In a season 9 episode of Seinfeld, George’s father Frank resurrects a holiday from George’s childhood called Festivus. Among other things, Festivus rejects the gift-giving aspect of many holidays. Frank Costanza may have been onto something.

Around Christmas time, the media will report excitedly that a certain amount of money has been pumped into the economy because of higher consumer spending. While this dollar estimate may seem like only good news, looking behind the numbers reveals a less rosy picture. The gift-giving surrounding Christmas and other holidays can be viewed as a loss in value to society from an economist’s point of view. 

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Consumer Choice

Anytime you go online, go to a store, or browse through a shopping magazine, you decide to buy something only if you value the item(s) at equal or more to the price you’d pay. If you think you could spend the $20 for a widget on better things, you wouldn’t buy the widget. Yes – you can buy impulsively, be under the influence of an illicit substance, or act in an otherwise irrational manner. But generally speaking you’re only going to buy that $20 widget if it’s worth $20 or more to you. This seems self-evident. Less obvious is that how much you value the widget isn’t widely known public information.

When someone goes to buy a gift for you, they’re taking an educated guess at how much you value an item. They have imperfect information about how much you value something. They could be buying a $20 item that you actually only value at $10. That $10 difference is what economists call deadweight loss.

Evidence

Joel Waldfogel at the University of Pennsylvania surveyed different populations to find out the difference between the cost of gifts people received and how much they valued those gifts. Waldfogel found that in general 10-33% of value is lost in gift-giving transactions. Because of this massive amount of destroyed value, Waldfogel has referred to Christmas as an “orgy of wealth destruction.”

How much that difference is correlates highly to the magnitude of imperfect information. The people who know you the best have the best sense of how much you value things. On one end of the spectrum, you have someone’s spouse or significant other. This person is most likely to know the gift recipient’s interests, needs, and daily routines. There is likely the least amount of imperfect information in this case and the lowest amount of wealth destruction. A step down from this is close friends and family; they know the recipient fairly well but there’s still more room for over-valuing a gift. On the other the end of the spectrum – where value goes to die – lies the office Secret Santa exchange. In this scenario people are compelled to buy gifts for people they barely know. The overall lesson, from an economist’s point of view, should be to minimize the level of gift-giving on this end of the spectrum.

Not all economists agree with Waldfogel’s idea of Scroogenomics. People give gifts for reasons other than purely utilitarian ones and these shouldn’t be dismissed. Sentimentality – “it’s the thought that counts” – is of course a significant value in many exchanges. But this sentimentality is partially captured in Waldfogel’s surveys. Additionally, there’s a positive correlation between the level of sentimentality and the accuracy of the gift-giver’s valuation; a gift from a spouse will mean more to the recipient than a gift from the randomly assigned office co-worker. 

Gift-giving is also a method of ‘signaling’ a giver uses to show the recipient how much he/she cares and well he/shes knows the recipient. The diamond ring shows the level of love the giver has (apparently?) for the recipient but more importantly the choice of ring is a signaling device to the recipient as to how well the giver knows him/her. Signaling then could be a value of gift-giving Waldfogel fails to quantify in his results. Or, an argument could be made that it’s an explanation for why we give gifts the way we do today, even if there are much better ways to signal to others how much we care for them.

Larger Implications

Money is the closest gauge we have to putting a number on how much we value something. But spending $20 on digging holes just to fill them back in again doesn’t mean we are $20 richer in our well-being – even if it means our GDP went up $20. This fact should be considered whenever we see government spending has increased our output by a reported amount. Arguably, there are reasons to think government spending makes up for a loss of aggregate demand in the macroeconomy. However, this spending always involves a certain amount of imperfect information on how much individuals actually value things. If the government spends money on a Bridge to Nowhere or bails out companies that we don’t want, there is value destruction. Gift-giving around Christmas time increases the dollar amount of consumer spending but the level of value added to the economy is much less than this spending.

Many economic transactions involve the same sort of imperfect information found in gift-giving. An argument can be made that others will know better than the recipient for how he/she should value something. But most of the time, money is most efficiently spent when the recipient is the one doing the spending. This logic has been the inspiration for recent charitable projects like Give Directly. (Giving cash instead of specific items also works to lower overhead and give as much money to the recipients as possible.) How individuals spend their money reveals their preferences rather than assuming we as givers know what they need the most. The effectiveness of these charities for individuals in developing countries is currently inconclusive but early evidence suggests promising results.

