It is the season of giving; a wonderfully inefficient time of year

The spirit of the season is upon us. With Black Friday and Cyber Monday at our backs, rounding out those holiday wish lists for loved ones will consume the collective American conscious. With all of these efforts brought about by the desire to bring a smile to someone’s face, the wonder and awe of the Christmas season is truly something to be thankful for. But as chestnuts are roasting on my open fire, peppermint snow mocha’s cease to leave my hand and mistletoe is strategically placed around my home, I would be remiss if I failed to do the right thing: confront the deadweight loss of Christmas.

When I think of elves working away in Santa’s workshop, I imagine a cohesive unit; I see groups of assembly lines; I see efficiency. How else could they fulfill every child’s wish list who manages to successfully evade the naughty list? It is a Herculean task which requires razor sharp focus, fail-proof systems and an efficient allocation of resources. OK, now that I’ve robbed Christmas of its emotions and sufficiently desensitized you, let me suggest that our gift-giving practices are all wrong.

The elves have it right. They give the kids exactly what they scribble, or likely now type, on their Christmas list. The productive value of Santa’s operation produces toys and goodies, which they selflessly give (not to mention deliver with free shipping) to the kids that value those gifts the most. That is, they create the most holiday cheer from their production. Somewhere along the line, though, family and friends began “winging” their Christmas giving. Crazy aunts began giving little girls scary dolls, or knitting little boys traditional Mexican blanket capes, called “sarapes”. Feliz Navidad. Grandmothers, who aren’t as mentally sharp as they used to be, began gifting wool coasters. And the wild uncle who traditionally gave fantastic, creative gifts began wrapping up footballs and candy canes, only scrapping the box before wrapping. Nothing better than the gift you can open before you open it. Oh wait, there is. When people hand you a package, watch you open it and then say, “you can return it if you don’t like it.” They’re trying to be thoughtful with the gift and by leaving the door open for its inevitable return. The sentimentality is very nice all around. Unfortunately, you still just gave someone an errand; plus the cost of gasoline and the opportunity cost of time to truck over to the mall.

In short, people of this ilk begin presumptuously assuming they know what their loved ones want for Christmas, more than the loved ones themselves. Big mistake. As a result, people become the proud new owners of belongings they value far less than the gift-giver paid for them. In many cases, the receiver of the gifts value their new property at $0, or negative dollars, as they are forced to pretend they’re happily surprised, or actually have to use the present occasionally out of some social custom of appreciation. I know it felt that way with the blanket cape. I mean for Santa’s sake, I was 17.

This dilemma is the deadweight loss of Christmas. People are consuming goods and services who experience greater marginal cost than marginal benefit. In other words, there are people in the world that value those goods and services much higher than they do, and they are the ones who should end up with them. Joel Waldfogel’s book, Scroogenomics, claims that in 2007, Americans spent $66 billion on gifts. The recipients of those gifts only valued them at $54 billion, producing $12 billion less holiday cheer. And for regular readers of SwiftEconomics.com who still haven’t been swayed that a consumption-based economy is less than ideal, no, the Christmas stimulus is not the giant economic boost you think it is. In the 2007 data cited above, not only did people experience $12 billion less satisfaction, $12 billion was subtracted from the economy’s store of value. That is, the money the commodities cost would have been valued greater than owning the commodity itself. And unfortunately, most Christmas gifts are not appreciating assets capable of storing value. Wait a second, I suppose in the case of the US dollar, neither can it. (1)

Regardless, there is a simple solution to this Yuletide calamity: give cash. Shoot, to be more specific, maybe give the Chinese yuan, or a precious metal of your choice. It may not offer the same sentimentality of a well thought out present, or the same feel-good story of struggling through crowds to multiple retail outlets, but, there would be no deadweight loss. The economy would clip along at elf-like efficiency and presents would take longer to be thrown away or donated to a thrift store.

Intuitively, we understand the deadweight loss of Christmas. Quasi-cash, or gift cards, have grown in popularity. Between 1998 and 2005, gift card sales increased 27 percent a year. Estimates say quasi-cash make up one-third of Christmas spending. (1) Have people in your life been asking for gift cards at the top of their lists?

Christmas cash: a treat for anyone's taste

If you’re going to go gift card, go all the way. Gift cards are simply not as good as cash. They are lost, forgotten or otherwise never redeemed. Gift card recipients are no longer able to change their minds and spend the money elsewhere. As unbelievable as it is in these technologically advanced times, most banks still will not allow you to deposit your Macy’s gift card, in case you get a wild hair to save. Besides, billions of dollars in gift cards expire every year, a tenth of gift cards’ aggregate value. (1) The economy’s store of value and maximization of holiday cheer suffer yet again.

In conclusion, listen to St. Nick and his faithful crack staff of elves. Give people exactly what they want. If you don’t know, ask. If you want it to be a surprise, surprise them with cash. This holiday season, may the Rolling Stones be silenced. We all can get what we want.

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(1) Scroogenomics – Townhall.com, retrieved December 2nd, 2009, http://townhall.com/columnists/GeorgeWill/2009/11/26/scroogenomics