Scroogenomics: Why You Shouldn't Buy Presents for the Holidays.
Spencer, Michael A.
Scroogenomics: Why You Shouldn't Buy Presents for the Holidays, Joel Waldfogel. Princeton, New Jersey. Princeton University Press, 2009. ISBN: 978-0-691-14264-7, pp. xii, 174, hardcover.
In Scroogenomics Joel Waldfogel ties together his nearly two decade research program into the wastefulness of gift giving at the holidays. (1) The major focus is on gift giving during Christmas in the U.S., but Waldfogel points-out that wasteful gift giving is not confined to the U.S. Scroogenomics is chock-full of interesting evidence (backed by data sources) and humorous anecdotes that illustrate the author's arguments. The book begins with a review of survey data that shows gift recipients (overall) tend to value noncash gifts at less than the price of purchasing the gifts, which paints an initial bleak picture of the holiday gift-giving season as a wasteful exercise in value destruction. This exercise is not a contemporary phenomenon, nor is it likely to vanish in the near future. However, Waldfogel notes that the recent rise in the popularity of "gift cards," which allows a recipient to apply the value of the gift card towards the purchase of an item(s) of his/her choice at participating stores, offers an opportunity to greatly reduce the inefficiencies of gift giving at the holidays. I briefly review the highlights of each chapter below.
The Introduction lays the foundation for the book's main argument that gift giving is an exercise in value destruction. During the Christmas season, the main perpetrator of this destructive behavior is Santa Claus, who Waldfogel humorously calls the "red tornado." (Of course, every giver of a noncash gift is potentially a red tornado.) Waldfogel, on page 5, tries to create an uproar over such wasteful spending with the following analogy: "[i]f you discovered a government program that was hemorrhaging money--say, spending $100 billion of taxpayer money per year to generate a benefit of only $85 billion--you would be outraged." The point here is that gift giving is like a bad investment; both destroy value.
Scroogenomics is written for a bread audience, so Chapter 2 defines the technical terms "consumer surplus" and "opportunity cost," and it shows how these terms are used to illustrate wasteful spending and explain the true cost of our choices. Consumer surplus is the amount by which a buyer's valuation for an item exceeds the price the buyer pays to purchase the item. However, as noted on page 11, "[g]ift giving severs the link between the buying decision and the item's value to its user, calling to mind the adage that the road to hell is paved with good intentions." For example, if I buy a friend a movie titled DVD-1 that costs $20, which presumably is its cost to society, but my friend values the DVD at $10, then my gift-giving action (albeit done with good intentions) destroys 50% in value to society. Let's say my $20 could have been used to purchase a different DVD-2 at the same cost of $20, but DVD-2 would yield my friend $30 worth of satisfaction, then my choice of DVD-1 actually results in a $20 cost to society, which is the true cost (or opportunity cost) of my choice.
In Chapter 3 Waldfogel investigates the size of holiday (i.e., December or Christmas) spending in the U.S. The U.S. National Retail Federation measures "holiday retail sales" as all retail industry sales that occur in November and December, but not all retail sales during these months represent gift purchases. Waldfogel obtains a more conservative measure of holiday spending by taking the differences in retail spending between the adjacent months of (1) December and November and (2) December and January. Given the majority of holiday gift purchases occurs in December, this approach tries to factor out the typical monthly retail sales (like grocery expenses) of households from the overall December sales figures. December minus November spending is estimated at $49 billion, while December minus January spending is estimated at $83 billion. By averaging these differences, Waldfogel arrives at a conservative estimate of $66 billion in U.S. holiday spending for the year 2007.
