The Welfare Cost of Christmas

And other merry tales

We economists have an entirely unfair reputation as Ebenezer Scrooges. Unfair, of course, but not entirely undeserved. Joel Waldfogel has a 1993 paper estimating the deadweight loss from Christmas. Other people don’t know exactly what we want. Accordingly, the gifts which others get for us are not as valuable as if we had been given the same amount of money and spent it on ourselves.

In order to estimate the loss, we need to find the difference between the value of the gifts, and the value we put upon them. Waldfogel gives out two surveys to his undergraduate classes, the first of which estimate that they received an average value of $438 worth of gifts over the holiday season, but would have been willing to pay only $313 on average for the same gifts. The second reports an average of $509 paid, which they value at $462. These are obviously unrepresentative families – they’re Yale students, with an average reported family income of $143,000 (in 1993) – but the ratio of value to price need not be. Spending on gifts is quite large anyway, averaging $400 per family in 1992.

Using the surveys, we can find that the deadweight loss of holiday gift-giving is between 10% and 33% of the total price of the gift. With expenditures on the holidays equaling $40 billion a year in 1992, the losses from gift-giving are at least as a tenth as large as that from income taxation. I got estimates of modern day spending on gifts, but found them a bit unbelievably high – nevertheless, my best estimate is that Christmas costs us a minimum of $27 billion a year in mismatched gifts.

It is possible that there is something special about the gifts which others get for us. We value them as a signal of affection, and the giver may also receive some utility from giving. Could anyone truly make the argument that this matters for government welfare programs? Many programs place strict limits on what the money can be spent on. Medicare and Medicaid can only be spent on healthcare; SNAP can only be spent on food; Section 8 vouchers can only be spent on housing. People’s needs aren’t perfectly matched up with the in-kind transfers which the government gives them. People would rather spend it on something else, and often do – there are thriving businesses buying food stamps at a fraction of the face value. Diane Whitmore (2002) estimates that food stamps trade at 65% of the face value. She also estimates that 20-30% of food stamp recipients would be unambiguously better off with cash, because they don’t spend their entire allotment. Those that do spend their whole budget spend it largely on soft drinks. She estimates the loss from that program alone sums up to half a billion a year alone.

The cost of medicare (in 1992) is estimated by Yun at $2.19 billion in overconsumption, and $19.46 billion from the payroll tax to fund it. This is much lower than the estimates in Smolensky et al (1977), who estimate deadweight loss for Medicare and Medicaid between 9 and 39 percent. (The study was described in the Waldfogel paper; because it was an old book chapter, I cannot find it now). We have every reason to believe that there is substantial overprovision of care, especially toward the end of life.

There are some arguments for in-kind transfers. We might think that the poor are so totally incapable of managing their own affairs that they must be given goods, rather than allowed to spend on what they want most. They might neglect the welfare of their family members, especially their children, and so transfers to benefit them must be in the form of goods from which only the child would benefit. If it is very difficult to observe income, the government might provide deliberately shabby benefits, so that only the poor use them. (The key paper to read on this is Besley and Coate (1991)). Even here, the targeting can be very inefficient. Jacoby (1997) looks at transfers in Jamaica, which are in the form of a bland lunch. Only the poor used it, but with a cost of $400 per person, recipients valued it only at $158.

We could substantially improve our welfare system by eliminating all in kind transfers and changing it to cash. Get rid of Medicare – replace it with cash. Get rid of food stamps – replace it with cash. And while we’re at it, let’s reconsider who we are transferring to. What makes old people so special? Why is so much of our budget dedicated to transferring from the young to the old? Are there no prisons? Are there no Union workhouses? Bah, humbug!

Merry Christmas.