Sunday, December 24, 2006

How Christmas Brings Out The Grinch in Economists

Holiday Is Highly Inefficient, Some Dismal Scientists Say; Analyzing the In-Law Effect

Wall Street Journal
December 23, 2006; Page A1

Given the fanfare and billions of dollars in spending it generates, you might think Christmas is the best thing to happen to the economy all year. But some economists say we would be better off without it.

In the cold, hard analysis of the dismal science, Christmas is a highly inefficient way of connecting consumers with goods. Squeezing a big chunk of people's spending into a year-end frenzy of gift-buying generates an abundance of ill-considered presents -- millions of unwanted ties, picture frames and toe socks that, had they found the right owners, could have brought a lot more satisfaction.

Economists call that foregone benefit the holiday's "deadweight loss."

"The economy is better off" if fewer gifts are given, says Tyler Cowen, a professor at George Mason University in Fairfax, Va., who riffs on economic topics in a popular Web log, or blog, called Marginal Revolution. "Most gifts are not enjoyed much anyway."

An economist?

Economists aren't suggesting Christmas be abolished. Still, in the latest Wall Street Journal forecasting survey, more than two of three economists opined that if Christmas ceased to exist as a holiday, consumers would either spend more on themselves or spread their gift purchases more evenly across other events such as birthdays. That, in the view of some academics, would put more goods into the hands of people who truly value them and improve social welfare as a result.

"We'd be able to eke out more satisfaction from the same amount of spending," says Joel Waldfogel, a professor at the University of Pennsylvania's Wharton School of Business who has studied the economics of Christmas giving. "We'd have a happier material realm."

For retailers, from the local jeweler to giants such as Gap Inc. and Wal-Mart Stores Inc., life without Christmas would be pretty hard to fathom. Overall, sales tend to spike about 15% in the last two months of the year, accounting for a quarter of retailers' annual revenue. The National Retail Federation forecasts that U.S. consumers will plunk down about $457 billion this holiday season, or about $4,000 a household.

In theory, smoother sales throughout the year would be better for retailers, enabling them to avoid the extra costs of planning and stocking up for the holidays. But most tend not to see it that way. "Christmas is the lifeblood of the retail business," says Elliot Braha, who has been selling collectibles such as Swarovski crystal for 30 years as owner of Edwardo Galleries of New York. "It's a time of year when people don't have a choice. They have to spend."

Still, if people's spending were better targeted, the benefits could be significant. Prof. Waldfogel estimates that if everyone bought gifts only for themselves this holiday season, the added satisfaction would be worth more than $10 billion. He derives the number from a study in which he asked college students to place a value on things they bought on their own and on the gifts they received for Christmas. On average, they valued their own purchases 18% more highly than the gifts.

In-laws were among the most unsuccessful givers: Recipients tended to value their gifts about 40% less than they did their own purchases.

Not all of that value is permanently lost. By re-gifting or by selling gifts on eBay, people can unlock an item's value by putting it in the hands of the right owner. According to a poll conducted this month by Impulse Research and KFC Corp., about four in 10 Americans say they have recycled a gift at some point in their lives. About seven in 10 said they would return gifts if they knew that nobody would find out about it.

Gift cards have provided in-laws and other hapless givers with a way to improve their success rate. According to the National Retail Federation, U.S. consumers will spend almost $25 billion on gift cards this season, up $6 billion from last year. By allowing recipients to choose their own presents, gift cards get around the problem of deadweight loss.

Even never-used cards, which by some estimates constitute about 10% of the total given, don't necessarily destroy value: They merely represent a transfer of funds from the giver to the retailer (or to the government, depending on state laws concerning unclaimed property).

Gift cards have their flaws. Some people don't get the same thrill as they do from choosing a more-personal gift, be it a white elephant or not. Bruce Kasman, head of economic research at J.P. Morgan Chase & Co., says his family's decision to switch entirely to gift cards for Hanukkah has been great for the children, but not necessarily for the older folks, who no longer have the satisfaction of knowing they will be remembered whenever junior wears that tie or uses that Xbox.

"From the broader perspective of what holidays and gift-giving are all about, I guess I have mixed feelings about it," he says.

Mr. Kasman's attitude demonstrates an important point: People derive benefits from giving that transcend the material value of the gift -- which helps explain the persistence of Christmas giving despite all the deadweight loss. Gifts not only have sentimental value, but also help people reinforce social bonds, a reality noted as far back as 1925 by French sociologist Marcel Mauss in his book "The Gift."

Indeed, economists increasingly are looking for ways to broaden their concepts of social welfare to incorporate people's feelings. In the case of Christmas, some have made attempts to estimate gifts' sentimental value, a factor Prof. Waldfogel explicitly ignored.

In one study, economists John List and Jason Shogren created an auction in which they offered students money for their Christmas presents, asking them to split their price into material and sentimental value. The result: On average, sentimental value accounted for about half the total. That more than offsets Mr. Waldfogel's estimate of deadweight loss, suggesting that Christmas gift-giving might not be such a bad thing when all factors are taken into account.

"People get a whole heck of a lot of value out of doing something for others and other people doing something for them," says Mr. Shogren, a professor at the University of Wyoming who specializes in putting a value on such things as biodiversity and human life. "Aunt Helga gave you that ugly scarf, but hey, it's Aunt Helga."

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