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.

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.

It's bad enough that we buy a lot of stuff that no one wants. It turns out we buy it using money we don't yet have. It wasn't always this way. In the 1930s, almost 10 percent of Christmas spending was financed with money squirreled away into Christmas clubs—bank accounts paying little interest but helping consumers save for the holiday. Participants promised to contribute weekly, frequently as little as $0.25 at a time. These accounts were popular because they helped even unsophisticated consumers—many of whom didn't have another bank account—avoid the temptation to fritter their money away. Since 1970, by contrast, the explosive growth in consumer credit has had the opposite effect, helping consumers fall prey to their lack of self-control when it comes to borrowing. In recent years, one-third of holiday spending is still not paid off two months after Christmas.

OK, Professor Scrooge, I can't really just not give anyone gifts—do you have any advice for how to give better gifts? First off, keep giving gifts to people you know well and see often, especially kids. When you know your recipients' wants and needs, your gifts are far less likely to destroy value. Gifts from givers in daily or weekly contact are, on average, about 10 percent more satisfying, per dollar spent, than those from givers in only monthly or yearly contact. In fact, the right gift can, in some circumstances, be even more satisfying than what the recipient would have done with cash. While textbook economics views people as fully aware of all the things they might like to buy, in reality our friends sometimes know about things we'd like before we learn of them. In those situations, well-chosen gifts can allow us to enjoy wonderful items that we did not know existed.

Second, while cash is in principle an appealing gift, as it allows the recipient to choose something she actually wants, it's considered tacky in our culture. Gift cards are probably the next best thing, although you need to be careful about fees and about losing them. Gift cards would be even better if their unspent balances—10 percent of spending by some accounts—went automatically to charity after a few years. With about $80 billion in annual gift card sales, there's $8 billion at stake here.

Finally, gifts to charity on behalf of recipients deserve a look. Such gifts can allow your friends and family to experience a luxury they probably can't usually afford. While luxury evokes images of jewelry and fancy chocolates, if you look at household spending data, one of the clearest luxuries—that is, an item whose share of expenditure rises with income—is charitable giving. So charity gift cards (offered by Charity Navigator or TisBest.org), which allow recipients to choose which charity gets the money, make it possible for recipients to act like rich guys, while transferring resources to high-value uses. Admittedly, these would be terrible gifts for 11-year-old boys, but they may be an ideal way to fulfill your giving obligations with other adults. Like it or not, we are about to go on our annual holiday spending sprees. That spending can be a force for waste or a force for good. Think twice before you put that sweater on your Visa.

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