less generous gift-givers than women; they get away with it only because their wives and girlfriends don't know (or don't want to). Margaret Rucker, a cultural studies professor at the University of California-Davis, surveyed couples about how much their partners spent on a gift. She found that the woman consistently overestimated what the man spent while the man consistently underestimated what the woman spent. (Indeed, in O. Henry's story we learn that Della spent $21 on Jim's watch fob, but we never find out how much Jim spent on Della's combs.) Such asymmetry suggests that even if you ignore gift-giving's strong likelihood to create deadweight loss, it contributes to the existing wealth inequality between men and women. Such inequality is economically inefficient not only because women are likelier than men to be raising children but also because women increasingly outperform men in the labor market.
Waldfogel further points out that Christmas gift-giving contributes to consumer debt because society has "shifted from saving up for Christmas to maxing out our credit cards to finance the gift storm." If you want to give yourself a good scare, take a look at this chart from Fortune magazine tracking the rise in credit-card debt (now $822 billion) since 1968. And (thanks to the housing bubble of the aughts) credit card debt has lately been declining relative to overall consumer debt, which now stands at $13 trillion. (Mortgage debt accounts for $10.6 trillion of that.) Jim and Della should thank their lucky stars they predate the era of revolving credit and the sub-prime mortgage.
But here's the thing: None of this matters in the current weak economy. What we need is stimulus, and it's clear the new Tea Party-tinged Congress won't let President Obama provide any. Christmas spending is all we're likely to get.
In a weak economy, Americans don't have the luxury of worrying whether their spending patterns are efficient; they just want to see somebody spending money, period. Nor (despite the sudden vogue for deficit reduction) do they really want to spend much time worrying about debt. Efficiency and debt are both important considerations, but not while unemployment remains close to 10 percent.
Now let's return to the topic of consumption. Many, many years ago, economists used to worry that people's economic wants far exceeded their economic needs. These wants were judged the creation of evil advertising executives on Madison Avenue. Advertisers, John Kenneth Galbraith famously observed in his Mad Men-era book The Affluent Society, "bring into being wants that previously did not exist." Over time, economists let go of the worry that this was necessarily a bad thing. How could you even tell the difference between what people wanted and what they needed? They probably didn't know themselves. Meanwhile, an economy based on wants rather than needs had more room to grow, however inefficiently.
Wasteful Christmas spending carries this thinking one step further. If Christmas present-giving were efficient, that would necessarily limit how much Americans spent on Christmas presents. Being inefficient, it does not. The more inefficient the better! Expensive gifts purchased without the slightest consideration of the recipient's desires would seem the order of the day. A good present is good, but a lousy present is better. Go out and buy the special person in your life something really, really expensive that he or she is guaranteed to neither need or want. Then throw away the gift receipt. Your loved one will despise you, but your nation will thank you.