It is perhaps the most yawning news of the new year that these two media behemoths have came to an agreement shortly after midnight. I did not find out this titillating news immediately when it happened because I was fast asleep, having succumbed while watching Season 2, Disc 2 of the critically acclaimed 1990s teen horror show Buffy the Vampire Slayer. Yeah, my New Year's Eve was just crazy like that.

Nobody knows yet what the terms of the agreement are, but likely it means we will be paying more for our MTV and Nickelodeon and Spike (can't go without all those James Bond marathons, now, can we?).

Maybe a little less Spongebob and The Hills wouldn't have been a bad thing.

Now, before anyone criticizes me, let me state that I actually liked both movies that I returned. The problem with the gift was not so much the content but the format. You see, I'm a widescreen whore, but the DVDs I got were full screen. I simply returned those and plan to get their widescreen counterparts as soon as a sale comes up (and pocket the difference...).

The shirt was just, well, flannel. Not that there's anything wrong with that.

Anyway, I started thinking about all this after learning about the term deadweight loss at the Freakonomics blog (they have a fairly humorous post about Brett Favre's contribution to deadweight loss this season). This sounds like kind of a harsh term, and maybe it is.

Basically, deadweight loss is the difference between the amount a giver pays for a gift and the amount that a recipient would have paid had she bought the gift herself. This does not imply anything about the amount of appreciation or desire for the gift. For example, say you really, really, really wanted a new GPS, but just couldn't justify the expense of $200-600 to buy one, but might be willing to buy one at $150. So you put it on your Christmas list, and either your parents, a cartel of good friends or your significant other end up getting you one. The giver(s) was willing to pay more for the gift than you were – and you are happy they were!

For those who want to read more, Stephen Dubner links to a paper about deadweight loss by Joel Waldfogel in his Freakonomics blog post I mentioned above. The math is a little beyond me, but it's interesting to read about the surveys of econ students¹, not to mention some of the conclusions and suggestions he makes. Here are some of them, with my commentary.

Commentary on Deadweight Loss

Non-cash gifts typically have deadweight loss

Logically, this makes sense. Whether you are getting a really great gift or a really crappy one, chances are that the person who bought it paid more than you would have for it. For crappy gifts, this is obvious: You wouldn't have bought it at all, so any money spent on it is too much. For good gifts, you probably would have bought it, but given that you had not bought it yet and instead asked for it for Christmas (or didn't ask for it and were surprised) means that you were not willing to pay for it at any given known price, and therefore the giver was willing to pay more for it than you were.

There are exceptions to this, of course. At least one exception that M$L readers probably care about is really good sales. Revisiting the GPS example above, say a GPS system that you've had your eye on goes on 50% sale without you seeing the ad. Your mom/friend/sig-other buys it at this sale price, and then on Christmas they brag to you about the great deal they got on your gift.² Realizing that it's below the $150 threshold you would have paid, you rejoice at the news of the money saved – and perhaps given to you in the form of another gift.

Cash gifts are immune (usually) to deadweight loss, but gift cards are not

Cash has no deadweight loss because the recipient can use the cash in exactly the way she wants. There is no opportunity for the descrepancy that is required to create a deadweight loss, unless somehow you paid more for the cash than the value of the cash itself. This could happen if you had to pay to cash a check or had to use an ATM not owned by your bank, but hopefully nobody reading this blog has to do either of those things.

Gift cards, however, can (but don't always) have deadweight loss for one of two reasons, depending on the type of card. Store-specific cards can have deadweight loss simply because they are store-specific – you can't buy that book in the bargain bin at Borders with a Barnes & Noble gift card, and so either you spend your own money to purchase it at the sale price or use the gift card to get it at the higher price. Generic gift cards (such as Visa prepaid debit cards or American Express gift cards) almost always have some kind of purchase or activation fee, and may not be usable everywhere, especially in the case of Amex cards. Many gift cards also have fees associated with inactivity or non-use by a specific date.

10-33% of value is lost when giving gifts

I sort of skimmed through the statistical analysis. The conclusion is that, on average, the deadweight loss from giving non-cash gifts is one-tenth to one-third of the value of the money used to purchase them. Stated another way, on average the recipients of gifts value those gifts about 10-33% less than the givers.

