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Gift Giving: Economic Plague

There are a number of economists who argue gift giving is a bad thing for the economy, and in large part they are right, and it’s easy to see why. One of leading opponents of gift giving is Joel Waldfogel, of the University of Minnesota, who says gift giving is:

the subversion of the usual way that economic activity works.

He wrote a book on the subject that is pretty good, but I’ll paraphrase his points here.

One big issue is of lost value, which runs into the billions of dollars. The way this happens is that most people undervalue the gifts they get, in other words, they don’t value the gift as high as the giver paid for it. As much as 20% less. That means a 20 dollar tie given to someone might only be valued at 16 dollars, meaning 4 dollars in value has just been obliterated by the gift giving process. Now, it’s true that this doesn’t mean very much in practical terms, and it doesn’t account for any value that derives from the acts of gift giving and gift receiving, but its safe to say that we are overpaying for gifts.

One thing that should be obvious is that when you buy something for yourself, you tend to be more efficient. You shop around for the things you want, you search for the lowest prices, you only buy things you will actually use, and most importantly, you only buy things that you value at least as high as the price is. When it comes to buying gifts for people, we are generally inefficient. You may still shop around on price, but it’s hard to figure out what people will actually use and to figure whether or not the price you pay is higher or lower than it’s perceived value to the gift receiver.

In his book, and in news articles that are seemingly recycled every year (I just saw one that was carbon copy perfect from last year), Waldfogel mentions that at Christmas in America, around 70 billion dollars are spent on gifts. 20 percent of that is 14 billion dollars in lost value or what he calls “vaporized satisfaction”.

He also goes on at length about the miss-allocation of resources caused by this. Remember, if you had been given 20$ instead of the tie, you would be 4$ better off than you are after the wrapping paper settles. Better yet, instead of falsely inflating tie demand, you might have bought something like this, which is undeniably more awesome and useful. Aside from just being awesome and more useful, your 20 dollar purchase of a desktop catapult kit ensures that resources will allocated properly to accommodate miniature catapult demand, rather than needless resources being allocated to manufacturing ties no one wants and leading to a miniature catapult shortage.

His solution? Give people gift cards so they can buy what they actually want or need or both. The gift card ensures that money is spent more effectively and with less loss of economic value. Still, up to 10% of gift card balances are never spent. You might think that is a boon for businesses, but it isn’t. Sure, they now have money they didn’t have to exchange merchandise for, but they have to sequester that cash for the possible future redeeming of the card. So 10% of all the money put on gift cards is just sucked out the economy, instead of ending up as profits which are used for paying shareholders, employees and expansion or improvement of facilities, not to mention there is no tax collected until the gift card is used, which could be many years before the law allows the card to be cancelled and the cash reintroduced to the economy.

It’s exactly for this reason that I opposed the State of Maine when they made it illegal for stores to start draining gift card and certificate balances after certain periods of not being used. No one, and I do mean no one, benefits from gift cards going unredeemed. In addition to retailers and tax revenues being hurt by everlasting unredeemed gift cards, the gift giver also loses out. Higher prices, fewer government services (possibly a good thing, but that’s not the point) and the gift giver having wasted money in a manner less efficient than burning it, at least you would get heat and light from that.

So Waldfogle’s first solution doesn’t really solve the problem, just reduces it’s effects and actually causes new issues. His second solution is giving people cash! Try as I might, I can’t see any downside to this idea. There are three possibilities when cash is a gift:

1. The gift receiver spend it on a need or want, resulting in economic growth and proper resource allocation.

2. The gift receiver never ever spends it, this results in a reduction, however small, in the money supply, meaning every dollar is worth more. This is the reason Scrooge is an economic hero.

3. The gift receiver loses the cash resulting in two other possible outcomes:

  • Someone else finds it and than spends it, accomplishing what the first possibility does.
  • The cash is destroyed and results in the second possibilities outcome of reduced money supply.

Now I give all kinds of gifts, the facts I’ve presented don’t stop me from doing whatever the hell I want, but I don’t harbor any delusions that gift giving, as it stands now, is anything other than a mostly destructive practice when it comes to the economy.

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