Winter 2011 issue -- When I think of Christmas, I think about gathering with family, sharing bounteous feasts, warming up in front of a roaring fire after shoveling the snow off the steps, decorating a tree, singing carols, and watching familiar TV specials featuring the likes of Charlie Brown and the Grinch.
Oh, and presents. Christmas is definitely about presents, and my family’s tree always has lots of them under its branches. But while it’s always fun to delight loved ones with gifts they didn’t even know they needed—and to be delighted in turn—many gifts fall short of this ideal. Some of them don’t even come close. Did Dad really need those golf-themed boxers?
Christmas does a poor job of “matching products with users,” according to Professor Joel Waldfogel, author of Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays. Specifically, his research shows that money spent on gifts you receive produces an average of 18 percent less satisfaction than money you spend on yourself. This means that for 2007 in the United States alone, out of $66 billion in holiday spending, givers “produced $12 billion less satisfaction than this expenditure could have bought, for an annual deadweight loss of $12 billion.” Sounds like everybody might just be better off giving cash.
But is Christmas gift-giving really as wasteful as this implies? While it is undeniable that all gifts are not created equal, a closer consideration of the reasoning behind Waldfogel’s conclusion reveals that this $12 billion deadweight loss is not all it’s cracked up to be.
If the average deadweight loss from Christmas presents is 18 percent, the actual loss for specific gifts ranges quite widely, and according to a specific pattern. In general, young children are easy to buy for, while preteens and teens often circumvent the problem by thoughtfully providing their parents, at least, with lists of items they covet. Aunts, uncles, and grandparents are usually not so lucky.
As a rule, buying for adults is trickier. We do best when buying for our significant others and close friends, whose preferences we can be expected to know quite well. We can get especially great gifts if we have specific knowledge they lack about products they would buy for themselves if they only knew about them. We do far worse with casual acquaintances and family members with whom we have infrequent contact.
If these people are better able to shop for themselves than we could ever be, why isn’t cash a more common gift? The reason Waldfogel provides is that there is a stigma to giving cash, although it is less pronounced for grandparents and aunts and uncles, who do sometimes give cash. Gift cards are an option, too, and generally carry less of a stigma than cash.
Waldfogel also anticipates the Panglossian objection of a certain school of economics that imagines people as perfectly rational. If they aren’t actually forced to do it, people must be spending their money the way they want to, so what’s the problem? But here too, there is a stigma. While we genuinely want to buy gifts for some of the people on our lists, we feel obligated to buy presents for some of them, too. Social norms require us to buy presents at least in some circumstances for people we don’t know very well—and prevent us from just giving them cash. A certain amount of deadweight loss seems inevitable.
Without denying the existence of some deadweight loss, there is good reason to believe that Waldfogel exaggerates the size of the problem. This is so not because he gets his numbers wrong—I take it at face value that he has been diligent in collecting and calculating his figures—but rather because his numbers don’t tell the whole story.
This becomes clear when he discusses the various reasons for giving, whether by individuals at Christmas or by governments and charities year-round. He explores three reasons for giving: redistribution, to help the poor; paternalism, to help those who lack the good sense to help themselves; and “altruism,” to maximize the satisfaction of loved ones. He rules out the first two as major motives for Christmas giving, and in an endnote also rejects a fourth option, imposing reciprocal obligations. (Think of The Godfather: “Some day, and that day may never come, I will call upon you to do a service for me.”) Waldfogel concludes that what he calls “altruism” is the main motive for holiday gift-giving. The fact that gift recipients’ satisfaction is not maximized, on average, is the source of the deadweight loss.
The problem with this conception of the issue is that it assumes that maximizing the satisfaction of loved ones actually is altruistic. But love, whether for a spouse, a friend, or a family member, is not altruistic. On the contrary, we love that which we see as a value to ourselves. As Nathaniel Branden has written, “This is the great compliment of love; to declare to another human being that his or her happiness is of selfish interest to our selves.” As Branden goes on to ask, do we really want to imagine that our loved ones spend time with us as an act of self-denial and sacrifice?
This is not just a semantic quibble, either, for it leads Waldfogel to focus on the wrong person when assessing the deadweight loss of gift-giving. By considering exclusively the satisfaction of the recipient, he ignores the satisfaction of the person footing the bill.