Of course, this does not mean that it's not worthwhile to give gifts. I'll talk more about that in my conclusion below.

The better you know someone, the smaller the loss

This is probably somewhat inuitive, but how well you know somebody is a big factor in the amount of deadweight loss for a particular gift. Think about it: Are you more likely to get a really great gift from your Aunt Maude who you haven't seen in 10 years or from your fianceé? If you said Aunt Maude, maybe you shouldn't make any down payments on a reception hall quite yet.

Government "gifts" have deadweight loss too

Waldfogel goes on briefly to mention deadweight loss in the context of government entitlement programs. Basically citing another study, he states that handouts that "most resemble cash" such as food stamps and rent supplments, have little or no deadweight loss. However, other programs, such as public housing, Medicare and Medicaid, show deadweight losses that are comparable with the gift-giving losses described above, and sometimes lower. He does not make any value judgments about this loss (to his credit, since it's an economics paper and not a policy or think tank paper) – so I will.

The most disturbing thing to me is that this is the loss in value of just the handout itself. This doesn't account for the amount of money spent to administer the programs, collect taxes and so forth. Of course, you will never see any mention of this type of loss on any official report about the successes of government programs.

Conclusion

Deadweight loss is simply the name given to the difference between the value of a gift as perceived by the giver and receipient. While it's interesting to think about (and wonder how much value the gifts I give have lost), please don't construe any of this to mean that giving gifts is not worthwhile.

Instead of thinking of deadweight loss as, well, a loss, you could think of it as a premium. This premium pays for the smile on the face of a friend who happily accepts and appreciates your gift, or the lovin' you get from your significant other later. These types of emotional and intangible goods the giver receives are not present if the recipient buys the item for herself, and so it makes sense in this context that the giver would pay more.

As for the study, I would have liked to see some mention about deadweight loss with regard to charitable gifts – both gifts given to charities (which are often cash, but not always) as well as gifts given by charities.

Notes

1. One wonders how valid an economic survey whose sole participants are econ students can be.

2. I realize this might sound strange or even horrific to some people. However, my family does this frequently for birthday, holiday and any other kind of gifts given. It's not uncommon during Christmas gift exchanges to hear sporadic exclamations of, "I only paid [insert absurdly small amount] for that!" or "That was [insert insanely high percentage] off!" Getting the best deal of the season is a badge of honor.

But I digress, this post is about soda. I've been trying to quit drinking Mountain Dew for literally years, mostly to help me lose (more) weight as well as save some money. The problem is that I love the stuff. It's the nectar of the gods, as far as I'm concerned. The longest I've gone without drinking it is about two weeks.

Now, however, Governor Paterson wants to impose an 18% tax on it. Looks like I have some added incentive to quit.

Fallacy of the fat tax

My wife had a discussion the other day with someone at work about taxing "fat foods." The person, who is in her young 20s and skinny as a rail, believes that people get fat because they eat fat foods, and if we taxed them then they would 1) stop eating fat foods or 2) we would at least have more money to take care of them.

Paterson seems to agree with this sentiment. In his commentary about the fat tax, Paterson equates obesity today to smoking fifty years ago, making statements like "three quarters of adult men smoked" and then saying that one out of four children are obese. Of course, Paterson isn't citing a source for his figure, so we should just believe him, right?

I'm not arguing that obesity is not a problem. The question is whether it's a problem that the government can actually do anything about. Paterson suggests that the recent tax increase on cigarettes will prevent a quarter of a million kids from smoking, save 47,000 lives and save more than $5 billion – but again he cites no references or studies that confirm such a savings. According to a recent NY Times article, the proposed fat tax on soda is presupposed to generate a mere $400 million and curb only 5% of soda sales, a decidedly less effective result.

But does any of this take into account the fact that soda sales have been declining now for awhile? A year ago, CNN reported that Coke and Pepsi both were counting on non-soda beverages (i.e., bottled water and energy drinks) to boost sales. A look at Coca-Cola's third quarter report¹ shows clearly that domestic soda sales have declined overall, and that a larger percentage of those sales are going to Diet Coke and Coke Zero, whereas non-soda beverages have increased in sales. This all points to a trend that seems to indicate that Paterson is hopping onto a departing train, and while it's impossible to say why people are buying less soda, I would venture to guess that it's in no small part due to increased knowledge about the health risks of such syrupy drinks.

