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The Holiday Orgy of Wealth Destruction December 21, 2012

Posted by federalist in Finance, Transportation.
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[S]omething like $13 billion a year, is what’s destroyed through gift giving in the U.S.

Joel Waldfogel wrote a whole book on this: Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays. Add me to the list of those efficiency-lovers who disdain our suboptimal holiday customs.

If you want to give a person something of real value then give money. This gives the recipient maximum flexibility to meet their needs or wants. Purchasing a gift for them (including gift cards or items with gift receipts) simply takes something with maximal utility — money — and turns it into something with less utility.  The best you can hope for is to break even, and that occurs only if the recipient would have spent that money on that item at that time.

This guidance does not apply to gifts of time, expertise, or other devotion that aren’t fungible, and which may not even be available for purchase. Which may be where we lost our way: Money seems to be most stigmatized as a gift for occasions where consideration is more appropriate than value. In such cases cash is considered a cop-out — the refuge of scoundrels who don’t know or care enough about the recipient to find something meaningful. In past epochs when markets were less developed and efficient perhaps you could chance upon something at the bazaar that the recipient wouldn’t be able to readily acquire. But today if you could order the item online then you’re fooling yourself if you think that spending hours shopping to find it — on top of whatever time it took to earn the money to pay for it — is doing anyone a service.

Waldfogel has pointed out more systemic problems with holiday consumption patterns. For example: We have to carry excess capacity in our market infrastructure to sustain the holiday surge.  That capacity goes idle during the rest of the year.  The most efficient economy hums along at 100% utilization year-round.

This is not just a problem of gift-giving. Anyone who has tried to travel during holidays would have to agree that they are barbaric. Our goal as both individuals and as a society should be to smooth out surges, not to, for example, create “the busiest travel day of the year” by simultaneously crowding highways and airports, or overwhelming the same vacation destinations at the same time. These customs spawn deadweight surge capacity, though even that is invariably insufficient for peak demand.

Why do people voluntarily queue up for travel delays and long lines? It’s inefficient and unsafe. It’s insane.

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Comments»

1. Dan - January 5, 2013

This all makes sense if humans were robots but we’re not. It’s fun to talk about maximum efficiency – but efficiency and maximum utility doesn’t always equal happiness (as cheesy as that sounds).

Plus sometimes people won’t buy themselves something even though they really want it, but if someone else buys it for them they really enjoy it. There must be some behavioral phenomenon for that.

2. federalist - January 15, 2013

I assume you don’t mean that the inefficient side-effects of holidays contribute to happiness, but rather that in spite of those negative effects net happiness may be higher than any conceivable custom that avoids them? I.e., you’re saying something like, “Yeah, Thanksgiving travel sucks, but it’s worth it to bring extended families together?”

As for the point that people won’t buy themselves something they really want, there is a modern solution known as a “gift registry.” But even that is suboptimal because is requires people to defer acquisition of things they want in order to allow for the uncertainty that they will receive some of those things as gifts (and at a less opportune times). Furthermore, the only rational basis for a sane person to defer utility-maximizing consumption is the presence of these gift-giving customs. In the absence of these customs only irrational people would spend money in a manner that does not maximize their utility, and there’s nothing we can do about that (other, perhaps, than try to educate them).


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