I write about economics for a living, so I understand concepts of deadweight loss and depreciation and inefficiency.
That said, I still ask my parents for gift cards for Christmas every year. And I buy them for people, too.
I know this is a sacrilege, and you might, too — there are all sorts of articles out there about how gift cards are sincerely a terrible, horrible gift. And yet I keep wanting them. It could be because I'm just a bad decision-maker, but I think there are excellent reasons to get a person a gift card … provided you buy it for the right kind of person.
The case against gift cards
The arguments against gift cards are all great arguments. Gift cards really can be incredibly wasteful.
One big reason is "breakage" — industry-speak for the money that is spent buying gift cards but that is never actually spent afterwards at the store. Estimates of how big this is vary, but according to one, up to $1 billion in gift cards are lost to "breakage" each year. Another says it was $2 billion. In 2005, Consumer Reports found in a survey that 19 percent of card recipients reported never using them.
Out of an annual total of roughly $118 billion in gift-card-giving, a couple billion dollars is not a huge amount of breakage, but it is a couple billion dollars in gift-giving loss (and free profits for retailers).
Another argument against the gift card is that any gift-giving involves deadweight loss — a concept most memorably enshrined in The Deadweight Loss of Christmas, a 2001 paper from Joel Waldfogel, currently a professor at the University of Minnesota's Carlson School of Management. When you give someone a sweater, chances are that you are getting them something that's a little less optimal than what they would buy themselves. Gift cards reduce this a bit, letting you pick what you buy, but getting someone a gift card to Williams-Sonoma does run the risk that the person might value a gift card to Target even more. You might as well just hand them the cash instead.
And of course, gift cards require little thought and are often dismissed as impersonal. You're not only giving them money — you're forcing them to go to the trouble of picking something out because you couldn't be bothered to do it yourself.
The case for gift cards
If that's the case, why am I (and so many others) so dead set on acting against my own self interest?
Because that gift card gives you no choice but to go shop for yourself. Andrew Leonard maybe put it best in a 2009 Salon piece: "It's better than money because it comes with an explicit, unignorable directive to use it in a way that gives you pleasure."
If my parents gave me that $100 in cash instead of in Banana Republic or J. Crew dollars, I'd probably just put it toward my student loans or credit card bill. Giving someone $100 and saying, "go have fun" or "buy yourself something nice" does nothing to ensure that the recipient will actually take that advice. The gift card, however, gives you no choice but to spend money (the trade-off being that you have no choice where to spend it).
(Disclaimer time. I fully realize "I'm too responsible for you to give me cash" is in the same ballpark of obnoxiousness as "I'm too much of a perfectionist" or "I just work too hard sometimes." Not only that, but yes, this is a very privileged argument — Give me money to spend, parents, not money to use wisely.)
Let's stress this one more time: if we're talking about plain economic well-being, choosing a gift card over cash is not optimal. $100 can either cut a little out of a student loan that will accumulate interest, or it can buy you a new sweater that will for much of the year accumulate moths.
But to put it succinctly, what you're giving with a gift card is the gift of imprudence.
But don't buy them for everyone
Of course, imprudence isn't exactly a gift that everyone needs.
The point is that they are great gifts for certain people. The friend who is in dire financial straits might appreciate cash (or, alternatively, a gift card that lets her/him buy essentials). The friend who hates shopping clearly won't be excited about it. And maybe most importantly, the friend who throws money around irresponsibly doesn't need any extra imprudence.
What you want to do, then, is get it for your friend or relative who is just too future-oriented. In a 2009 Atlantic article, behavioral economists call these people "hyperopic." They get so focused on those future outcomes that they are, to use a technical term, fun-haters in the present.
So consider those hyperopic friends when you look at your holiday present list. Like any gift, gift cards are easy to dismiss as economically unsound, but they can be the gift of safe-but-slightly-bad decision-making to your pathologically virtuous friends.