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The hidden costs - and benefits - of giving gifts

Humbug economist Joel Waldfogel won't let go of his theory that Christmas gift-giving imposes scandalous wealth destruction in the economies of nominally Christian countries.

With publication this year of Scroogenomics: Why You Shouldn't Buy Presents for the Holidays - released just in the nick of time for Christmas - Prof. Waldfogel returns to an argument he first advanced 16 years ago. In an academic paper entitled The Deadweight Loss of Christmas, he argued that gift-giving wasted more than $15-billion (U.S.) a year in the United States alone. Why such a persistent preoccupation with Christmas presents? You can decipher the answer from the title of another of his books - his 2007 The Tyranny of the Market. Santa is another secret agent of laissez-faire capitalism, another expression of market failure.

You can legitimately argue that people should stop giving Christmas gifts. Scottish Presbyterians banned the holiday altogether in the 16th century, after all, and English Puritans banned it again in the 17th century. (In England, the ban was largely the result of too much riotous wassailing on Christmas Eve.) But Prof. Waldfogel, who teaches at the Wharton School at University of Pennsylvania, cuts corners in promoting an economic justification for a gift-less Christmas.

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He observes that people who receive gifts do not value them as highly as the people who give them and he defines the deadweight loss as the negative difference between the giver's price and the recipient's evaluation. Based on various studies, he calculates that deadweight loss can reach 100 per cent (as when Mom gives Dad a tie that he will never wear). Prof. Waldfogel puts the average deadweight loss at 18 per cent - meaning that every $1 in gift-giving means an 18-cent loss in "utility," the economists' word for good stuff.

But by biblical tradition itself, givers primarily benefit themselves in gift-giving transactions. The unknown author of the Book of Acts quotes Jesus as saying: "It is more blessed to give than to receive." If this is so, the negative utility that bothers Prof. Waldfogel must be balanced against the positive utility that he ignores. (In fairness, he does concede, in The Tyranny of the Market, that givers place higher values on their gifts than the purchase prices - implying that givers create "utility" separate from getters' evaluations.)

Classical-liberal economist Mark Thornton (senior resident fellow, Ludwig von Mises Institute in Alabama) picked up on this fact in his review of Scroogenomics. "[Prof.]Waldfogel is comparing the cost [of a gift]to the buyer with the benefit of the receiver," he says. "The real comparison is the cost to the buyer with the benefit to the buyer. Sure, buying gifts can be frustrating but so what? The real value is in acknowledging the recipient. The gift itself is just one part of the overall ritual." This complex ritual is as old as time.

"If I spend $20 to buy a fruit cake for Aunt Mary, I receive more satisfaction than spending the $20 on something else for me or for her," Mr. Thornton argues. "Yes, gift-givers may 'feel compelled' to buy gifts, and the utility they receive might be characterized better as relief than as anything else, but it is still utility."

Further, people give gifts of things, rather than money, because they want to send messages. "People give books to people who do not read much in the hopes that they develop a good habit," Mr. Thornton says. "Cash might ring up higher on the recipient's utility meter but donors ... are interested in other results. That is why charities tend to provide services in such a way that they cannot be sold for cash."

As for deadweight losses as calculated by recipients of unwanted presents, Mr. Thornton dismisses the dilemma out of hand: "[It is]now a very small amount of money." Furthermore, Christmas in the United States, and presumably in Canada, too, is far less commercial than it was during the Great Depression: "Since 1935, Christmas-related spending has been reduced by 50 per cent (when adjusted for inflation and GDP)." Americans, incidentally, apparently are much more restrained in Christmas spending than Europeans: "We are the 21st lowest in spending out of the 31 OECD countries, and we spend only $3 of every million dollars of GDP..." This, Mr. Thornton says, makes the U.S. the sixth-most "Scrooge-like" of the 26 major economies.

Mr. Thornton says that Christmas, as an institution, is always evolving and adapting. In the Dirty Thirties, people saved money all year to buy Christmas presents. Now people put the expense on their credit cards. Now, in other words, people copy governments. The economic issue here isn't Christmas presents, he says, it's debt-spending: "government has virtually destroyed the incentive to save." Gift-giving itself, however, is fine - with positive economic utility. Call it St. Nickonomics.

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