The economic folly of Christmas gift-giving: Learn from Chinese and hand out cash instead

Most recipients would use the money in a wiser way to buy themselves what they truly value

PUBLISHED : Tuesday, 22 December, 2015, 1:13am
UPDATED : Friday, 04 March, 2016, 2:59pm

Economists call it the deadweight loss of Christmas. And newspaper editorial writers have turned it into a pre-Christmas op-ed genre. Every year, readers of one serious publication or another will inevitably be treated to a light-hearted lesson on why economists think giving gifts is a bad idea.

This year, the privilege falls on The New York Times, with Arthur Brooks, an economist and the president of the American Enterprise Institute, an influential think tank, explaining, yet again, the meaning of the finding.

We all have Joel Waldfogel, a Yale University economist, to thank for this. In 1993, he published a seminal paper in which he asked his students to make two estimates: guess the total value of all the Christmas gifts you received that year, and then ask yourself how much you would pay for them if you didn’t receive them.

It turned out the gifts they received were worth 10 to 33 per cent less to them than what they would buy for themselves if they were given cash instead.

The loss of one to more than three dollars for every 10 dollars spent on gifts is an aggregate loss to the economy. The answer: the perfect and the only sensible gift is cash.

Of course, we are talking about Western economists, and like most people, they don’t want to be party-poopers. Christmas is, after all, a religious festival, less so for Christians than for capitalists and marketers.

So such op-eds inevitably draw the same conclusion or some variants of it: don’t sweat it; it’s the thought that counts. Continue to buy gifts, even though it may be inefficient and wasteful.

But, for the deadweight losses, we Chinese could have told you so. Many of us have been Westernised so we give gifts during the festive season, too. But come the Lunar New Year, we are all back to our old Chinese selves by handing out red packets, which contain cash.

This saves givers the time and hassle of having to shop, while recipients can use the money to buy what they want with no massive deadweight losses to the economy.

Economists should stick to their guns. And Westerners should learn to go Chinese by giving red packets during Christmas.