Carpe Diem

Shopping on Black Friday? Consider the most economically efficient gift of all: cash, to avoid deadweight loss and crowds

Although that strategy didn’t work out so well for Jerry Seinfeld….


In a 1993 American Economic Review article “The Deadweight Loss of Christmas,” Yale economist Joel Waldfogel concluded that holiday gift-giving destroys a significant portion of the retail value of the gifts given.  Reason? The best outcome that gift-givers can achieve is to duplicate the choices that the gift-recipient would have made on his or her own with the cash-equivalent of the gift.  In reality, it’s highly likely that many gifts given will not perfectly match the recipients’ preferences. In those cases, the recipient will be worse off with the sub-optimal gift selected by the giver than if the recipient was given cash and allowed to choose his or her own gift. Because many gifts are mismatched with the preferences of the recipients, the author concludes that holiday gift-giving generates an economic ”deadweight loss” of between one-tenth and one-third of the retail value of the gifts.

The National Retail Federation estimates that Americans will spend about $328 billion this year on gifts for family members and friends. If the deadweight loss estimates of Professor Waldfogel are accurate, that would mean that between $33 billion and $118 billion of spending on gifts this holiday season will be wasted.

In the Seinfeld episode above, Jerry thinks like an economist and tries to avoid the deadweight loss by giving Elaine a beautifully gift-wrapped package that contains $182 in cash.  Watch as Jerry’s economic thinking backfires, suggesting that there might be a cost to giving cash that Waldfogel’s model didn’t consider.

41 thoughts on “Shopping on Black Friday? Consider the most economically efficient gift of all: cash, to avoid deadweight loss and crowds

  1. Christmas is the pre-eminent example of how spending money on junk and not necessities is a powerful fuel of the economy.

    If people just gave money -much of it would not be spent but “banked” and Christmas would be a horrible bust.

    not to mention how boring Christmas morning would be.

    it would become a game of why you gave someone else a smaller amount than they gave you or worse – you gave them a gift card that had to be spent and they wanted the money instead.

    Christmas would turn into a gigantic day of millions of pissed off people but those who mostly just received gifts – like kids and other “unproductive parasite” types already receiving Obama “gifts” and entitlements would love the game of “receiving” rather than giving just ducky.

    In the true spirit of Christmas – the government should give all recipients of entitlements an extra-special bonus payment for Christmas so they have enough to give cash to others, eh?

    :-)

    • Larry,

      Two things:

      1) What are you doing up at 6:40 AM?

      2) In regards to your comment “If people just gave money -much of it would not be spent but ‘banked’…” this is not necessarily true. In economics, we have a term called the “marginal propensity to consume.” It is a fancy way of saying you spend a percentage of your income, and save the rest. In America, the marginal propensity to consume is approximately .75 (in other words, for every dollar earned by the average American, they will spend 75 cents and keep 25 cents). Obviously, this changes from person to person, but the concept remains the same. I just mention this because I object to your comment that most of the cash gift would be banked and Christmas would be a bust. We can safely assume that the cash gift would be seen as extra income by the receiving party, and would thus be used in a similar manner as typical income.

    • Christmas is the pre-eminent example of how spending money on junk and not necessities is a powerful fuel of the economy.

      Of course I’m sure you are mindful of the extreme subjectivity of the words “junk” and “necessities” so as not to give the impression your values are better than those of others.

        • I don’t save that much, but I do have 10% of my paycheck put into my retirement account.

          With direct deposit, where you can have a certain percentage of your paycheck put into different accounts, makes saving much easier!

        • To be perfectly honest, Walt, I’m not sure I could resist the marshmallow. The only reason I save what I do is because I never actually see the money; it goes right from my paycheck to my IRA.

          • ” The only reason I save what I do is because I never actually see the money; it goes right from my paycheck to my IRA.”

            that’s what a lot of people do with FICA.

          • True, Larry. The difference is I get to choose how my money is invested. If I feel my IRA is too risky/not risky enough, I can switch my money. If I feel the fund is not making enough, I can switch. If I want to tap into it early to buy a house or a car, I can. Most importantly, the money stays mine. One cannot claim FICA as the same.

          • Larry,

            Thanks for passing that article along. It does a good job explaining exactly what Social Security is: a supplement as opposed to a living wage.

            My biggest objection to Social Security is that it is mandatory (surprise surprise. That’s my objection to everything). I can do much better with my own money.

            Let me show you:

            I save 10% of my pre-tax income into my IRA. That works out to $333.33 per month. For the sake of simple math, let’s assume my IRA gets me a constant 10% return (obviously, the rate of return will vary). Now, assuming that I save that same $333.33/mo for the next 40 years (the approximate time when I can start withdrawing from Social Security), I will have about $2.5 million saved up, or a monthly payment of $10,416 (assuming I am retired for 20 years). The average monthly Social Security payment in 2012 was $1,230.

            Now, maybe Social Security is good for some people. I can see that. But why not give me the option to opt-out of the program and save me the $X I pay in FICA? Honestly, I think I can do a better job investing that money than the government can.

