Why Economists Hate Gifts : Planet Money And how seventh graders solved the problem.
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Why Economists Hate Gifts

Why Economists Hate Gifts

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JOEL WALDFOGEL: I think some people perceive me as attacking Christmas, which I never meant to - just the sloppy way that we celebrate it.

(SOUNDBITE OF SONG, "CHRISTMAS IN HARLEM")

TEYANA TAYLOR: (Singing) Christmas in Harlem, right after autumn falls. Soaking it all in, then we gon' hit the mall. Even though we ain't balling, feel like we bought it all. The mistletoe's right here. Come give a kiss to Santa Claus...

CAITLIN KENNEY, HOST:

Hello, and welcome to PLANET MONEY. I'm Caitlin Kenney. Today is Friday, December 23. That was economist Joel Waldfogel you heard at the top. On the show today, we bring a bag full of candy into a seventh grade classroom to try to solve a holiday economic puzzle that has been bugging people like Joel Waldfogel for years. But first, of course, we have the PLANET MONEY indicator from our own Jacob Goldstein.

JACOB GOLDSTEIN, BYLINE: Today's PLANET MONEY indicator - 489 billion. The European Central Bank loaned 489 billion euros to European banks this week. This was part of this new three-year lending program. And this was a huge, huge number. It was much bigger than anybody expected. And for the most part, it was taken as good news that this number was so big. That's because Europe is basically falling into another recession right now. Banks there have been pulling back on lending. So getting all this money out there into the banking system - that is making people hopeful that the banks are going to keep lending, which should be good for Europe's economy.

KENNEY: I mean, it makes sense. You lend to the banks. That's got to be a good thing for the economy because then they can go out and lend to people who need it. But that's not the core problem in Europe. I mean, the problem we've been talking about for so long is government debt. You know, people won't lend to countries like Italy right now, and that's what's really driving this crisis. So how is this going to help all the European governments?

GOLDSTEIN: Well, that's a good question. And, you know, people have been saying the ECB should just lend directly to the governments more than it's been doing. But there are a couple reasons to think that lending to the banks will actually help the governments. One is, the banks may take some of this money and just lend it right on to the governments. They're actually borrowing at super, super low interest rates from the ECB, so they could actually make a profit just by taking this loan from the European Central Bank and then buying government bonds. So that's way one.

Way two is even if they don't do that, even if they don't run out and buy tons of government bonds, if they take this money and make regular loans - lend money, say, to businesses that want to hire more people - that actually would also be good for European governments. And that's because making more loans - that's good for economic growth. And in the long run, what European governments really need to get out of trouble is more economic growth.

KENNEY: Right. And that's something we're hearing a lot about lately. You know, all these governments have imposed austerity measures. They cut back on a lot of things. But the fact of the matter is, they're never going to be able to get out of this debt if they can't grow their economies. Like you've said before on this podcast, they basically need to grow their way out of debt.

GOLDSTEIN: That's right.

KENNEY: All right. Thank you so much.

GOLDSTEIN: Thanks.

KENNEY: OK. So on with the show. Christmas and the holiday season, we think about it as a happy, joyful time of year. But there's a certain group of people who don't feel that way about it - economists. Once you learn about economics, it's hard to appreciate the holiday season because you see all these problems. That economist you heard at the top, Joel Waldfogel - he gets particularly upset this time of year. Why? It's because of this problem called deadweight loss. What's deadweight loss? It's this.

SADRE: Hey, my name is Sadre (ph). I actually got - and this is kind of silly, but I got a Power Ranger - like, a big old Power Ranger toy. I was kind of angry because I really hate Power Rangers. And I was like, what is this?

ANGELICA: My name is Angelica (ph), and last year, my mom got me a Barbie (laughter). I didn't want it. And I was like, I'm too old for it.

