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Why Economists Hate (and Love) Christmas

Your growing collection of ugly sweaters represents billions of dollars in value being destroyed in the economy every year.
December 25, 2013, 6:40pm
Christmas shopping may not be as big of a boon as thought. Photo via iolanda/Flickr

Anecdotal evidence would suggest that the holiday season is a boon for the economy. After all, according to one theory popular in the early 80s, the black in Black Friday denotes the color of the ink that accountants use to designate profits. But gift exchange might not make actual economic sense.

Joel Waldfogel pioneered the case against gift giving and its potential for economic destruction in 1993 when he asked 86 Yale undergraduate students how much they would have paid for the Christmas gifts they received. The average cost was $313.40, nearly $125 less than the actual price paid.

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The result was intuitive, but also telling: We’ll never know someone as well as themselves. In the resulting paper, “The Deadweight Loss of Christmas,” Waldfogel concluded “between a tenth and a third of the value of holiday gifts is destroyed by gift-giving,” the worst offenders being non-cash gifts from our extended family. Your growing collection of ugly sweaters represents billions of dollars in value being destroyed in the economy every year.

Waldfogel’s findings would culminate in a 2009 book, Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays. This is why economists don’t get invited to parties.

According to Waldfogel, we lose value not only in our choice of gift but also the time and effort we spend trying to pick them out and acquire them. He suggests that the process is even more wasteful than government spending, noting in his original paper that “deadweight losses of in-kind government transfers are thus no larger, and in many cases are smaller, than the deadweight losses of holiday gift-giving.”

Of course, you can’t value life’s special moments in dollars and cents. There’s also utility, an economic term that represents the satisfaction we get from performing an activity or consuming a good or service. Giving presents to our loved ones is awesome not because we think we’re giving them exactly what they need, but for that immeasurable warm and fuzzy feeling.

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It may also boost total consumption. My frugal father loves his new Shure earphones, but he’d never have splurged $100 on his own for the sake of higher fidelity. Luckily for him, I’m terrible with money and love him to bits. This theory is confirmed by behavioral economics, says MIT economist David Autor. “There are things you wouldn’t buy for yourself that you wouldn’t give up, once you had them, at their market price,” Autor told Bloomberg.

We’re complicated creatures and while price is a great indicator of value, it’s not the only thing we find valuable. There’s also something to be said about the value of uncertainty when it comes to stuff like love.

Woldfogel’s findings then have proved predictably polarizing. Here’s what other economists think, according to an IGM Forum poll:

Joseph Altonji (Yale) — Disagree: “Cash is more efficient in a narrow sense, but holiday gift exchanges are about interpersonal relationships.”

Alberto Alesina (Harvard) — Strongly Agree: “The choice of the gift giver is a signal of intensity of search effort.”

Markus Brunnermeier (Princeton) — Strongly Disagree: “It's the thought (identifying the right present) that matters! In addition money lacks the surprise element.”

Janet Currie (Princeton) — Disagree: “Gifts serve many functions such as signalling regard and demonstrating social ties with the recipient. Cash transfers don't do this as well.”

David Cutler (Harvard) — Uncertain: “I don’t want to be a scrooge!”

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Angus Deaton (Princeton) — Strongly Disagree: “This is the sort of narrow view that rightly gives economics bad name.”

Steven Kaplan (Chicago) — Agree: “In some cases, non-pecuniary values are important, but in general, the statement is true.”

Nancy Stokey (Chicago) — Uncertain: “For many (most?) gifts, "efficiency" is not the point.”

Michael Greenstone (MIT) — Agree: “Generally agree but exposes neoclassical econ limitations bc it excludes utility from gift giver or recipient choosing/receiving a gift.”

Eric Maskin (Harvard) — Disagree: “Only an economist could think like this.”

@sfnuop