With Christmas less than 24 hours away, we thought it would be a good time to repost this interview with a grumpy economist who wishes everyone would spend less. Wharton professor Joel Waldfogel’s book is called, Scroogenomics: Why You Shouldnt Buy Presents for the Holidays.
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| Did Scrooge have the right idea? (Getty Images) |
Mr. Waldfogel estimates that Americans drop close to $70 billion a year on Christmas shopping for gifts people often dont want
baggy underwear, ugly sweaters, etc. Society, he says in the book, would be better off if people didnt spend it.
Throughout the year, we shop meticulously for ourselves, looking at scores of items before choosing those that warrant spending our own money. The process at Christmas, by contrast, has givers shooting in the dark about what you like
to make matters worse, we do much of this spending with credit, going into hock using money we dont yet have to buy things that recipients dont really want.
He says the deadweight loss to society from all of this frivolous spending — an orgy of wealth destruction as he calls it — is about $25 billion. Imagine if that money was given to charity instead? Or how many banks it could have saved! (If it were used to pay down the governments debt, we might get the whole thing paid off in just a few centuries!)
Mr. Waldfogel has been on this subject for some time. Below are excerpts from a recent interview with the professor:
It sounds like youve gotten stiffed on a lot of holidays. Whats the worst present you ever got from anybody?
Waldfogel: I really havent gotten stiffed a lot. Its more that I first encountered holiday gift giving in a major way after Id been trained as an economist. Instead of seeing it in the warm filtered way that many people see it through childhood, I just saw it as an orgy of wealth destruction. All of these gifts were being given and the items werent being chosen by the ultimate consumers. If microeconomic theory teaches us anything, it is that people do best when they make choices for themselves. Here is all of this consumption where the choices are being made by someone else. Wow. That seems like a real opportunity to allocate resources badly.
You didnt get any gifts as a kid?
Waldfogel: No, I got gifts. But holiday gift giving was not a big deal in my family.
How do your wife and kids feel about your attitude?
Waldfogel: Initially my wife was put off by it. But I try to be a pretty careful gift giver. Part of the point here is that when you know what people want — the immediate family — those are people where you can do pretty well giving gifts. You know what they like. You know what they have. You care. The situations that are really recipes for disaster are situations where youve got an obligation to give, but you dont know what to give
the nieces, the nephews, the grandchildren, the people you dont see very often but you have to give them something because there is a custom or obligation. Those are the situations where you run the risk of turning wealth into dross.
Have you ever been in a secret Santa drawing at the office?
Waldfogel: I havent. They sound like a method for destroying wealth, but at least each person only has to buy one thing. Suppose there are five people in the office. Everyone could need to buy four gifts and do badly in all four. Instead, you buy one and just do badly on the one. Its better than buying four that are equally ill-suited.
What does your shopping list look like this year?
Waldfogel: I take a lot of pictures. I like to give people photographs of themselves or their loved ones. It doesnt cost much but its something they like. Well, maybe theyre just being polite, more polite than I would be.
How big is the loss? Put it in numbers, this dead weight loss to society you describe.
Waldfogel: My favorite way to do it is to compare what would you be willing pay for stuff that you receive as a gift per dollar spent versus what would you be willing to pay for stuff you bought for yourself per dollar spent. The surveys converge on the idea that it is about 20% less. U.S. holiday spending per year is conservatively about $65 billion. So about 20% of that, something like $13 billion a year, is whats destroyed through gift giving in the U.S. But it turns out it is by no means limited to the U.S.
You see the same pattern of spending in almost every major western economy, with a big bump in spending in December. You dont see it in China and you dont see it in Israel. But you see it in every country that is predominantly Christian, and some that arent. Japan also has it in a big way. If you add up that spending in the other major OECD economies you get, instead of $65 billion alone for the U.S., $130 billion (in holiday spending). Theres every reason to believe the dead weight loss is as big elsewhere. That would get you to $25 billion a year around the world in value destroyed through gift giving.
Thats a lot of money. You could recapitalize a bank with money like that.
Waldfogel: No kidding! I think of this as Waldfogels half trillion dollar gift. This is a perpetual stream of $25 billion a year. I dont know what the current discount rate is, but thats a whole chunk of change if we could stop doing it somehow.