What Could We Do Instead?

Waldfogel has a few suggestions on how we can improve on the level of deadweight loss associated with gift-giving. The first is to just give cash. Cash has this amazing power of giving people the power to exchange it for pretty much anything they see fit. It might not be romantic and it might not look good underneath the Christmas tree, but there certainly is no orgy of wealth destruction. Another option is gift cards. Gift cards could have a small amount of imperfect information; I remember getting a Best Buy gift card as a young child when I was nowhere close to being in the market for electronics or even to buy a CD. But gift cards give enough flexibility that the destruction of value in gift-giving can be significantly minimized.

This takes away the excitement of gift-giving but it could be just because we’re used to the status quo of gift-giving. There are many gift exchanges in modern society that follow purely practical guidelines. Wedding and baby registries, for example, tell gift-givers exactly what the recipient needs. The next time a birthday, holiday, or office exchange comes around, think twice before you buy a gift. Put some money in an envelope and know you are doing your part to minimize the orgy of wealth destruction that is running rampant in modern society. Or give money to The Human Fund.

To hear the ideas of this article in podcast form, check out episode 9 of Upset Patterns found here (iTunes link found here).

Imagine your town decides to mandate that all ice cream is free or very cheap. Soon, lines are out the door for people wanting to get cheap ice cream. Sure, people can get similar desserts, but they’d have to pay full price. In order to take care of these long lines, the town decides to mandate that every store must provide free or very cheap ice cream. This might sound silly but it’s exactly how cities deal with parking. Cities price street parking, or “curb parking,” very cheaply and then deal with the excess demand by requiring businesses and residences to have off-street parking. The costs of this distortion of land use may not be immediately obvious but they are significant financially, environmentally, and with regards to time.

Land: A Limited Resource

The fundamental problem of economics is finding out how to use the scarce resources we have on earth in the best way possible. In the case of parking, land is a limited resource with many alternative uses. A typical parking space is around 330 square feet, not including aisles in parking garages and parking lots. 330 square feet is no insignificant amount of space, especially in dense cities. With other resources, we can think of prices as a “signal wrapped in an incentive” that coordinate resources in an economy. A free parking spot in New York City is giving away some of the most valuable land on earth and completely ignoring the price system as a means for allocation. Most cities, due to history and the political inertia of voters being used to free parking, charge too little for curbside parking. When the price of a resource is lower than what the market would otherwise dictate, there is a shortage. If ice cream were close to free, people would want to consume more of it than was available. The land used for parking is no exception. To get rid of this shortage, public policy has been set mandating more off-street parking.

In the United States, the number of spots required for off-street parking is largely arbitrary. Consider the following graph showing how San Jose mandates parking space depending on the type of establishment. When pressed to come up with a reason for where they get the numbers, public officials usually claim ignorance or just say it’s how it’s always been.

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Some other examples of requirements include: 1 space per 10 nuns for a nunnery; 1.5 spaces per fuel nozzle for a gas station; 1 space per 2,500 gallons of water for a swimming pool; 1 space per tennis player for a tennis court; or 3 spaces per beautician for beauty shop. It should be noted that these numbers are created from little data-driven research on efficient land use. One study surveyed 49 cities in the San Francisco Bay Area and found parking required for hospitals ranged between 29 and 1,682 spaces. The differences were uncorrelated to the corresponding cities’ population levels or densities. Why should we allocate land like this when we’d never allocate any other resource with such arbitrary mandates?

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The Cost of Cheap Parking

Measuring the costs of this distortion can be hard to wrap one’s head around. The only obvious price in the case of free/cheap parking is the price of the parking spot to the driver. Because of this, the costs to sub-optimally priced parking are hidden and diffused across the entire population. Mark Delucchi at University of California – Davis estimates drivers pay between 1-4% of the actual costs of off-street parking. He estimates the annual capital and operating costs of off-street parking in the US to be between $79B and $226B in 2002. Remember that the cost of parking is not only the land used but also the maintenance for the spaces. As a comparison, the US spent $231 billion on medicare the same year. Because drivers pay so little of this, it is essentially a pure subsidy. A gas tax between $1.27 and $3.74 per gallon in 1991 dollars would have to be enacted to offset the subsidy for off-street parking.