I don't know any more than anyone else whether the tax will be "successful" – either by deterring soda consumption or by raising enough money to cover the medical problems (partially) caused by such consumption. (Is it even the state's responsibility to cover such medical problems? What if we simply said: No, we won't cover such health issues? Then people would have to live, or die, with the consequences of their choices. What a concept!) What I do know, however, is that such taxes are reactive, discriminatory and tend to become status quo long before anyone thinks that maybe we ought not to tax such things.

But let me tell you about my own experience with obesity and soda.

I am fat and don't need a tax to tell me so

According to the CDC's Body Mass Index calculator, I am obese. Go ahead, input the nubmers: I am 5'11" and 218 pounds (as of my last weigh-in at the gym). I was down to 213 before Thanksgiving, at which point I was merely overweight, but so go the holidays.

Here's the thing: Even though I am considered obese, I have lost more than ten pounds in about as many months. In February, I started going to the gym regularly, and at the time I weighed close to 230, if not more. (I didn't start weighing myself right away when I started going to the gym, mostly because I was too afraid to look – many people drop several pounds right away when they first start working out regularly, so I may have lost more than I know.) On top of the weight loss, I've lost a number of inches off my stomach, have toned my arms and legs, and am generally feeling a lot better about the way I look. The belly is still there, but it's like a quarter keg instead of a full one.

I've gotten to where I am by dedicating myself to becoming physically fit the same way I dedicated myself three years ago to becoming financially fit. I committed myself to three days per week at the gym. I've had and am having some hard times keeping that commitment – December has been a particularly tough month for me – but I have for the most part persevered and the results are a slow but regular and healthy loss of weight. And I did it all while still drinking soda.

Okay, I know what you are going to say: If I had stopped drinking soda, I would have lost more weight. That is almost certainly true. It also probably doesn't help that I like to eat post-midnight snacks on those nights that I simply cannot fall asleep for one reason or another. If only I had some maternal entity looking out for me who could have prevented me from slowing my weight loss by taxing me heavily on Mountain Dew, Ritz crackers and Cracker Barrel cheese, I would be so much happier now...!

But I am a strong believer in incremental changes for things that you can control. Sometimes things happen that you can't control – death of a friend or relative, being laid off, a snowstorm that collapses the roof on your home – and in such instances, of course you need to react and adapt quickly. But in just about everything else, I believe slow and steady wins the race.

I followed this advice when I started fixing my finances a few years ago. I started saving just a little bit for expenses I knew I would have coming up in the next few months, such as clothes, gifts, etc. After I got a raise, I upped the amount as well as the number of categories I was saving for. I branched out into investing in stocks and doing some balance transfer arbitrage, while continuing to save and pay down credit card debt.

Likewise, when I started working out, I wasn't too concerned about changing my eating and drinking habits. Sure, I knew that by eating better I probably could lose more weight, but I also knew that I was never very good at dieting. If I tried to both diet and work out at the same time, but then failed at dieting, it's quite possible, knowing my own psychology, that my dieting failure would lead to me stop working out as well. (I actually did try to stop drinking soda once during the last ten months, but it lasted less than two weeks.)

Now that I've established that I can follow through on working out, it probably is time for me to start looking at the things I eat, especially since we're only three days away from that perennial "New Year's resolution" season. But my point is that I was losing weight while still drinking soda. Perhaps I am the exception to the rule, but it goes against the claims that Governor Paterson, and others, are making: That soda causes obesity.

Just like living within your means financially means to spend less than you make, living within your means physically means to eat less than you expend from a calorie perspective. With finances you can achieve fitness by either 1) increasing your income, or 2) decreasing your expenditures; with physical fitness, you do this by either 1) increasing your activity (exercising), or 2) decreasing how much you eat. Sure, doing both is great and preferred in the long run, but only one is truly necessary to reach your goals.

Notes

1. I own Coca-Cola stock. And yes, I realize that my love for Mountain Dew flies in the face of my investment decision.