You could get rid of our budget deficit in just a couple of centuries with that kind of money.
Waldfogel: Yeah, we ought to securitize this thing and see what happens. Dont quote me on that.
You mention China. On Chinese New Year the Chinese hand out cash in little red packets to kids. Theyre called lai see packets. Should we adopt that tradition and just ditch the Christmas trees altogether?
Waldfogel: Let me tell you what the data say. A lot of surveys in the U.S. ask people about themselves. There are two groups in U.S. survey samples that give a lot of cash instead of gifts, Jews and Asians. These are Asian Americans. I think it is a reflection of the common practice in China to give cash.
Cash is in general a stigmatized gift. Psychologists have studied this. It would be very awkward for me to give cash to a social peer. It is OK to give cash to a child or a grandchild or a niece or nephew. So we do see a lot of cash giving in those groups. And what weve seen in the past fifteen years is astronomical growth of gift cards, which are cash without the stigma. You the recipient get to choose what you want. They appear on the lists of most desired gifts. I dont have to tell people that they should give cash instead. Just look at the data. Probably on the order of a third of holiday gift giving is now in the form of gift cards. It does look like a response to a concern about destroying value.
It is kind of a cruel irony that the Chinese give each other cash, which is an efficient way of allocating wealth, and then they make all of these toys and appliances that Americans give each other which creates a dead weight loss.
Waldfogel: It is. I wish Id thought of that.
Youve got a bunch of proposals for avoiding all of this wasteful spending. What are your two best ideas?
Waldfogel: My two best ideas are both to do with gift cards. One problem with them is that something like 10% doesnt get redeemed. From a purely economic standpoint, thats not value destruction, its just a transfer because after 36 months or 48 months depending on the company, the escrowed gift card money that doesnt get redeemed gets recognized as revenue and so it goes to the shareholders of Target or Gap. I dont think buyers of the gift cards who meant to transfer some satisfaction to the recipients of the card would be happy to know that. Theyre only transferring 90% of what theyre giving to the recipients on average.
My proposal is how about encouraging companies to issue gift cards which after 18 months default to charity. The unspent balance goes straight to charity. It would have to be a default, not one of those things where you have to go to a Web site and do it, because we know people are pretty lazy and stupid and wouldnt do it. That way you would know that either the recipient or some worthy cause is getting his generosity for the holiday.
Is anyone biting on your idea so far?
Waldfogel: Not yet.
What about idea number two?
Waldfogel: Its another idea related to charity. Lets say youve got to get a gift for your brother-in-law and you don’t know what he likes. How about giving him one of these Charity Navigator Good Cards, where the recipient has the right to choose among a long list of charities and allocate the gift to the charity of his choice. If you look at spending data and what people spend more on as they get richer, one thing they spend more on is charity. It is like an aspirational activity. If I were a lot richer, what would I do? I would give to charity. If I give you the ability to give to charity, there is evidence in the data that is the kind of thing you would want to do if you were richer.
One the arguments against your argument is that if people followed your advice and did a lot less spending on Christmas, it would hurt the economy. Whats your retort?
Waldfogel: It is because I need to stick a lot of stuff under the tree I buy all of these underwear I was going to buy you next year anyway. It is not really Christmas that is causing that spending. Christmas is causing it to occur through the gift giving mechanism and you get the wrong size. Thats retort one.
Im not against spending, Im just against spending done ignorantly by others.
Retort two is related to retort one. Although George Bush said go out and spend and other folks have exhorted us to spend at times, spending is not really a measure of success or satisfaction. Unwanted and wanted spending are equally good for sellers. But spending is supposed to be good for buyers. When we say it is good for the economy, we cant just look at the amount of spending, we want to think about the amount of satisfaction that were getting from the spending when we think about the economy. Remember, there are hurricanes and we have to spend too, but thats not good news.
Final question. Who does the holiday shopping in your household.
Waldfogel: As in most households, my wife does more than I do, but I do some.
Thats probably a good choice on your familys part.
Waldfogel: I like to give. Im not against giving. Im just against bad giving.
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