KENNEY: Think about it this way. Normally, if you buy something for yourself - say, a sweater or a Power Ranger - you're buying it because if the Power Ranger costs $20, you'd rather have the Power Ranger than the $20. It's worth at least that amount of money to you, so you gain in the transaction. But Waldfogel says that's not usually the case with gift-giving because someone else is buying it for you, and they don't necessarily know what you want.

WALDFOGEL: I could spend $50 and buy something that's worth nothing to you.

KENNEY: So say, for example, you bought me a $50 toaster for Christmas. I don't need a toaster. I don't really have room for one in my Christmas. You're saying that's just a drain on the economy, just lost money.

WALDFOGEL: Well, yeah. And particularly, if I buy you a toaster and you don't need it, so you stick it in a closet and that's where it stays forever, something cost real resources. You know, some elves, so to speak, had to make that toaster. But if it generates no use and no satisfaction for anyone, then it's just pure waste.

KENNEY: This may seem like, who cares? This only happens once a year. What's the big deal if I didn't want a toaster and I got one? But Waldfogel has done a bunch of research on this. He wrote a book, "Scroogenomics: Why You Shouldn't Buy Presents For The Holidays." And he estimates that U.S. holiday gift-giving destroys about 13 billion dollars' worth of value. That's 13 billion dollars' worth of toasters hiding in the back of your closet or ties that don't match anything you own or books you're not going to read.

Last year, David Kestenbaum and I were talking about this problem of deadweight loss, and he had an idea. He wanted to see if we could make Christmas more joyful by making it more efficient. David, being a scientist, he wanted to conduct an experiment. So in search of an answer, we went across the river to Brooklyn to the seventh grade class at the Lyons Community School. Here's the podcast that originally aired last year.

(SOUNDBITE OF ARCHIVED BROADCAST)

KENNEY: We got there pretty early in the morning, just around 8 a.m. And we're in this classroom that looks a lot like you expect. There's something on every inch of the wall. There's a map, whiteboard, results of the most recent science experiments they've done.

DAVID KESTENBAUM, BYLINE: So we started our experiment doing what the economist Joel Waldfogel hates. We gave out gifts to the kids, people we don't know at all. And we gave out the gifts in the most inefficient way possible - randomly. We just had this bag with 10 pieces of candy. We line up the kids, we walk down the line, and we give each of them a piece of candy completely at random.

KENNEY: And mostly, the kids just stare at the things in their hands. They're checking out what they have and what their neighbors are holding. But some pieces of candy, like the box of Sour Patch Kids - really big hits.

UNIDENTIFIED CHILD #1: Oh, you lucky.

(CROSSTALK)

KESTENBAUM: Some other things we hand out, though, they are not so popular.

Something wrong with Fig Newtons?

JUSTIN JAMES: I hate figs.

(LAUGHTER)

KESTENBAUM: It's a box of raisins.

UNIDENTIFIED CHILD #2: Oh, I hate raisins.

KENNEY: Besides the Sour Patch Kids, Fig Newtons and raisins, we gave out Nerds, Mike and Ikes, Three Musketeers, Reese's Peanut Butter Cups, Twix, SweeTarts and Swedish Fish - 10 candies in total.

KESTENBAUM: So Caitlin, when you and our production assistant Jess were trying to figure out what to buy, I overheard way too much talk. Jess was down the street at the drugstore calling back, should I get Mike and Ikes? Or I want something they don't like. We should get you get raisins. Oh, no, they're totally going to hate SweeTarts

KENNEY: Yeah, we had a lot of fun with this, I have to say.

KESTENBAUM: All right, so once we handed these things out, we wanted to measure - we wanted to measure how much wealth we have out there in this scenario. So we did this the way economists might do it. We asked the kids, how much do you value what you have in your hands? Look around and give us a number from zero to 10 - how happy are you with what you got?

GENESEE: My name is Genesee (ph), and I got Mike and Ike. And it's a zero because I don't eat these.

KESTENBAUM: All right, Mike and Ike gets a zero.

DARNAY: My name is Darnay (ph), and I got a Three Musketeers bar. And I got - I have - I put up a five because I like them, but not that much.

