Asymmetrical Information - Megan McArdle

12.26.12

How Terrible Is Christmas?

Should we bother giving all those useless gifts?

I am probably not the right person to answer this question: I spend the week with my father, who lives in a cosy little house with a water view, where we eat a lot and have reasonable conversations.  During this week, presents are opened, mostly things that the other person actually wants and can use.  I have no horror stories to share.  

But in this post I'm specifically addressing a question that is raised by one economist or another almost every year: isn't Christmas a huge waste?  All those presents that no one wants represent huge deadweight loss.  Wouldn't well all do better by giving cash, or skipping the process entirely?  

This seems like a silly question in a world of wishlists--I got the exact martini glasses I wanted, the exact electric pressure cooker I wanted, and the exact 13-inch cast iron skillet I wanted, because people could go right on my Amazon wish list and identify them.  And yet, I still had the surprise and thrill of opening gifts (well, okay, I knew what the skillet was before I opened it), because there were a number of things on my list.   As far as I know, this experience was shared by everyone else around the McArdle hearth. And by millions of other families in the United States.  

But even when families freelance, I think economist ignore two things: the social role of gifting, and the option value of gifting.  Sociologist Gabriel Rossman covered the social aspect in a guest post for me earlier this year, at my old digs:  

From a purely utilitarian perspective [Mitt Romney helping a fellow Mormon family move while nursing a broken arm] is ridiculous. You have a man with a vast fortune and a (temporary) physical impairment. It would be an obvious gain from trade if rather than providing his hobbled physical labor, Romney were instead to give Christensen $100 and tell him to hire a day laborer. Of course if it happened like that the story would be the plot to an episode of Curb Your Enthusiasm with the upshot that Larry David is an obtuse misanthrope, not a religious testimonial with the upshot that Mormons have a strong community. Indeed this story is in the middle of a paragraph which begins and ends by talking about how as a general matter Mormons are eager to help one another and is part of a broader argument about how Mormons provide both mundane and ecclesiastical services to one another directly rather than through professionals. In the context of the essay, the practical value of the impaired labor that Romney provided is clearly secondary to the affirmation of moral community implied by his willingness to provide it. In this sense, that Romney was injured makes his contribution more significant, not less, which is why Christensen chose to draw attention to it.

Similarly, consider Joel Waldfogel's AER article "The Deadweight Loss of Christmas" (which he later adapted into Scroogenomics). The article basically demonstrates that people don't especially like the gifts grandma gives them for Christmas. I like Waldfogel a lot* and think this article makes a real contribution in showing how gifts are a deadweight loss when viewed from the perspective of market pricing. However treating this as a problem and normatively asserting that people are irrational to give gifts is like an astronomer chastising a comet for not having the right orbit. (This is not an uncommon issue with economists). The conclusion suggests the policy proposal that replacing in-kind welfare benefits with cash transfers would increase the poor's utility. (Again, not unheard of). In related news, if my grandmother had balls she'd be my grandfather. There is a certain logic to replacing in-kind programs with cash transfers that is very compelling on its own terms, but in practice few people would agree to it. One of our biggest transfer programs is Medicaid, and converting it to a cash transfer would mean that especially sick poor people would go without heath care, something the left would find unacceptable. (You can see this understanding implicit in the individual mandate, which not only serves the wonkish goals of avoiding the death spiral and cross-subsidizing the sick, but perhaps more importantly the political goal of including in universal coverage those people who would rather spend their money on something other than insurance premiums). Likewise, the right has a habit of objecting when welfare recipients spend transfers frivolously on either an isolated or widespread basis. In the 1990s it was a common trope to complain about welfare recipients who had cable television. More recently we've seen complaints about (and restrictions against) people drawing transfer payments from ATMs at casinos and strip clubs or using food stamps to buy junk food. That is to say, there is an implicit, pan-ideological consensus that transfers are about society providing the poor with that which we deem it appropriate for them to have and not that which they would purchase themselves if they had the money. A cash transfer welfare state would be politically untenable even though it is probably true that cash would be more efficient (as assessed by the utilitarian logic of market pricing).

Human beings have a variety of ways to exchange goods and services and the ways we do so both reveals and structures the nature of our relationships.

I'm reading David Graeber's book, Debt, and while I'm aware of the problems, I do think he gets one thing really right: his exploration of money as a substitute for strong relationships.  That is its appealing feature for cosmopolitans, of course; relationships are wonderful in theory, but in practice, they inevitably turn out to be parochial and limiting and an endless amount of work.  You do this time consuming task of finding gifts which often aren't right, and then pretending to like and use the wrong things others have gotten you . . . and why bother if you could each buy yourself better stuff?  The sociologist and anthropologist answer that the work is the relationship.  The only way to have strong social ties is to spend an "inefficient" amount of time and resources investing in them.  

In other words, as one of my professors once pointed out, it would be unwise to try to increase the market utility of your latest fling by leaving cash on the nightstand instead of sending flowers.

But there's another answer that might satisfy the most cosmopolitan homo economicus, which is that gifts from other people have option value.  When my husband and I order Chinese food, we get three entrees instead of two.  Wasteful? Yes, from a strictly present-oriented calculation: the third entree is something we've never had before, and often we don't like it very much.  But the third entree has option value: the possibility that we will discover something we like even more than our current standbys.  (Even if we don't like it, we eat the leftovers, so it's not entirely wasted.)  

Having another person buy you a gift stretches your consumption possibilities beyond the limits of your own imagination.  Yes, often they will buy you something you don't like as much as the thing you would have bought.  On the other hand, sometimes they'll buy you something that you like even better than the thing you bought with your own money.  Last year my in-laws got us a motion-activated soap dispenser which turned out to be the absolute perfect thing for our powder room.  I'd never have bought it myself, but I know I like it better than whatever we'd have bought if they'd given us cash instead.  This year, my father bought us marshmallow shooters.  And I imagine that most of my readers can call to mind at least one gift in this category.  

How much is that option value worth?  I'd say a lot.  Especially if it comes bundled with stronger relationships.