Humbug or wise man?

Joel Waldfogel, Wharton professorPhoto credit: Candace diCarlo

That cat-themed coffee cup for your officemate. That garrish sweater for Great Uncle So-and-So. The waffle iron for the in-laws. They all seemed like a good idea in the muddled process of picking something—anything—
during the holiday gift rush. But on Christmas morning, those choices may be regrettable.

Wharton Professor Joel Waldfogel calls this wrap-whatever-you-can-find practice irresponsible gift giving, and he’s got a serious problem with it. Since the early 1990s, he’s surveyed college students about gifts they have both given and received, as well as items students have bought for themselves, identifying a phenomenon that he has labeled the “deadweight loss of Christmas.”

Deadweight loss, which is also part of the name of Waldfogel’s widely noted 1993 paper on the topic, refers to a loss to one party that is not offset by a gain to another. In the gift-giving context, a person who spends $100 on himself (or herself) will presumably spend that money on something that actually nets them $100 worth of satisfaction. But when you spend that amount on a gift for someone you know only casually, you may end up getting a cat cup for a dog-lover, a sweater in the wrong size, or a waffle iron for people who don’t cook. “And so the same expenditure—$100 by you versus by me, produces, in our little hypothetical example, at least $50 less in satisfaction,” says Waldfogel, the Joel S. Ehrenkranz Family Professor and professor of business and public policy. It’s a troubling equation, he says, that adds up to a good amount of dissatisfaction and absolutely zero gain.

Waldfogel isn’t opposed to gift giving as a rule. He just objects to “sloppy spending that destroys value.” In his new book, “Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays,” he advocates a rethinking of gift giving that could make the giver and the person on the other end of that waffle iron much happier.

In this recession, retailers are eager to get their hands on the $65 billion (by conservative estimates) consumers are expected to spend this holiday season. “The stuff I’d like to just plain eliminate is the stuff that nobody wants. Even there, I’d be delighted to see it turn into charitable contributions,” he says, explaining that charities will spend the money in more meaningful ways.

The Current sat down with Waldfogel before the start of the holiday shopping season to talk about his new book, ways to make gift recipients happier and whether this recession year is the year that his message sticks for good.

Q. How did you conduct the research for your new book, ‘Scroogenomics’?
A.
Over the years, I’ve done a lot of surveys of college students, starting at Yale but more recently at Wharton, and I’ve done surveys at other schools, too. The standard way it’s come to work is this—I ask people about things they’ve received as gifts and I ask them to answer each of these things: ‘What do you think the giver paid? What’s it worth to you?’ And then I ask them about stuff they’ve purchased for themselves: ‘What did you pay? What’s it worth to you?’ And so I can make these comparisons of per dollar spent: ‘How do I like the stuff that others buy for me, versus per dollar spent, how do I like the stuff that I buy for myself?’ And I can make the comparison within individuals. I can even make it for the same item. ‘How much do you like the CDs you buy for yourself, per dollar spent, versus the CDs others buy for you?’ I can make these comparisons that hold a lot of different things constant.
The bottom line answer is 20 percent. That is, per dollar spent, [people] like the stuff that others buy 20 percent less than the stuff that they buy for themselves. That’s my measure of how inefficient the gift giving process is. [The percentage] is much worse for givers who know less about me ... the aunts and uncles, the grandparents, the people who don’t see me every often. What’s very consistent is the people who don’t see the recipient very often are precisely the people whose gifts miss the mark. In-laws are a wonderful example. They do quite poorly.

Q. What’s the solution to all of this? Is it to buy fewer gifts for a smaller amount of people?
A.
First of all, the people you know well, go ahead and keep giving them gifts. Especially kids. They’d be devastated not to receive gifts, and furthermore, little kids don’t have super well-defined preferences so you can’t disappoint them that much. They’re delighted with the doll or the truck—so keep giving them gifts. Ditto for significant others—spouses, other intimates. You know them well and you’re in a good position to choose things they would actually like. But when you get to those situations where you have an obligation to give a gift and you really don’t know what the person wants, then you really ought to worry about how much value you’re destroying with your choice and think about some alternatives.