But how do the costs of this subsidy manifest themselves? One evident symptom is the sprawl it creates. Any land used for parking is land that cannot be used for residential or business purposes. So if a city block could fit 5 shops in a world with no parking, but a city requires half the block to effectively be used for parking spaces, two blocks are now needed to fit those same 5 shops. Multiply this effect over every different kind of establishment and you can picture how much it spreads everything out.

When one considers the cost of driving a car to a destination versus other forms of transport, many costs add up to create the total cost – fuel, automobile insurance, the car purchase itself, parking etc. By reducing a drivers’ cost of vehicle travel, we are distorting an individual’s travel choices towards cars over other forms of transportation. We are ok to drive more because it’s cheaper than the actual cost of the journey. Off-street parking requirements have existed since the middle of the twentieth century so our habits have adopted accordingly. This sprawl has a spiraling effect and the car dependence is a self-fulfilling prophecy – parking requirements increase mobility by car, but the sprawl decreases mobility by bike, foot, or public transit.

Off-street parking requirements also have the unfortunate effect of reducing the amount of affordable housing. Most municipalities require a certain number of parking spaces based on how many residents will be in the building. This number does not change depending on the demographics of the residents. So if your residents are all poor and don’t have enough money to buy cars, you still need to devote part of your property to parking spaces. This means parking spots for people that don’t own cars and less space devoted to actual residences. A lower supply of housing means higher prices.

These requirements also have a second effect of distorting incentives to build affordable housing in the first place. If the city requires you to include x number of spots per resident, wouldn’t you be more inclined to build bigger tenancies that fit fewer tenants so you have to devote less land to parking? Bigger tenancies with fewer tenants means residencies that are more expensive and out of reach to low-income individuals. Oakland had no parking requirements until 1961. Afterwards, housing density went down 30% (sprawl) and construction costs went up 18% (decreased housing affordability).

Businesses also have distorted incentives in how they build. For a new building, a business can decide its use and then fulfill parking requirements accordingly. For an old building, a business needs to use the parking available as a limitation on its possible uses. If the number of spots wouldn’t satisfy the requirements for your nunnery, swimming pool, or beauty parlor, you need to build elsewhere. This means lots of vacant buildings remain unfilled because of the limited flexibility. It also incentivizes demolition and new development rather than using existing buildings.

Perhaps the most apparent cost is one we’re all accustomed to when trying to find a parking spot – “cruising.” Cruising refers to that tedious amount of time you spend circling the block around your destination hoping someone will leave their spot and you can swoop in. Since the cheap cost of curbside parking has created a shortage of spots, it’s only natural to cruise around until you find one that’s available. Some drivers will pay for lot parking, but why would you if a free spot is just around the corner? As George Costanza said, “It’s like going to a prostitute. Why should I pay for something when, if I apply myself, I can get it for free?” Cruising causes congestion that creates pollution and wastes time and energy. Research estimates that around 30% of cars in congested traffic are cars cruising and up to 45% in Brooklyn. If the line is too long at that free ice cream place, you’re gonna keep scoping out nearby places until you find one that’s available.

The Solution

In order to use land most efficiently, it only makes sense to make parking as expensive as it actually costs. This means having parking be priced according to forces relating to its supply and demand and not arbitrary regulations. Cheap parking enforces inefficient land use in urban sprawl, causes residential and business rents to increase, decreases the amount of affordable housing, and increasing pollution through cruising and the increased transportation time from increased sprawl. This doesn’t mean getting rid of parking altogether. It just means that the price of a car journey should more closely reflect its true cost.

The “right price” for curbside parking has been defined by economist Donald Shoup at the University of California – San Diego as the lowest price that ensures a 15% vacancy rate for a given area. Technology is available that can change this price based on fluctuating demand. Certain neighborhoods in cities like San Francisco and San Diego have effectively utilized this technology. A 15% vacancy rate means just enough cars can park without having an unnecessary amount of cruising.

