Christmas is over and considering that, this piece is a little too late. But, no worries, it may help you ponder over something which you may have witnessed a couple of days back.
To begin with, I have my birthday in the month of November, on the same date as Christmas. The thing common between the two events, apart from the date, is gift-giving. Now, if you are a middle-class Indian teenager, then most probably you will get clothes as a gift on your birthday, and the same is the case with me. But, I am not that much of a cloth guy. Yet, I have to accept it even though unwillingly. And when this happens, I may not value the gift as much as the buyer of it must have paid. This is what economists call deadweight loss. Christmas plays a huge role in the world economy, especially in that of the world’s largest economy: the US. According to Wikipedia,
“Figures from the U.S. Census Bureau reveal that expenditure in department stores nationwide rose from $20.8 billion in November 2004 to $31.9 billion in December 2004, an increase of 54 percent. In other sectors, the pre-Christmas increase in spending was even greater, there being a November–December buying surge of 100 percent in bookstores and 170 percent in jewelry stores. In the same year employment in American retail stores rose from 1.6 million to 1.8 million in the two months leading up to Christmas.”
What is true for the US, is true for European nations as well. In the Indian context, this is the Diwali-effect of Christmas.
But a lot of this spending becomes a waste when we give people unwanted gifts. Joel Waldfogel, the American economist, calculated the deadweight loss of Christmas in his most famous research paper. He concluded that, on average, a $100 gift is being valued at $82 by people. This means a deadweight loss of 18%. This amounts to a total of $35 billion being wasted on poorly chosen Christmas gifts around the world. This is real money being wasted which could have been spent anywhere else. Buying something which the other person doesn’t need is useless, for him and for the economy. Surprising them is also a waste. As Tim Harford writes in The Next Fifty Things That Made The Modern Economy,
“…givers are deceiving themselves to think an off-piste gift will be more welcome. Even Santa Claus likes to receive a polite wish list from good children. Who are the rest of us to think we can do better?”
So what is the solution? In the song Paisa Paisa, in the movie De Dana Dan, Akshay Kumar asks Katrina Kaif, “Kyun paisa paisa karti hain, Kyon paise pe tu marti hain?” (Why do you keep on chanting money, Why are you desperate for money?). Well, the answer is that Katrina Kaif is actually an economist who has read Joel Waldfogel, and she knows that the only way to reduce deadweight loss is to give others cash as presents. This reduces the ineffectiveness of buying gifts, as now the receiver can buy whatever he wants.
So, the next time you come on my birthday, you know what to do. Christmas was just an excuse, originally I wanted to tell you this 😉