Monday, December 24, 2007

The dead weight loss of Christmas

Sorry to rain in on all your Christmas cheer, but this period just bums me for the waste of resources it brings with it. I am all for people being generous to others and spreading wealth and happiness, but Christmas presents are just the wrong way to do it. Are the gifts you give to others truly the best use of the money the others would have made? Or, seen from the perspective of the gift receiver, would have bought something else with the the value of the gist I just received?

It turns out that the AER published back in 1993 a short article by Joel Waldfogel with the same title as this post. He surveyed Yale undergraduates to estimate how much the mismatching between the gifts and the wishes of the receivers were destroying the value of the gifts. Results: between 10% and 33% are lost. Losses are at the lower end of the interval for gifts from immediate family and friends, and at the upper end for extended family. Waldfogel finds also that cash gifts are more likely when losses are likely to be high, or when there is high variation in recipient valuation.

Waldfogel's results were controversial, first because the sample was drawn from a highly unrepresentative sample of the American population: Yale undergraduates (rich, young, dependent on parents). Also people seem to value a good more when it is received compared to self-bought. This can even result in a welfare gain from Christmas. Subsequent comments (rarely has a short article in the AER generated so much discussion in the AER) highlight that it is very difficult to measure anyway, and that the sequencing of the survey questions matters.

My take on this: I have the feeling that in many cases the original Waldfogel results are accurate. Just think of all the "gift stores" that sell crap you would not buy for yourself, but is good for giving to others. But I can believe that in some situations, the sentimental value of a gift makes up for the value. Think for example about diamonds: while the diamond industry managed to create the illusion they are worth a lot, their resell value is very low. Yet, all those women receiving diamonds are overjoyed, even when they should realize the hole it created in the household budget.

Once you remove the sentimental value of a gift, it is clear that there is a dead weight loss. This extends beyond Christmas. Imagine for example housing support for the poor, as it is common in the UK. Why give a housing subsidy? Wouldn't the poor be better off with a general subsidy?

Note also that gift buying typically happens in period where buying frenzy is encouraged by stores and media, at least in the United States. I can understand that it becomes difficult for some people to exercise restraint. Such unbridled consumerism can only add to the dead weight loss.

Media often comment how important good fourth quarter shopping results are for the economy. Well, the media is most likely wrong. I would prefer to have smaller seasonal effects and a better allocation of resources.


Anonymous said...

Call us grinches, but our family has virtually abandoned the gist giving. It just became an empty exercise, a dead weight loss in your terminology. Quite symptomatically, my wife is very explicit in that she does not want jewelry. It is one of the poorest investments you can imagine. Better buy a gold ingot if you insist on rare metals.

TStockmann said...

I doubt medieval Carnival/Mardi Gras was the best way for peasants to consume scarce calories and there was certainly more at stake than the allocation of discretionary consumption in contemporary western Christmas. Some of us crave the rhythm of comparative austerity and excess, with all the attendant waste.

I'm also not sure there's all that much opportunity cost for some of us, with modest and satified everyday tastes and habitual buyers' remorse. Even a decade of foregone Christmas shopping wouldn't buy anything more meaningful than hit-or-miss holiday gifts, like that desert island, the freedom of a significantly earlier retirement, or a thoroughly bought Member of Congress.

The charity alternative takes us out of the Economic Man analysis of the original post, and is deeply dreary to boot.

She loved the studs this year, by the way.

Anonymous said...

But, think how dreary this time of year would be (in the northern hemisphere) without Christmas. There must be significant value in helping us through the winter solstice, since people have been doing something at this time for thousands of years.

Anonymous said...

If the goal of Christmas is to make winter less dreary, then it is very poorly timed. It should be in March, so we can build the anticipation as we get closer to it and survive through the dark winter.

I do not think the point of the post was to criticize the excessive consumption on Christmas, it was rather about making it more excessive, or making it as excessive with less resources by just giving people cash.

T-Bone said...

You're right, the media portrays it wrong. I think consumerism is just bad in general. For some reason, people assume that more GDP is always good, and that buying creates jobs.

But that is missing 2 things. One is that leisure time, pleasant environments, happiness, etc. aren't generally expressed in dollar values and are represented in GDP figures. But they sure are worth a lot to me.

2nd is that there's a better way of creating jobs than buying unnecessary items that nobody really wants and that really just create waste. That is to quit your job so someone else has to fill it. If you can't find anything that's truly worth the amount of work hours you needed to afford it, then why work, right? You'd be better off donating to charity than buying something for the sake of consumerism.