The economic argument for never giving another gift.

The search for better economic policy.
Dec. 8 2009 7:04 AM

You Shouldn't Have

The economic argument for never giving another gift.

Illustration by Charlie Powell. Click  image to expand.

With just three weeks till Christmas, the Red Bull-infused phase of the holiday shopping season is upon us. If recent history is any guide, the month of December alone—with just 8 percent of the year's shopping days—will bring 23 percent of the year's sales at jewelry stores, 16 percent at department stores, and 15 percent at electronics stores. U.S. December retail sales can be expected to exceed sales in other months by $65 billion. Finally, some good news for the economy. Or maybe not.

Normally—during the 11 non-December months of the year—I'll spend $50 on something only if it's worth at least $50 to me. Typically, measures of spending provide a lower-bound on the value of the satisfaction that buyers expect to reap from their purchases. While some of our own purchases ultimately disappoint, we generally buy well for ourselves, so using spending as a barometer of consumer satisfaction makes sense. Spending on gifts is different. When I set out to spend $50 on you, I operate at a significant disadvantage. I'm not certain about what you have or what you want, so when I spend $50 on a gift, I may buy something worth nothing to you. There's no guarantee that consumer satisfaction meets, exceeds, or even comes close to the amount spent on the gift.

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How much satisfaction do we purchase with the $65 billion worth of stuff we put under the tree? Over the past 15 years, I've done a lot of surveys asking gift recipients about the items they've received: Who bought it? What did the buyer pay? What's the most you would have been willing to pay for it? Based on these surveys, I've concluded that we value items we receive as gifts 20 percent less, per dollar spent, than items we buy for ourselves. Given the $65 billion in U.S. holiday spending per year, that means we get $13 billion less in satisfaction than we would receive if we spent that money the usual way—carefully, on ourselves. Americans celebrate the holidays with an orgy of value destruction. Worldwide, the waste is almost twice as large.

But doesn't this analysis ignore the joy of giving? you ask. Can't that joy make up for the inefficiency of gift giving? Let's consider an example. Your Aunt Mildred buys you a $50 sweater. You don't hate it, but you don't love it, either. In all likelihood, you'd have bought it for yourself only if it was a steal—let's say you'd have been willing to pay no more than $30 for it. So far, her gift appears to destroy value. But suppose Mildred got joy in giving the gift, and while it would be hard to do so with any precision, let's suppose we can attach a dollar value to Mildred's joy. For the sake of discussion, let's say it's another $30. That would bring the total benefit of the transaction to $60, $10 more than its cost. But wait: If Aunt Mildred got the same joy from giving you a sweater you actually wanted—worth its $50 price tag to you—then the transaction could have created $80 in value. Relative to this, the bad gift misses out on $20 worth of satisfaction. So even accounting for the joy of giving, our gift-giving is inefficient. Of course, it's also possible that Mildred enjoys giving you only sweaters you do not like, but if so, then Mildred is a sadist. And I doubt that sadism motivates the vast lot of gift giving.

Hold on there! Isn't spending good for the economy? The economy consists of buyers and sellers. In normal transactions, the seller gets a price exceeding his cost and therefore makes some profit, while the buyer gets an item she values at or above its price (in which case the buyer receives some surplus). A well-functioning market maximizes the joint surplus experienced by sellers and buyers. With gift giving, the seller still gets his profit, but the ultimate consumer (the gift recipient) gets an item that produces less satisfaction than an equal amount of spending would have led to if she had purchased an item for herself. So, is holiday spending good for the economy? It's good for sellers, but it's not sufficiently good at producing satisfaction for the ultimate consumers. And most of us are, after all, consumers rather than sellers.

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