Scrooge Economist Says Gift-Giving Is Stupid

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Published December 23, 2011

| FOXBusiness

Buying a gift may spread holiday cheer, but it also spreads something else: Global wealth destruction.

Joel Waldfogel calls holiday gift-giving "the subversion of the usual way that economic activity works."

You can tell Waldfogel isn't from the North Pole. But believe it or not, he lives close enough. He is the Frederick R. Kappel Professor of Applied Economics at the University of Minnesota.

He is also a research associate at the National Bureau of Economic Research, the official arbiter of when recessions begin and end. And he is the author of "Scroogenomics: Why You Shouldn't Buy Presents for the Holidays," published in 2009.

Waldfogel has been debunking the yuletide myth of economic prosperity for a long time. In 1993, he wrote a paper called "The Deadweight Loss Of Christmas," spelling out the widespread economic damage caused by the commercialized holiday.

Earlier this week, Waldfogel was at it again in a webcast for members of the media that was sponsored by the National Science Foundation. Here is just some of his math:

Americans spend $70 billion on holiday gift-giving, according to Waldfogel's estimates. Around the world, that figure doubles to about $140 billion.

Waldfogel has spent years interviewing people about gifts they have received, and in the process found that gift recipients generally view the value of most gifts they receive as worth 20% less than what the gift giver actually paid.

It stands to reason that if you spend $10 on a chunk of fruitcake, the person you give it to is going to value it at $8--if that. This means at least $2 is completely wasted in the traditional fruitcake handoff, unless, of course, it is regifted. But then a regifted $10 fruitcake may only be perceived as being worth $6.

The point is: You may be an efficient shopper when you buy things for yourself--say, a sweater you might actually like--but you are lousy at picking out surprises for others, especially grandchildren, nieces, nephews, cousins and others you don't often see.

Merchandisers are well aware of this all-too-common human disability. This explains Chia Pets, Snuggies, Mariah Carey CDs, and an entire industry that is always inventing bizarre kitchen gadgets for people who don't even know how to cook.

Here is where Waldfogel's math really hurts: 20% of $70 billion is $14 billion and 20% of $140 billion is twice that. World-wide, this amounts to about $28 billion a year worth of value lost on unappreciated gifts--or what Waldfogel dubs "vaporized satisfaction."

This is almost as unproductive as taking all those billions and spending it on a war--except that some people will get a higher amount of satisfaction from a war, than say, Big Mouth Billy, the singing bass.

"If Christmas were a government program, the Citizens against Government Waste would classify the entire...annual expenditure as 'waste,'" Waldfogel wrote in his book. "The bucket Santa uses...isn't just leaking, it's gushing."

Waldfogel said there is a way around this problem: Give the gift of cash. What better way to stimulate the economy than everybody passing around their dollars? Except that it is considered a bit crass, even in an annual orgy of shameless consumerism. So Waldfogel noted that a more-acceptable idea is to give gift cards.

Gift cards have the potential to curb the billions in annual economic losses from bad gift choices, Waldfogel said, because they allow gift recipients to efficiently find value and satisfaction. But there are some economic inefficiencies to gift cards too. Among them: About 10% of gift-card value is never claimed, Waldfogel wrote, and retailers can't book the unclaimed cards as revenues for years. Additionally, some retailers put restrictions on how gift cards can be redeemed. And who said Grandma wants to shop at Victoria's Secret?

For Waldfogel, the worst of it all is that the holiday season has become such a necessity that consumers will rack up their credit cards and pay interest on unpaid balances for months--often just to buy junk from China that nobody wants or needs. And why?

Waldfogel chalked it up to the Homer Simpson theory of why people do things: According to Homer, "It's because they're stupid, that's why."

That is as good an explanation as you will hear from any Ph.D.-touting economist. It certainly describes the way I feel squeezing through crowded malls and standing in checkout lines with my stack of credit cards.

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http://www.foxbusiness.com/economy/2011/12/23/scrooge-economist-says-gift-giving-is-stupid/