Businesses naturally will be afraid this increase in price will scare away customers. But remember that the status quo of underpriced parking scares away customers too. Higher prices could incentivize carpooling, since the higher price of parking can be diffused across a handful of passengers. Businesses can also be convinced to embrace this increased price by having the parking revenue be re-invested in the respective business districts. Old Pasadena, a formerly skeezy neighborhood in LA, embraced right price parking and started using the money for district improvement efforts and eventually became a popular entertainment/shopping district. Austin does something similar, investing in trees and sidewalk upkeep with the revenue it gets near the University of Texas campus. In both instances the businesses, though perhaps initially skeptical, have embraced right price parking.

Water flows in the path of the least resistance, and it could be that parkers go from the spots of right price to residential neighborhoods with cheaper parking. So what’s the best way to counter-act this problem? Resident-only parking permits tend to over-compensate for this problem by creating an artificial scarcity – many of the spots go unused throughout the day as residents go to work or run errands. Instead, Shoup recommends a scheme where residents and guests park for free in their neighborhood but can charge parkers that want to use their designated spot. Remember all those unused parking spots in the housing for low-income individuals? Why not allow them to rent out their spots to people from other neighborhoods? Otherwise, the land goes completely unused. Cities like Boulder, Aspen, and Santa Cruz have successfully enacted schemes like Shoup’s to efficiently allocate residential parking spaces.

The Endgame

It can be hard to imagine paying more for parking in our given city landscapes. Remember that our cities have developed based on distorted incentives that increase sprawl and devote unnecessary land use to parking. Once parking is priced correctly and parking requirements are removed, land previously used for parking can be devoted to more valuable uses. Cities will slowly become denser and the higher price for parking won’t be as unavoidable as one may think.

The status quo of a car-dependent urban lifestyle does have its perks – cars allow one to carry large items, avoid adverse weather than encountered by biking or waiting at a bus stop, and often gets a traveler quickly from one point to another. But the price of a car journey needs to closer reflect the true cost. An ice cream-dependent urban lifestyle also has its perks – but we can spend all that milk, sugar, labor, and land on better resources.

To hear the ideas of this article presented in podcast form, check out episode 10 of Upset Patterns found here (iTunes link found here). This article draws heavily from Donald Shoup’s 2011 book “The High Cost of Free Parking.”

Alex Tabarrok posts this speech Nobel Laureate Thomas Sargent gave at Berkeley’s 2007 graduation:

I remember how happy I felt when I graduated from Berkeley many years ago. But I thought the graduation speeches were long. I will economize on words.

Economics is organized common sense. Here is a short list of valuable lessons that our beautiful subject teaches.

1. Many things that are desirable are not feasible.

2. Individuals and communities face trade-offs.

3. Other people have more information about their abilities, their efforts, and their preferences than you do.

4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.

5. There are tradeoffs between equality and efficiency.

6. In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well meaning outsiders to change things for better or worse.

7. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation.

8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.

9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore).

10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.

11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).

12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates

Loyal UP reader Dink sends me this article that I sent him a couple days ago about a new law from the US Department of Transportation mandating rear-visibility cameras in new cars in 2018. A few things to mention, based on this article entirely:

  • This law will cost more than its benefits, according to the government’s own calculations.
  • This could give people a fall sense of security and be even more reckless in that they are now assuming they will see anything behind them. Because of this, estimates of lives saved could be overstating the benefits.
  • It’s hard to put a $ value on personal liberty when thinking about a cost-benefit analysis like this. For something like airport security, in a hypothetical world where we had perfect information, we could weigh the costs of the extra time and staffing extra security takes and weigh it against the (alleged) lives saved and see if it’s worth it. But of course the analysis shouldn’t stop there. We value personal liberty, and we can’t put a dollar value on it.
Take this hypothetical: I have this new law up my sleeve that will a) reduce our dependency on foreign oil, b) reduce greenhouse gases by making cars perform at a more fuel-efficient level and c) save possibly thousands of lives per year. Sounds good, right? Well this law is mandating a national speed limit of 40 miles an hour. When evaluating the cost-benefit of this law, we don’t stop at the benefits of a, b, and c and weigh it against the value of the extra time spent under this new speed limit. We place value on the ability to go a speed limit that might be inefficient by fuel standards, dangerous, and decrease our energy security. Similarly, if the NSA actually saved lives through its monitoring, we wouldn’t just analyze the cost of the NSA vs the lives saved.
The point is that we value personal liberty, everyone values it in different magnitudes, and not including it in an analysis like this is misleading. The explicit cost of this law might only be between $44 and $142 per car, but the mandate in itself is not an insignificant cost.