          • Jon – just curious …did you include the effects of inflation on your calculations?

            that’s what social security says is their main advantage – that payments to you are inflation-adjusted.

          • Well, I sort of adjust for inflation in the rate of return.

            Social Security is good in that it does adjust for inflation.

            In my calculations, I assume a 10% rate of return. Again, for the sake of simple math, let’s assume inflation never is more than 2%. The IRA is earning inflation (2%) plus some (an additional 8%), so it is out performing inflationary pressures. Social Security, on the other hand, just keeps pace with inflation.

            Now, you can argue “well, your assumptions are unrealistic: inflation and the rate of return will not remain constant. They will flux.” That is fair. That is also why IRAs adjust. I am 23. Most of my IRA is in high-risk, high-return things. This does not bother me. If my savings are wiped out in a black-swan event, I still have plenty of years to rebuild my nest egg. As I get older, my IRA will automatically switch into less risky things. By the time I am old enough to retire, the fund will be in very safe assets and (in theory) cover me for inflation. The bonus is, over the past 40 years I have been saving, the interest rate over and above inflation has been compounding and compounding. So, even if at age 65, my fund is only performing at inflation, I still have more than if it was constantly performing at inflation.

          • Jon,

            How are you figuring the disability and survivor portion of SS benefits into your calculations? For example, permanently disabled at age 35 and collecting SS until death or married and/or dying at 45 after being disabled at 35 with three young kids. I won’t go into the Medicare part of SS in that calculation. SS is too hybrid of a plan to be compared as a straight investment plan as you are attempting to do (part disability insurance, part life insurance, part retirement income/investment).

            I maxed out paying in SS 36 of 41 years, so my only decision is when to start receiving it (62-72 years old). Just for kicks, and to see a real life case, here is my SS download:

            1971-2011 Years
            $122,807.00 SS paid by me
            $125,091.00 SS paid by employer
            $30,717.00 Medicare paid by me
            $30,717.00 Medicare paid by employer
            $309,332.00 Total

          • re: ” How are you figuring the disability and survivor portion of SS benefits into your calculations? ”

            yep. ditto.

            social security is MORE than just an annuity!

          • Walt-

            I am just using a simple analysis here. I didn’t go too deeply into the SS survivor benefits and disability. The $1,230 number I quoted is the average SS monthly benefit in 2012 (a href=”http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/13/~/average-monthly-social-security-benefit-for-a-retired-worker>Source). The reason for this is simple: I was driving home the point I think we all agree on: SS is a supplement, rather than a living income. My other point, which I was less clear on, was that this supplement should be optional. I feel I could better invest that money so I could get more than just an inflation increase on those dollars. I am not trying to argue here that Social Security should be abolished (while that is a view of mine, that is not the point here). I was just arguing that the money can be better invested, and I believe I should be given that option.

            This started as a discussion of saving in America, but we got distracted. I don’t know about you two, but I am glad this distraction happened. I feel like some good discussion happened.

          • Jon, optional SS would be cool for prudent savers such as us, but at a per capita savings rate of 3% annually, it would suck for the aggregate in old age :(

            I feel fortunate I made it this long of never having to miss much work from sickness or injury, but SS sure would have helped my hypothetical family of 3 young kids who are left when I die in a car wreck at age 30 that paralyzes my wife for life.

            I, too, enjoyed the discussion. You are cordial even in disagreement, and you seem wise beyond your years.

          • Walt

            Jon, optional SS would be cool for prudent savers such as us, but at a per capita savings rate of 3% annually, it would suck for the aggregate in old age.

            What is your point? Aren’t more choices better?

            Do you think a low savings rate might be explained in part by the fact that some may be counting on SS so don’t think they need to save as much additionally?

            Do you think a low savings rate is a symptom of the Fed holding rates at nearly 0% which discourages savings and encourages consumption and borrowing?

          • “What is your point? Aren’t more choices better?”

            Yes, but SS is here to stay for the foreseeable future (at least the contribution part). I lived my life believing I would never see SS, but now that I am in spitting range I want it.

            “Do you think a low savings rate might be explained in part by the fact that some may be counting on SS so don’t think they need to save as much additionally?”

            It’s difficult to say for sure, but before SS was implemented, many people did not save very much. I know a ton of people who think they are going to live solely off SS, but I think they will be severely disappointed when they try.

            Do you think a low savings rate is a symptom of the Fed holding rates at nearly 0% which discourages savings and encourages consumption and borrowing?

            The smart money is currently in double-digit equity returns. I am at 14% return for the year and this is my worst year out of the last three. My five-year total returns are shitty, but my 3, 10, 20, and 30-year returns have been great. Most of the people I know who are not savers now were not savers when saving and CD interest rates were high in the past.

          • Walt-

            We can discuss whether or not Social Security is necessary, but I will hold off on that conversation for now. There is a strong case to be made on both sides, but I just don’t feel like getting into it right now. Please do not take this as a reflection on you (I think you know I hold you in high regards), but merely as a lack of “fighting spirit” on my side (read as: “I am on vacation.”)

          • The smart money is currently in double-digit equity returns.

