Have Yourself an Efficient Little Christmas
Economists will say that holiday gift giving is "suboptimal" spending. They probably don't believe in mistletoe either
By David Futrelle

(MONEY Magazine) – Every year around this time, economists recoil in horror as their fellow Americans throw themselves with gusto into a massively inefficient social ritual in which billions of perfectly good dollars are transformed, through some perverse reverse alchemy, into appallingly tacky tchotchkes. You and I know it as Christmas.

So what's the economists' beef with the Yuletide season? That awful sweater from your aunt—the one that's been sitting in the back of your closet for years—is not only an affront to taste; it's an affront to economic efficiency, a textbook case of what the dismal science charmingly calls "suboptimal" spending. You could have taken the money she spent on it and bought something you'd actually use.

Wharton economist Joel Waldfogel estimates the "deadweight loss" of gifts-gone-bad at perhaps 10% of total Christmas spending—or about $5 billion a year. Given that gift giving is so inefficient, Waldfogel seems baffled as to why it occurs at all, though in one recent paper he allows that it might lead to the "correction of externalities among intimate individuals." (Whatever that means. Clearly you don't want this guy as your secret Santa.)

Christmas would obviously be a lot more efficient if everyone just gave cash, since there's not much chance a crisp $50 bill would end up sitting unused in a closet. While cash is still seen as fairly crass in many households, Americans do seem to be embracing a host of not-quite-cash alternatives that allow them to optimize their Christmas buy cycle: Roughly two-thirds of U.S. adults gave or got gift cards over the past year, up from a third just three seasons ago, according to gift-card provider ValueLink.

But do we really want Christmas to be as efficient as Wal-Mart's supply chain? In their attempts to strip the sentiment from gift giving to get at its cold, hard economic core, the economists miss the point. Gift giving has been around longer than civilization itself—it's a ritual that, ideally, makes both giver and receiver feel warm and fuzzy inside. Seeing someone react with honest pleasure to a perfectly chosen present is, as the ads say, priceless.

The less than perfect gifts? Well, most of us are a tad more forgiving than the economists are. The misshapen potholder your kindergartner made for you this Christmas won't exactly match your decorating scheme. But it's the thought, after all, that counts. —DAVID FUTRELLE