If Obamacare is going to work close to as intended, the people it aims to help need to know about its basic provisions. This includes the need to sign up and the existence of healthcare.gov. A study found found a set of the population was incredibly misinformed about the basics. Studies show the best cure is to listen to our 8th episode.

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Thomas Piketty’s Capital in the 21st Century was finally released in English last Monday. It’s been hailed by many as one of those once-in-a-decade game changing books. Needless to say, I am very excited to read it. I’ve only read through the first fifty pages but the basic arguments are clear and already fascinating.

A narrative of economic development prominent today is that inequality is efficient (to an extent) and decreasing. Simon Kuznets observed in the middle of the twentieth century that in developed countries income inequality was decreasing and incomes were converging. He made it clear that this was only a correlation and he gave no declaration that this was inevitable or sustainable. Nonetheless, incomes were converging and many took this to be the beauty of capitalism: inequality may exist for a while but in the end we’re all better off.

In fact, convergence happened a century before. As the Industrial Revolution steadily expanded in the early 19th century, the vast majority of workers saw stagnant or falling wages next to exploding incomes of capital-owning individuals. David Ricardo and Karl Marx separately predicted different doomsday scenarios of a massive scarcity of land causing an unhealthy concentration of wealth and spiraling returns to capital causing a global revolution, respectively. Of course, neither apocalypse happened. In the last third of the 19th century, low-income individuals saw their wages rise, even if it occurred with massively increasing inequality.

Inequality increased in the roaring 20s until the Great Depression and World War II. From the time of these events until the early 1970s, income inequality decreased in most developed countries. The prevailing wisdom was that high inequality was followed by converging incomes in the natural progression of economic development.

What Piketty aims to drive home is that this convergence was the exception, not the rule. The Great Depression and Second World War caused the fortunes of the capitalists to implode. In fact, the financial crisis of late initially decreased inequality mostly because the rich had more to lose. After World War II, he argues, American policy was set up to reward broadly distributed growth instead of growth aimed at rewarding capitalists. Then, Reagan and Thatcher won and it was reversed. I should note here that Piketty is French, has been a member of the Socialist Party, and by virtue of being an inequality economist comes with certain biases. His points are largely data-driven but do need to be placed in the context of his background.

The fundamental identity he proposes in the book is that when r > g capitalism will breed unsustainable inequality. r is the rate of return on capital and g is economic growth. When the return to capital is bigger than the rate of economic growth, wealth accumulates in a concentrated set of hands. When an economy is slow-growing, past accumulated wealth has growing importance. Inequality is thus bound to increase and continue to do so. Developed economies have slowed since 1973 and r is becoming greater than g, in the eyes of Piketty. Further, g includes population growth and this has been close to zero in many countries. As he promises to show in later chapters, this identity need not be necessary. Policy can help change this to prevent a revolution or massive conflicts Ricardo and Marx once predicted.

I find the premises presented so far to be interesting for a number of reasons. One is that Piketty admits this divergence is not the result of any market failures. Rather, he finds the more perfect the capital market the more inequality a country will have. Second, I have always assumed a convergence of incomes in economic progress or, at the very least, figured that increasing inequality can be forgiven as long as everyone is better off in absolute terms. If this is not the natural path of capitalism, we are all in for a surprise of hurt. And third, a few writers have posited that we are in a Second Machine Age much like the first industrial revolution, where wages may stagnate now but eventually they will rise. Whereas the first industrial revolution replaced brawn with machines, now we are replacing brains. The gains from this may be realized by the masses eventually, but there could be a very rough transition period. I hope to see how Piketty addresses this and how fatalistic he sees a spiraling inequality.

If you’re one of the few people that reads this blog, listens to our podcast, and was not aware that we released an episode on Bitcoin…here it is!

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