KESTENBAUM: OK. Five.

MICHAEL: My name is Michael, and I got Nerds. And I put up a two because I don't really like these.

JUSTIN: My name is Justin James, and I put a zero because I don't like figs.

KESTENBAUM: One kid has been writing these numbers down on the board as we go in very neat handwriting. And then we add them up.

UNIDENTIFIED CHILD #3: Thirty-five, 36, 37, 38, 39, 40, 41, 42...

KESTENBAUM: Collectively, we got 50.

KENNEY: Total wealth - 50. And this is an important number. It's how much value there is in this room at this moment. But I've got to say, it seems low to me.

KESTENBAUM: Why?

KENNEY: Because before we came in, these kids had nothing, and we just handed them this candy.

KESTENBAUM: For free.

KENNEY: Right, without them doing anything. We didn't ask them to answer any questions or solve any math problems. We just handed it over.

KESTENBAUM: And they're like, yeah, zero, one.

KENNEY: Right. It seems so bizarre. What kid doesn't love candy?

KESTENBAUM: This is what Joel Waldfogel, the economist, is saying is the problem with gifts. Even a gift, even something you get for free, you know, you may not value it very much. It makes you think, you know, if we could make the holidays more efficient, we could make everyone much happier because, on average, right now, everyone in this classroom, they're basically at a five.

KENNEY: So we wanted to find a way to fix this. And we asked the kids, what can we do? Without bringing anything new into this classroom, is it possible to make all of you happier, to increase the total wealth? Here's the first answer we got, completely unedited, from Joshua Felicien (ph).

KESTENBAUM: So how can we make that number go higher?

JOSHUA FELICIEN: To appreciate - like, do something that, like - oh, my God. Like, give it around. Probably, like, trade and, like, stuff like that.

KESTENBAUM: Trade. So what I love is that in just 11.8 seconds, Joshua Felicien, seventh grader, has proposed creating a marketplace, one of the most important economic innovations in human history. You see it pop up throughout civilization. Here, it takes just 11.8 seconds.

KENNEY: And it makes sense. These kids probably don't have jobs. Most of the money they get probably comes from their parents. And so they can't just go out and buy things. It makes sense when you're in this sort of seventh grade pre-money world. You trade. Kids trade things all the time. They trade baseball cards, toys, Halloween candy. In fact, literally within seconds of us handing out the candy to the kids, before you asked them their ideas about what we could do, I heard them whisper to each other, hey, you want to trade?

KESTENBAUM: So that's what we decided to let them do.

I want you to look around - you've seen what everyone has, right? I'm going to give you, I think, 60 seconds. OK. You'll have one minute to trade. And it has to be mutual. So, you know, you can't force anyone to trade. The other person's got to be willing to trade. So - all right, ready? Go.

And, Caitlin, all of a sudden, it is like we are on the floor of the Chicago Mercantile Exchange. It's like everyone's swapping corn futures contracts.

UNIDENTIFIED CHILD #1: You want to trade?

UNIDENTIFIED CHILD #4: Swedish Fish.

UNIDENTIFIED CHILD #5: What you want?

UNIDENTIFIED CHILD #4: No, I hate raisins.

DARNAY: I got Nerds. I got Nerds. Yeah, I got Nerds.

KENNEY: All of a sudden, there's this frenzy of activity. Everyone is clustering together. One kid just holds a Twix bar up over his head so anyone who wants it can just run over to him. A minute later, we stop the trading.

KESTENBAUM: OK, I think we're done.

So everyone gets back in line. And now we want to see if the trading has increased the wealth in the room. So we go down the line again, and we ask everyone to value what they have now. Give us a number again from zero to 10.

GENESEE: My name is Genesee, and I got Sour Patches. And it's a 10 because I love Sour Patches.

KESTENBAUM: And what were you before?

GENESEE: A zero.

KESTENBAUM: So you went from a zero to a 10.

GENESEE: Yeah.

DARNAY: My name is Darnay, and I have Nerds now. And I give it a nine because they taste really good to me.