Q. What are some alternatives?
A.
One is gift certificates or gift cards. Maybe a third of all holiday spending goes to gift cards and they are really popular with gift recipients. It allows the recipient to choose which thing he or she is ultimately going to consume. It’s like cash in the sense that it lets them choose, but it’s unlike cash in that it’s not icky. We have certain exceptions to the ‘cash-is-icky’ rule. Grandparents, or aunts and uncles, are allowed to give cash. But in general, cash is an icky gift.
A problem with gift cards, however, is ... on average something like 10 percent of the gift card is never redeemed. That’s not inefficient, but it means that 90 percent of what I give you, you get, and 10 percent of it goes to somebody else—the shareholders of Target Corporation. It’s not inefficient, but it’s not what the giver had in mind.
The second solution, in my mind, is charity gift cards. If you look at expenditure data, you see that one luxury that richer households [spend money on] is charitable giving. Economists define luxury as goods that occupy a bigger share of the budget for people who have higher income. If you think of luxuries as things that people would like to have if they had more money, giving to charity is what people would like to have. Oftentimes, we think of gift giving as a way to give the recipient things they wouldn’t normally be able to afford, so how about giving them the opportunity to give to charity? Obviously, it’s not a good idea for an 11-year-old boy. But for those grownups that you’re obliged to give something ... giving to charity could discharge your obligation without destroying a lot of value. I really like that idea.
Getting back to gift cards, I would love to see—and somebody has told me that my prospects for doing this are about as good as the prospects for Mideast peace—but I would love to see issuers of gift cards issue a new kind of gift card, which, after a year or two years, defaulted the unspent balance straight to charity.

Q. That way, it’s not going to waste.
A.
It’s not literally waste if the shareholders get it. It’s not waste because it’s not value destroyed, but I don’t think it’s what the givers had in mind and frankly, I don’t think the retailers meant for that to happen. The giving of gift cards has grown just astronomically in the last 10 or 15 years.
The way it works is, I buy a gift card, the retailer doesn’t get to recognize that revenue; they have to hold it in escrow because they stand ready to redeem the card. What happened was a lot of cards didn’t get redeemed and retailers had stacks of cash and asked, ‘What do we do with it? Well, I guess we have to recognize the revenue.’
In some states, the unspent balances become unclaimed property, and they get absorbed by the state. Again, not probably what the giver had in mind, but not the worst charity in the world. In California, once the balance dips below $10, the holder of the card can ask for it as cash ... but I’d rather see it go straight to charity. That way…I can go buy myself something and say, ‘You know what, keep the change,’ and then give it to charity.

Q. For some recipients, even if the gift is wrong, they still appreciate the thought or gesture. How do you factor that in?
A.
There’s this sentimental value, both on the giver’s side and on the recipient’s side. Let me outline the case against my whole argument and then say why that’s wrong. Suppose you buy me something, for which, as an object, you pay $100. But I would only be willing to pay $50 for it. Between the extra sentimental value, plus the value you attach to giving me this, it gets me over $100, so it’s therefore not value-destroying.
My response to that is, ‘Well, wouldn’t you also have enjoyed giving me something that I actually wanted?’ If so, relative to giving me something I actually wanted, you have destroyed value. Wouldn’t I have gotten the same sentimental value out of something I actually wanted?
Let me give some plausible exceptions to that—and this isn’t so much sentimental value as it is other motivations for giving. Suppose I’m an irresponsible child. Now, the economist would say to give me cash so I can buy exactly what I want, and I want 10 pounds of candy corn. As a parent, I’m not going to give the child the opportunity to buy 10 pounds of candy corn. I’m going to give the child a hat. It’s cold outside, or maybe some gloves, and maybe enough money to buy a pound of candy corn. That’s not sentimental value, but a different motivation. I have a paternalistic motive. Maybe I want to shape the child’s behavior and induce him to do something healthy. I think that’s a reasonable motivation when giving to kids. ... I have no quarrel with that as long as the giver understands what he or she is trying to do.

Q. In the years that you’ve looked at this, has value destruction gotten worse?
A.
Well, the growth of gift cards is a really encouraging sign. Of course, you could view that differently. It’s sort of tacky and thoughtless, but recipients love them. They’re a change that’s happened since I’ve started doing this.
The other thing that’s changed related to that is, if you look at the monthly retail sales statistics, they show this giant spike in December in the U.S. [and] in almost every developed country. The dropoff between December and January arises because we did a bunch of consumption in December and we don’t have to give gifts in January. But people get gift cards and tend to redeem them in January—not all of them, but a lot of them. One thing you see in the data is that the drop off between December and January has shrunk to unprecedented levels because gift cards shift a lot of spending into January.

