Is Gift-Giving Bad For The Economy?

The gift-giving season is upon us, but before you go buy that festive holiday sweater for your great aunt, one economist asks you to think twice before you fork over the cash. Host Jennifer Ludden speaks with economist Joel Waldfogel who argues that holiday gift giving is an inefficient way of getting the right stuff to the right people.

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JENNIFER LUDDEN, host:

I'm Jennifer Ludden, and this is TELL ME MORE from NPR News. Michel Martin is away.

Coming up, our own day-after Thanksgiving tradition here at NPR. It's part of the StoryCorps project. We'll take some time for the National Day of Listening.

But first it's here, ready or not, the start of the holiday shopping season. The decorations are up. There are giant sale ads in the paper and that music in the mall.

But one man suggests you think twice before heading out to buy that cute thingamabob for your cousin's girlfriend. Joel Waldfogel is the chair of business and public policy at the University of Pennsylvania's Wharton School, and his new book is about the economics of gift giving. It's called �Scroogenomics: Why You Shouldn't Buy Presents for the Holidays.� Waldfogel joins us from member station KUOW in Seattle. Hi, there.

Mr. JOEL WALDFOGEL (Author, �Scroogenomics: Why You Shouldn't Buy Presents for the Holidays�): Hello.

LUDDEN: So on a personal level, I'm all for saving money. But for society, can you explain what is it about holiday spending that doesn't make economic sense.

Mr. WALDFOGEL: Well, sure. And by the way, I'm not against spending, just sloppy spending. So normally when I go out and shop for myself, I'll only buy something that costs $50 if it's worth at least $50 to me. So with normal spending, outside of the gift-giving context, spending provides some rough measure of satisfaction.

When I'm buying gifts, it works very differently. Now, I'm at a huge disadvantage when I set out to spend $50 on you, because I don't know what you like, and I don't what you already have. So I could spend $50 and buy something that's worth nothing to you. So the problem with gift spending is that it just tends not to produce nearly as much satisfaction per dollar spent as regular spending.

LUDDEN: You take a look back in history at how Christmas gift giving has changed over the generations. I mean, did we use to be better at this?

Mr. WALDFOGEL: I mean, I certainly went into this project thinking that our generation, you know, had invented sex and holiday spending. But it turned out that really neither is true. If you look back at the data as far back as the retail sales data go, about 1935, even a little earlier, you see that the same pattern, the big jump in retail sales in December was there. And, in fact, the size of that jump - which you can kind of quantify as holiday spending - was bigger relative to the economy in 1935 than it is today.

LUDDEN: In the height of the Depression.

Mr. WALDFOGEL: Well, that's right. But even taking out the Depression, I mean, just the last three generations, the economy has grown in the U.S. by about a factor of five. Holiday spending, measured the way I describe, has grown by about a factor of three. So we've gotten a lot richer, but we haven't allocated proportionately more resources to gift giving. We've allocated proportionately less which, by the way, suggests that holiday gift giving is a necessity, not a luxury.

LUDDEN: So what do you recommend? What is the perfect way to do your holiday gift giving?

Mr. WALDFOGEL: Well, although on average gifts generate 20 percent less satisfaction than items we buy for ourselves, it's also true, though, that different givers create different amounts of missing satisfaction. Folks who know us well or in frequent contact with us, they do pretty well, whereas folks who don't know us as well, their gifts really miss the mark.

So my first suggestion would be for people you know well and for whom you have some good reason to choose a gift, go ahead and keep doing what you're doing, and it's especially important to keep giving gifts to kids who would be devastated if they didn't get them. But for other people, people for whom we are obliged to give gifts but whose preferences we really don't know, for them we ought to do something different to avoid destroying value.

LUDDEN: Such as?

Mr. WALDFOGEL: Well, in principle, an answer would be to give cash, but of course that's a crazy answer because people think�

LUDDEN: Oh, so rude.

Mr. WALDFOGEL: Exactly. And it's awkward. It's really a socially impermissible gift, but something that's a lot like cash in the sense that it allows the recipient to choose which item he or she will actually consume is a gift card.

LUDDEN: Right.

Mr. WALDFOGEL: So gift cards have become enormously popular in the last 15 years, and they really do allow recipients to do choose and it also seems to avoid the stigma of giving cash.

LUDDEN: So we are our own best gift choosers?

Mr. WALDFOGEL: I think that's right. I mean, after all it's a really basic tenet of economics that, you know, that the consumer is best situated to choose for him or herself. That's frankly the basis of many economists disdain for government. Because after all, when government chooses for us, they get us the wrong health care program, the wrong color shirt, the bridge to nowhere. And so this notion that we're best situated to choose for ourselves is a pretty basic notion and fairly a common sense one.

LUDDEN: Although, there is this argument in this economic downturn that if people had more money in their pockets, they could go out and spend and that would stimulate the economy. But you suggest that's not necessarily the best solution.

Mr. WALDFOGEL: Well, you know, spending is always good for sellers, because sellers always get the price in excess to their costs and therefore some profit. But there are buyers and sellers in every transaction. And again, the problem with spending on holiday gifts is that the buyers don't necessarily get something more valuable than the price. And they certainly don't get something, on average, more valuable than what they could have purchased with the same amount of money.

LUDDEN: But if we have all that unwanted clothing and knickknacks and whatever sitting in our closet and maybe we pass it on to charity. I don't know. It's been rung up at the cash register. It shows up in the, you know, little reports that come out and show how the economy is booming. And then we have to go out and buy something that we really like, so then in it makes it even more of an economic stimulus.

Mr. WALDFOGEL: That's true. I mean, after all, we all want to do something meaningful with our lives. If we have some big chunk of people in the economy making stuff that get stuck in closets and never used, that really sounds like a waste of resources to me. That's really kind of unfortunate. It's a complete waste.

LUDDEN: So you're for efficient gift giving.

Mr. WALDFOGEL: That's right, I am. And now, I should get on, finish the little bit about the gift cards. You know, they are nice in the sense that they allow the recipient to choose what item he or she will consume. But I do have a misgiving about gift cards. About 10 percent of the balances on gift cards never gets redeemed. And, you know, so it ends up going over to the retailer. Now, that's probably not what the givers had in mind when they bought the card. So I do have to this wide-eyed suggestion. Wouldn't be nice if retailers issued gift cards perhaps alongside gifting gift cards, but the new gift cards would default to charity after 24 months.

LUDDEN: What a great idea. How's this whole theory of thoughtful gift giving, I guess, how is it going down with your whole family.

Mr. WALDFOGEL: Well, since I know my family pretty well, I try to pay attention to my wife and my kids during the year. This doesn't really affect us. I think a big change in what I experienced, though, is that many others, including my family, are reluctant to buy me gifts.

(Soundbite of laughter)

LUDDEN: Joel Waldfogel is the author of �Scroogenomics: Why You Shouldn't Buy Presents for the Holidays.� And he joined us from member station KUOW in Seattle. Thanks so much.

Mr. WALDFOGEL: thank you.

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