In Chapter 4 Waldfogel addresses the question of "How much waste occurs at Christmas?" by using a measure called "yield" that is the ratio of a recipient's valuation of a gift to the recipient's estimate of how much the giver paid for the gift; i.e., yield = (value + price). If yield < 1 (or 100%), this implies gift giving destroys value that is not offset by any gains to society, so a "deadweight loss" exists. In a survey of Yale University students, Waldfogel (1993, American Economic Review) elicited values and prices on Christmas gifts the students received in 1992. He found an average yield of 87%, which lead him to conclude that a deadweight loss to Christmas exists. He refined his survey design in 2002 to elicit values and prices on items recipients had received as gifts and on items they purchased for themselves. He found recipients' own purchases generated, on average, 18% more satisfaction per dollar spent than did gifts from others. These results were robust across samples and types of gifts and recipients. Although this suggests a deadweight loss to Christmas exists, which Waldfogel estimates at $12 billion (= $66 billion x 0.18) for the U.S. in 2007, survey results have found that yields are higher the closer the relationship or the more frequent the contact between giver and recipient--that is, gift giving is more efficient the better the giver knows the recipient's preferences.
Giving cash gifts would seem to be a general panacea for eliminating the deadweight loss of holiday spending because recipients know their preferences better than would-be givers; however, Chapter 5 reveals that giving cash is plagued by a stigma of social unacceptability in many cases. Cash gifts are typically deemed inappropriate when given from younger to older people (e.g., from child to parent), to significant other, and to friends and siblings. However, it is usually acceptable for parents and grandparents to give cash to children.
Despite the stereotype of Americans as excessive spenders, Chapter 6 reveals that Americans are not the world leader in holiday gift giving and value destruction. The U.S. ranks at or below the median ranking in terms of a "December sales spike" (i.e., the percent by which December retail sales exceed those in adjacent months), per-capita Christmas spending, and Christmas spending per million dollars of GDP. Not surprisingly, countries that are mostly non-Christian appear at the bottom of the rankings. In terms of value destruction, Americans are not alone. Survey results from Europe and Brazil reveal noncash gifts destroy value, and in a 2006 study of the deadweight loss of Diwali, Indian researchers reported an average gift yield of 85%. As in the U.S., the international studies reveal that the level of satisfaction generated from noncash gifts increases with the closeness of the relationship between giver and recipient. Overall, Waldfogel estimates the worldwide deadweight loss of Christmas to have been over $25 billion in 2006.
Chapter 7 shows that contemporary U.S. holiday spending is not excessive relative to spending patterns over the past 100 years, but Chapter 8 reveals that the way Americans finance holiday purchases has significantly changed in the last 25 years. Waldfogel uses U.S. monthly retail sales data, which dates back to 1935, to calculate the percent excess of December sales over the previous November and following January sales. The pattern consistently indicates an increase in December retail sales. Prior to 1935, and beginning in 1919, the U.S. reported monthly indices of retail sales which also indicate a spike in December sales. Although holiday spending has been relatively high for generations in the U.S., Americans have largely moved from financing holiday spending without borrowing to financing holiday spending with credit cards. Credit cards are not bad if they are used as a "charge card," whereby the balance is paid off within a month without incurring any interest charges. This allows the consumer to expand his/her current purchasing opportunities interest free. The data since 1980, however, suggests that much of the U.S. financing of Christmas spending with credit cards is not paid off within one month. At an 18% (or higher) current interest rate on many credit cards, this is putting a strain on many household budgets across the U.S.
Chapter 9's humorous title "Is Christmas Like Spam, Underwear, or Caviar?" can be interpreted as "Is Christmas an Inferior Good, a Necessity, or a Luxury?" The answer: Christmas is a necessity like underwear. This categorization is based on various pieces of information regarding U.S. Christmas spending. For example, although Christmas spending has increased as the U.S. has gotten substantially richer since the 1930s, Christmas spending has not kept pace with income growth. Given Christmas is a necessity, in conjunction with social constraints on giving cash, Christmas gift-givers appear obligated to purchase noncash gifts that create a deadweight loss to society.