Q. This is a tough year for a lot of people. Do you think gifts might be smaller and more thoughtful?
A.
Well, let me put it this way: I sort of hope so. I’m not wishing ill on retailers, but given that people may have less to spend than they have in some past years, one consolation is that people weren’t getting all that much satisfaction out of the spending, so less spending will not mean a lot less satisfaction. Withdrawing some of it won’t be as bad as withdrawing normal spending.
Another thing to mention is that it’s not so clear to me that gift-giving holidays cause spending. They just cause it to occur at that time and through that mechanism. For example, if a family needs to get the kids a bunch of underwear and wraps them up as holiday gifts, it’s not the holiday that caused the expenditure of underwear, it just causes its timing, and it also may cause it to be the wrong size and the wrong color. Without the holiday, they still need as many pairs of socks and underwear. I’m not sure that doing less through the holiday mechanism reduces spending overall, it just changes who makes the decisions.

Q. What do you make of wedding registries? Has that cut down on the amount of bad or inappropriate items that people receive?
A.
When there’s a lot of money at stake, people develop institutions that prevent the destruction of value. For weddings, we have registries, which essentially turn gifts into cash by saying, ‘Here’s what I want. You can buy me the fourth place setting.’ That’s a way to say, ‘You could give me cash, but it allows you to buy an item.’ Weddings, bar mitzvahs—those are all situations where we’ve developed institutions and traditions that allow cash giving, because there’s a lot at stake here. Who needs 50 fountain pens?

Q. Has gift giving around Christmas also caused an increase in gift giving around other cultural celebrations? I’m thinking specifically about Hanukkah.
A.
Interestingly, I mention we have a holiday spending spike almost in every country in December. Two places that don’t have it are China and Israel. The Israelis do not celebrate Hanukkah as a gift-giving holiday. American Jews do. In the survey, I have gotten clear evidence of this among American Jews. Hanukkah in the U.S. is celebrated much the way Christmas is celebrated. Somebody did a study like my original study in India for Diwali and found very similar results. It strikes me that it’s a fairly universal phenomenon that gift giving can bring about consumption of products that aren’t well-matched with the recipient’s preferences.

Q. Can I ask what you and your family do around the holidays and what, if anything, you celebrate?
A.
We give gifts. I will admit, my work on this topic has made others hesitate to give me gifts, but I actually am a pretty avid gift giver, at least for family members. But I think over the years, it’s reduced the number of gifts I get. Having said that, there are some kinds of gift giving that can be not only as good as cash, but even better. One of the kinds is permission, particularly within the family. My wife knows what I want. I know what she wants. The issue is, is this a sensible use of our resources? I still give gifts, but they mostly come in the form of permission—‘Yes, go ahead and buy that digital camera, go ahead and buy that fancy lens.’ Those are wonderful gifts. Knowing that I’m doing something with the blessing of my family turns what would otherwise be a guilty excursion into a sanctioned one.

Q. Do you think this is the year that your message sticks?
A.
In some ways, here’s the silver lining in the recession cloud. We can’t spend so much, but since a lot of that spending was producing little satisfaction, that’s not such a bad thing. Again, with apologies to retailers, I’d be happy to see people spend as much, but I just want people to get as much satisfaction as possible, if you’re going to spend $65 billion on satisfaction. That $65 billion is a very conservative number. The National Retail Federation claims that holiday spending is almost half a trillion. ... either way, we’re talking big dollars.

Q. But retailers are probably happy to have people keep buying gifts for every person under the sun.
A.
On the broader question—is it good for the economy? ... I’m agnostic about the level of spending. Whatever the level of spending is, I’d like there to be lots of satisfaction.
For the people who you know well, I think, you should keep doing what you’re doing. But in these funny situations where we have to get something, wouldn’t it be nice if we could try to transfer some resources to the needy and to good causes, and allow our recipient to engage in the luxury activity of charitable giving? It’s a triple win. It’s a no-brainer.

Q. For kids, it’s still a big deal to unwrap presents on Christmas morning.
A.
For situations where you don’t really know what to do but you really want to give something, give something little. Give something little in conjunction with the gift to charity in someone’s name. Don’t try to say it all with a particular choice.

Originally published on November 12, 2009