No wonder economics is called the “dismal science” — sometimes our rigorous analysis threatens to spoil everyone’s fun.
Take holiday gift-giving, for example. The conventional wisdom is that “it is better to give than to receive” and while there is some merit in this if everyone gives (so that everyone receives), I think you can probably see the collective action problem here. Only an economist (or maybe an excitable child) would point out that, strictly from a material accumulation point of view, there are real advantages in being on the receiving end!
A Badly Flawed Process
But it gets worse because some economists suggest that it may be better not to bother with gifts at all. Don’t give gifts, give cash. Or, better yet, keep the cash and spend it on yourself. Gift-giving itself is a badly flawed process. This Scroogish sentiment is in part the result of Joel Waldfogel’s famous article on “The Deadweight Loss of Christmas.” Waldfogel concluded that Christmas, for all its merriment, was actually welfare-reducing because recipients do not generally place a value on gifts that is as high as their cost. They end up receiving stuff they would never have purchased with their own money.
The cost of giving gifts exceeds the benefits, so gift giving is an economic drain. Dismal, huh? Here’s how it works.
Your aunt paid $50 for the sweater that she gave you. How much would you have paid for it? $50? $45? $40? Well, the fact is that you had the option of buying it for $50 and didn’t, therefore you must not have valued it at the full amount. So its value to you is probably less than what your aunt paid. But how much less?
Economists seem to agree that the best case scenario is that there is about a 10 percent average loss in gift-giving, which I call the “Santa Tax,” although the “yield” as reported by survey respondents varies a good deal. The National Retail Federation estimates that Americans will spend more than $550 billion on holiday gifts in 2012. If the deadweight loss rate is just 10 percent, that would be a $50+ billion Santa Tax this year. Yikes!
There are many problems with this way of calculating holiday giving gains and losses. It is pleasing to give gifts, of course, and this should be taken into account. But how much would you be willing to pay for the pleasure? And would your pleasure have been less if you had just given cash? The efficiency loss might be less with a cash gift, but perhaps the pleasure of giving (and thus the incentive to give) would be diminished, too.
Santa Tax Wine Edition
Then we can argue about the size of the Santa Tax. Is 10 percent about right … or do you suspect (as I do) that it might be much higher, especially when you are buying gifts for people who are much older or younger or who have very different tastes or needs from your own? Have you ever received a gift that was 100 percent deadweight loss? If you are honest you probably have. But it’s the thought that counts, isn’t it? How big a Santa tax is too much?
Which brings us to the wine part of the problem. Doesn’t it seem like the Santa tax is probably even larger for wine gifts than for many other things? Most of us have experienced the deadweight loss when a bottle of wine that we’ve paid good money for doesn’t turn out to be worth what we’ve spent. So it is no surprise that the loss rate might be even worse when other people are doing the buying (and giving) for us.
Giving wine as a gift is risky (unless it is someone you know very well) because there are so many different choices and individual tastes differ so much. There are lots and lots of good wine gift choices, of course, but it is easy to get caught in the Santa tax trap. I’m sure that a lot of holiday wine gifts miss the mark badly.
Maybe that’s why wine enthusiasts receive so many “wine gizmo” gifts instead of wine — but those gadgets are subject to the Santa Tax, too. The New York Times‘s William Grimes recently complained about this problem.
Across the land, Christmas trees spread their fragrant branches over packages containing monogrammed Slankets, electric golf-ball polishers and toasters that emblazon bread slices with the logo of your favorite N.F.L. team.
But for some reason, the culture of wine and spirits provides especially fertile ground for misbegotten concepts like these. Year after year, it yields a bumper crop of inane but highly giftable innovations like wineglass holders that clip onto party plates, leather beer holsters and octobongs, the most efficient method yet devised for eight college students to consume a keg’s worth of beer simultaneously.
Tyler Colman, writing on his Dr Vino blog, singled out gifts of fancy automated corkscrews for particular criticism. You can probably think of some high Santa tax wine paraphernalia that you’ve either given or received yourself.
Beyond the Octobong: Wine Economist Gift Guide
OK, I suppose the octobong is out, but some of the wine gizmos that Grimes reviews in the article are sort of weirdly fascinating. I guess I can see why they are given as gifts (even though you might never spend your own money on them). So where does that leave us when it comes to wine gifts?
My first bit of advice is simple: don’t give a bottle of wine to friends or relations, share it with them. There is something about a shared experience that transcends a simple commodity transfer. (From a technical economics standpoint, I think sharing adds some “public goods” elements to the deadweight loss equation that can cushion the Santa Tax loss). Trust me, from an economic theory standpoint, sharing is the way to go.
In fact the more I think about it the more I believe that sharing rather than giving is the key. Sharing a bottle of wine rather than just giving it may seem a bit selfish and is certainly more expensive (since time as well as money are involved), but sharing changes the game from transaction to relationship and this seems to me to be the essence of both the holidays themselves and wine, too.
More Gift Advice (and Shameless Self-Promotion)
Back to giving and receiving. Best gift to give a wine enthusiast? A copy of the new paperback edition of Wine Wars, of course. (Shameless self-promotion never takes a holiday).
Best wine gift to receive? It’s gotta be Wine Grapes by Jancis Robinson, Julia Harding and Jose Vouillamoz — the brilliant 1242 page survey of 1368 wine grape varieties. So many grapes, so much information, such beautiful illustrations. This jeroboam-sized book will provide years of detailed research use (including very cool DNA analysis of wine grape origins!) and hours and hours of simple browsing pleasure for any curious wine geek.
Weight? Yes, quite a lot of it; 6.8 pounds shipping weight according to Amazon.com (although my copy feels light for its size). Deadweight loss? Forget about it!
Click here to view a pdf of Waldfogel’s original article, which appeared in the December (of course) 1993 issue of the American Economic Review. The illustration is of a certain Mr. Grinch, who may or may not have been an economist. Happy holidays everyone!
You have succeeded in delivering a convincing argument that “the Grinch Factor” should be used in my gift-giving analysis. Or maybe better yet, my Aunt Gertrude should! The annual Christmas sweater certainly qualifies for a 100% Santa Tax and that is much larger than a wine gift! I would argue that at least a gift of wine I’ll open twice and has an “entertainment factor”to consider.
Great article, Mike. I learned something new!
Your piece had a fascinating viewpoint. Based on the same logic of dollar-value return-on- investment only, economists don’t have children or pets.
Your article was fun and applied perfectly to at least two classes of people: a) people who hate shopping
b) Those who get upset at the idea of buying a present that isn’t appreciated.
There are at least two other classes:
c) People who enjoy the thrill of the hunt, searching for an unasked for gift that will thrill the recipient.
d) Those who pray to St. Martha Stewart who want everything perfect in their home and select gifts they believe “anyone with taste will appreciate.” Since I don’t dress well enough or spend enough on redecorating my home every year to be in their social circle, I must admit, I haven’t spent a lot of time with this group. However, I believe the time I’ve spent has been more than sufficient.
Speaking of economists and children … check out the famous “Rotten Kid Theorem,” one of the cornerstones of “family economics.”