The Deadweight Loss of Christmas


According to the Gallup organization, the average American planned to spend $830 on Christmas gifts last year, meaning that total nationwide spending on Christmas gifts was just over $200 billion. Economist Joel Waldfogel of the University of Minnesota has estimated that 10-30 percent of this was wasted as “deadweight loss.”

Deadweight loss is an economic term for goods that yield fewer benefits than the cost of producing them. On net, society comes out behind when such a good is produced and consumed. Suppose you spent $10 to buy someone a pack of socks for Christmas and that pack of socks confers $6 in benefit to the recipient. On net, you and the recipient come out $4 behind. Given Waldfogel’s estimates, the U.S. economy on a whole comes out $20 billion to $60 billion behind due to Christmas spending.

The idea that Christmas spending represents an economic loss seems counterintuitive, as Christmas spending is generally thought of as economic stimulation. This ignores the fact that if you didn’t spend $830 on Christmas gifts, it would be spent on something else that would have yielded higher benefits – like a nice Florida vacation. The retail store’s $830 loss would be the hotel and airline’s gain. If you get more than $830 in benefit from this vacation, society (since you are part of society) comes out ahead, in contrast to the Christmas spending.

Is the solution to stop giving Christmas presents and go on vacation instead? Only a Scrooge would suggest this remedy! Is the solution to give cash instead of gifts? Anyone who has watched Seinfeld knows that this is not an attractive option – and what fun would exchanging cash really be? There are some straightforward ways to avoid the deadweight loss of Christmas. Find a unique gift that your recipient would like, but might not know exists, perhaps from a local small business. Or, buy the recipient something he/she wants, but would feel guilty about purchasing. Maybe your recipient would enjoy getting a massage, but would feel bad about spending that money on him/herself. A gift certificate for a massage, thus, would be a value-increasing gift. Donating to a reputable charity in lieu of a gift would likely result in little deadweight loss, too.

Changing consumer preferences may be reducing the deadweight loss of Christmas. Mall traffic has been steadily declining with predictions that a third of all shopping malls in the U.S. will eventually fail. Consumers, Millennials in particular, seem to be valuing experiences and uniqueness over mass consumerism. Millennials have reported that more than half of their Christmas spending will be on experience-related purchases, rather than consumer goods. Boutique small businesses in urban environments seem to be an increasing trend, with Millennials moving to the suburbs at a lower rate than previous generations. If this is the case, then perhaps, the deadweight loss of Christmas 2016 will be the Ghost of Christmas Past.



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