Chapter 10 discusses two views regarding the commercialization of Christmas. One view condemns what it sees as the excessive commercialization of Christmas, which puts undue financial pressure on individuals to purchase gifts, detracts from the true meaning of Christmas, and destroys the planet through excessive consumption. As one supporter of this view comments: "[o]ften, we give useless gifts at Christmas, because it's expected of us, and we feel guilty if we don't" (p. 101). The opposing view does not condemn the commercialization of Christmas, but rather its supporters are annoyed "... that religion--Jesus in particular--is absent from the mall" (p. 103). Waldibgel's overall criticism is directed at the excessively wasteful spending generated at Christmas, not so much at either of the two views on the commercialization of Christmas.
In Chapter 11 Waldfogel addresses two counter-arguments to his central thesis that gift giving at Christmas is inefficient. One argument suggests that gift giving at Christmas must be efficient because it is done voluntarily. Waldfogel's response: the choice not to give Christmas gifts is not really free because individuals are constrained by a "social norm" to give such gifts. One might also recall that Christmas gift giving is a necessity like underwear. The second argument suggests gift giving at Christmas must be efficient because the practice has existed for at least a hundred years. Waldfogel's response: gift giving at Christmas has stood the test of time, despite its wastefulness, because such giving faces the classic "principal-agent problem," where the agent (a giver like grandma) faces misaligned incentives to not give bad gifts. The principal (a recipient like a grandchild) is often too polite to tell grandma what he really thinks about her Christmas gift, so the inefficiencies of gift giving endure for generations.
In Chapter 12 Waldfogel begins to suggest that the advent of the "gift card," first introduced by Mobil Oil in 1995, offers hope for making giving more efficient. He presents evidence that the stigma of giving gift cards is disappearing, and now gift cards reside near the top of many recipients' wish lists. The data, however, reveals that roughly one-tenth, on average, of the gift card value is never redeemed. Although this suggests that gift cards are not much more effective than giving noncash gifts in transferring satisfaction from giver to recipient, gift cards (unlike giving noncash gifts) do not destroy value because unredeemed gift card values typically represent a transfer from purchaser to seller.
In Chapter 13 Waldfogel argues that cash contributions to charity are a luxury. This is reflected in data that shows the share of expenditures to charity increases with household income. The fact that people voluntarily give to charities, Waldfogel further argues, implies that the "law of diminishing marginal utility" applies to money. This suggests that a redistribution of money from the rich to the poor benefits the poor more than it costs the rich. Given these arguments, Waldfogel advocates that net social satisfaction can be increased if gift givers make charitable contributions through their recipients, who presumably would like to donate to charities if they had more money.
Scroogenomics' last chapter is titled "Solutions--Making Gift Giving a Force for Good." Here, Waldfogel offers several potential remedies to improve the efficiency or effectiveness of gift giving. Based on Chapter 13's arguments, Waldfogel suggests that net social satisfaction can be increased by requiring unredeemed balances on gift cards after a specified expiration date to be donated to a predetermined charity, or by giving "charity gift cards," which allow recipients to donate the money to charities of their choice. The use of "gift registries," which is a popular way to give newlyweds gifts that they really want, involves the would-be recipient(s) creating a wish list of items wanted at a particular retail store whereby givers purchase the listed items on behalf of the recipient. Lastly, allowing balances on gift cards below a certain amount to be redeemable for cash can improve the effectiveness of gift giving.
Overall, the main focus of Scroogenomics is on the wastefulness of gift giving during Christmas; however, many of its arguments can be applied to gift giving in general, such as for weddings, birthdays, or any other special occasion. The deadweight loss of gift giving may initially seem endless, but Waldfogel uses concrete facts and humor to give us interesting insights into the problem and offer us potential remedies to combat it.
Michael A. Spencer
Associate Professor of Economies
Minnesota State University, Mankato
Mankato, Minnesota
Note
(1) For those readers unfamiliar with the nineteenth century novel A Christmas Carol by English author Charles Dickens, Scroogenomics is a humorous combination of the novel's main character Ebenezer Scrooge and the term economics. Scrooge is known as a nasty, penny-pinching, old man who never gives gifts, but in the end he turns into a friendly philanthropist.
