Goodwill toward Men: Thinking Economically about Charitable Giving

Just as surely as Santa Claus arriving at Herald Square at the end of the Macy’s Thanksgiving Day Parade, or “All I Want for Christmas Is You” playing on the radio, you can be certain the holiday season is upon us when you see any one of the many annual articles, podcasts, or blog posts discussing economist Joel Waldfogel’s 1993 journal article “The Deadweight Loss of Christmas.” A rare “crossover hit,” the article’s argument is provocative but, within certain bounds of application, correct.

The argument goes like this:

• People themselves know what goods or services will best satisfy their wants and needs.
• If you give someone money as a gift, they will use it to buy whatever good or service is most important to them.
• If you buy a good or service as a gift, sometimes you’ll give the recipient what they would have bought themselves, but much of the time you’ll pick something else that is by definition less valuable to them.
• The gap between the value to the gift receiver of what they would have bought themselves and what they actually get is pure waste, what economists call “deadweight loss.”
• Based on survey data, it looks like the magnitude of that loss is between 10% and 33% of what the giver pays for the gift.
• A very large number of gifts are exchanged each holiday season, and relatively small losses add up to a large amount of waste—between $4 and $13 billion in 1992’s gift-​giving season, the most recent when the paper was published (in 2023 dollars that’s roughly between $9 and $28 billion).

Waldfogel doesn’t attempt to put a value on, for example, the experience of participating in the ritual of giving and receiving (non-​cash) gifts, or to account for other mitigating factors—it’s beyond the scope and arguably beside the point of the exercise.

I say only “arguably” beside the point because, looking at it another way, “The Deadweight Loss of Christmas” arguably commits one of the cardinal sins of economic reasoning: observing that people do not behave in the way an economist’s model predicts, and then concluding that the problem is with people, not the model. As a practical matter, you probably should consider the factors the model ignores in your own gift-​giving, especially when exchanging gifts with those closest to you. To Waldfogel’s credit, the paper does discuss how the people closest to you are the least likely to get you unwanted gifts and are less likely to give you cash, compared to those more distant, who are more likely to get you something you don’t want and more likely to give you cash.

While the case for giving cash gifts to friends and family is subject to conditions and caveats, these concerns generally don’t apply to another type of giving: charitable donations to the needy. When it comes to alleviating extreme poverty or helping refugees or victims of natural disasters, it’s not the thought that counts—it’s actually helping. Very often, doing the most good means getting cash directly into people’s hands with as little hassle and as few strings as possible.

If you want evidence of that beyond the standard economic case, consider remittances. Remittance payments are cash transfers made by migrants to their “folks back home.” Remittance payments dwarf government aid, totaling about $647 billion sent to people in low- and middle-​income countries in 2022 (Ratha et al. 2023, p. 1), compared to $204 billion in “Official Development Assistance,” or government foreign aid (OECD 2023). When every dollar counts, the people closest to those receiving aid give cash.

Likewise, you can look closer to home and observe that pretty much every food cupboard or soup kitchen in the country wants donations in the form of cash, not food—that way they can buy what is most urgently needed, rather than whatever people guess might be needed or think “ought” to be given to the hungry.

Following the economic logic, we should want our charitable giving to the world’s poor to look more like remittances and less like government aid in two important aspects. Government aid is by its nature politically controlled, and so comes with restrictions on its use and other strings attached. Remittances are not so encumbered. Government aid typically involves third parties spending money on others’ behalf. Remittances let people decide for themselves.

To be clear, direct cash transfers won’t end poverty by themselves—at the very least, you also need to have well-​functioning local institutions—but compared to other types of interventions, like in-​kind donations of goods and services, or government-​controlled foreign aid, direct cash transfers have a lot to recommend them.

One charity that operates on the principle that beneficiaries should decide for themselves how aid money is spent is GiveDirectly, which hosts on its website an excellent page summarizing the research on cash transfers. If the season of giving so moves you, GiveDirectly is a well-​rated charity deserving of your support.