            The question was about savings rate, not rate of return, my point being, that an artificially low Fed rate encourages spending and discourages savings.

          • I agree, Ron. Since consumer spending is considered by many to be around 70% of our economy, the government is driving consumption up for the masses with the low interest rates.

            Here are some data I crunched from FRED (the first number 10-year personal savings rate (PSR) average of disposable income) and the Federal Reserve(the second number 10-year T-Bill interest rate average):

            PSR% T-Bill% Decade Avg.
            7.8 6.7 1960s
            8.3 8.1 1970s
            7.7 8.2 1980s
            6.6 7.6 1990s
            6.2 6.7 2000s
            4.5 3.0 2010s

            I don’t play the government’s game with a near 40 years of 10-25% disposable income savings rate. I’m a Boglehead, so I just make semi-annual adjustments to keep my current asset allocations in line and stay the course.

          • That table sure looked better in preview with more white space area! I guess we need to HTML code a table in this format.

          • Preview? What am I missing?

            That table sure looked better in preview with more white space area! I guess we need to HTML code a table in this format.

            Give it a shot. WordPress allows a lot more HTML than Blogger.

          • Ron, Not really a preview–just what it looks like after pasting in the Comment box from Excel and before hitting Post Comment.

          • HTML Code Table First Try:

            PSR%
            10 Year T Bills
            Decade

            7.8
            6.7
            1960s

            8.3
            8.1
            1970s

            7.7
            8.2
            1980s

            6.6
            7.6
            1990s

            6.2
            6.7
            2000s

            4.5
            3.0
            2010s

          • Second try:

            PSR%
            10 Year T Bills
            Decade

            7.8
            6.7
            1960s

            8.3
            8.1
            1970s

            7.7
            8.2
            1980s

            6.6
            7.6
            1990s

            6.2
            6.7
            2000s

            4.5
            3.0
            2010s

  2. Ahhh but think of the excitement you might miss if you don’t go shopping today…

    Man Pulls Gun on Rowdy, Line-Cutting Black Friday Shopper

    Police Sgt. Rob Carey tells the San Antonio Express-News a man rushed into the store when it opened Thursday night to get to the front of a line, started arguing with people and tried cutting in front of them.

    One man who got punched pulled a gun and that scattered shoppers, including the impatient line-cutter who took cover behind a refrigerator. Then he fled.

    Carey says the man with the gun had a permit to carry the weapon and isn’t being charged with a crime…

  3. I see this Amazon.com TV ad in our future: reduce your dead weight loss: use Amazon wish lists to get what you want and give what they want.

  4. Pingback: Christmas, Hanukkah, and Black Friday Economics | The Dangerous Servant

  5. If someone gives you a gift and you don’t like it go exchange it. If someone gives you cash, then think of the person while you enjoy spending it or watching it accrue interest. My son was born on Thanksgiving, so for his birthday yesterday I gave him a Sling Adapter so that he can watch live TV and his DVR recordings while he’s a way from home through the DISH Remote Access app. I knew he would appreciate it because he’s always complaining about not having enough time to stay home to watch stuff that he likes. After one of my coworkers at DISH said that she’s now able to watch the TV she’s always missing with the DRA app, it occurred to me that my son might like this thoughtful gift.Turns out I was right, and he was just as happy as if I had just handed him a wad of cash!

  6. re: manatory social security death and disability benefit

    the question is if you did not have this as mandatory and many did not voluntarily buy disability and death insurance, and became disabled and unable to work and/or had a family – what would we do instead?

    this is similar to the EMTALA and MedicAid question.

    ditto Jon’s demeanor in discussions… in general… can
    and does discuss without getting too rowdy!

    • The inevitable question of these black-swan events to come up whenever the topic of social insurance arises. However, as I said to Walt just now, I don’t quite feel like getting into this conversation now. I think you know I respect and enjoy discussing with you, but I am just too tired to get into a long-winded discussion right now.

  7. Sometimes I believe I think like an economist. And then I read a post like this one and realize that maybe I do not.

    As it was explained to me many years ago, the purpose of a Christmas gift is not to increase the economic wealth of the recipient. Rather, the purpose is to show the recipient that the giver cares about them. Gift-givers generally show their care by their selection of a gift which:

    - demonstrates the giver’s knowledge of the recipient;
    or
    - shows that the giver was willing to devote time in making a gift or researching the recipient.

    Receiving dollars might maximize a recipient’s wealth, but it does not – as Elaine correctly shows in the Seinfeld episosde – maximize the recipient’s satisfaction.

    • I agree with John Dewey. I usually try to buy a gift that I know the recipient would not buy for themselves – even if it is expensive and I do not expect an equitable return on my purchase at all.. Nice if I get it but I also enjoy the recipients pleasure at receiving a special gift.

    • You are thinking like an economist John Dewey, you are considering the total value given and received – not just the cost of the inputs.

      Otherwise, how would you explain people sport fishing for tuna that costs them $100/lb plus many hours worked, when they could pay others to do it for them and deliver it to them in cans at a convenient location near their home, for a small fraction of that cost?

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