If I spend $20 buying myself a book, it is because I expect that book to be worth more to me than the $20 I gave up for it. If I get $25 worth of satisfaction from owning and reading that book, then I have made a wise purchase, whereas if I get only $15 worth of satisfaction, then I have made an unwise purchase. I should have bought something else with my money. I move on, hopefully having learned a little more about my preferences.
If I spend $20 buying you a book, on the other hand, and you only get $15 worth of satisfaction from it, was it still an unwise purchase? Not at all. What if I get $10 worth of direct satisfaction from discussing the book with you afterward, or just from knowing that I did give you some satisfaction? And because I value your satisfaction, too, I think that our total satisfaction ($15 + $10 = $25) was worth the $20 I spent.
There would still be some deadweight loss if you only got, say, $9 worth of satisfaction from the book (which might then only give me $6 of direct satisfaction, for a total of $15). But if I chose really well and you got $25 worth of satisfaction from it, I might get $15 worth of direct satisfaction for a total of $40 worth, which might more than make up for the times when I chose poorly. The point is that by ignoring the giver—who is the person making the purchasing decision, after all—Waldfogel surely overestimates the deadweight loss of Christmas. In other words, how good a job Christmas gift-giving does of “matching products with users” is simply the wrong thing to measure.
To be fair, Waldfogel does remember the giver from time to time. For example, when discussing, as an aside, the extra cost of the time spent shopping (2.8 million extra hours in December 2007 in the U.S. alone), he acknowledges that for those who enjoy the shopping, it is not really a cost. But when it comes time to calculate the size of the monetary deadweight loss, the giver’s satisfaction is completely forgotten.
This oversight also leads him to propose the wrong solutions to the problem of deadweight loss, such as it is. One solution he favors is gift cards—especially if they can be made to be more efficient, as some 10% of the value of gift cards is never redeemed. Re-evaluating the deadweight loss from the giver’s perspective, though, gift cards clearly provide less scope for a personal connection. (Hey, wasn’t that a cool gift card? Remember that part where the main character…) They might therefore provide less direct satisfaction for the giver.
This consideration is doubly relevant to giving cash, for those who are not inclined to let mere stigma dictate their behavior. I can get a real kick out of giving someone a book, a DVD, a bottle of wine, or a gadget that I know they will like. It can enhance our connection to think about them enjoying it and thinking of me when using it. Giving cash establishes no such personal connection.
Also, cash received as a gift can easily just get lumped in with the cash one already has, so that in spending it, one considers the opportunity costs of not spending it on other things. From this perspective, receiving a nice bottle of Scotch one would not have chosen to buy for oneself if one had received the equivalent in cash can actually be a good thing for a Scotch lover on a tight budget.
Waldfogel also favors charitable giving through others, which is to say, giving to charity in someone else’s name. He backs this up with data showing that people do give more to charity as they grow richer, and so would presumably give more to charity at any given point if they could afford to. While this also adds the satisfaction of the gift’s ultimate recipient into the mix, it is an open question whether or not it would really produce the most satisfaction for the giver.
Ultimately, if one spends one’s money in a way that one finds sub-optimal—factoring in the satisfaction that one gets from producing satisfaction in loved ones as well as in strangers—then one has acted irrationally. Contra the Panglossians, this does actually happen all the time. But while giving gifts that others truly appreciate is indeed more satisfying than giving them things they neither want nor need, it is not the whole story. It may make perfect sense for me to give you a gift you value slightly less if I, for whatever reason, get extra pleasure knowing that I’ve given it to you.
I recently received a wonderful gift: Ernest Hemingway on Writing, a collection of his stray thoughts on the subject. My aunt picked it up for me on a visit to the Ernest Hemingway Museum in Oak Park, on the outskirts of Chicago. The timing was perfect, because I had just seen Woody Allen’s film, Midnight in Paris, in which Hemingway makes an appearance and utters a few choice lines about writing. My aunt didn’t know of my rekindled interest in Hemingway, but she took a chance or had a hunch, and because she did, I received a great gift I didn’t even know existed, and I will think of her whenever I re-read it or see it on the shelf. Lucky for me, she wasn’t preoccupied with the deadweight loss of gift-giving