KESTENBAUM: And what did you have before?

DARNAY: I had Three Musketeers, and I had a five.

KESTENBAUM: OK.

JUSTIN: My name is Justin. I traded a fig for raisins.

(LAUGHTER)

JUSTIN: So now - it was a zero to a one.

(LAUGHTER)

JUSTIN: This is better.

(LAUGHTER)

KESTENBAUM: From Fig Newtons to raisins is a zero to a one, OK.

NICHOLAS HEVEN: My name is Nicholas Heven (ph). I got Fig Newton bars. And I put a eight because, as you see, the picture, it looks OK. But I never ate Newton bars, so I put an eight.

KENNEY: So we start to total up the numbers. First, we're trying to do it in our heads, and we all end up with different figures. But eventually, we converge. The total wealth in that room is now 82. And we started with 50.

KESTENBAUM: So magically, without bringing anything new into the room, without buying more candy, without consuming any electricity, without elves having to work overtime, just 60 seconds of letting people trade - our classroom wealth has gone from 50 up to 82, from an average of five to an average of 8.2. Behold, the amazing power of economics. And I tell this to the class. I try to tell them.

That's why countries trade with each other. That's why you have commerce. That's why we have money because without doing any extra work, except 60 seconds of walking around with your candy in the air, you can increase the happiness - by a lot, in this case.

My little speech didn't get much of a reaction.

KENNEY: I know. But David, we were really popular up until this point. I think...

KESTENBAUM: With the candy?

KENNEY: Yeah. We just walked in and handed them candy. They loved us. And I think at this point, they were just waiting for us to stop talking so they could actually eat it.

KESTENBAUM: To be fair, I think this idea that trading sort of increases wealth is one of those things that falls somewhere between being very basic and very profound. I mean, there's part of you that goes, duh, because this is what we live and breathe every day. This is the economy that we live in. But there's also a part of you that goes, oh, you know, I never quite thought of it that way.

KENNEY: We wanted to know what Mr. "Scroogenomics" himself thought of our experiment, so we called Joel Waldfogel back. And we read him his holiday wish from last year, that everyone have a happy but efficient holiday season.

KESTENBAUM: So do you remember saying that last year?

WALDFOGEL: That sounds like something I would say, so I agree with it.

KENNEY: (Laughter).

KESTENBAUM: Still.

WALDFOGEL: Yes.

KENNEY: And we told him about our experiment, how we randomly handed out candy to the kids in Brooklyn.

KESTENBAUM: Then we said, well, what can we do to make that number go up, to make this more efficient?

WALDFOGEL: (Laughter).

KESTENBAUM: You're laughing.

WALDFOGEL: I'm laughing because I've done this. I did this at my day care when my kids were, like, 2 and 4. Anyways, I'm loving this. Go ahead.

KENNEY: So we tell him that then we let the kids trade, and the happiness went from 50 to 82.

WALDFOGEL: You know, that's - I love this story. It's like - it maps one-to-one into the story I always tell. But then I say to the kids, you know what this is? This is efficiency (laughter).

KESTENBAUM: That really gets them excited.

KENNEY: (Laughter).

WALDFOGEL: No, they're totally glazed over. But the point is, there's no more stuff here, but there's more happiness. That's efficiency.

KESTENBAUM: Wait, so tell us your story.

WALDFOGEL: Well, so there are two versions of it. Literally, the candy one was with my nieces when they were 4 and 6. And it was the dregs of the Halloween candy. And I said, well, could you just rank order those from your most to least favorite? And the two kids had different rank orderings. So I engineered some trades. But then the little one started to cry. And the older one said, Uncle Joel, is this economics?

But the happier version of the story, though, is when I did it at the day care with coloring book pages. And I brought two kids up and gave them things I think they didn't want. And I said, what can we do to make them more happy? And some kids suggested they could exchange. But then I just randomly handed out a bunch of stuff. Now, again, these were, like, 4- and 6-year-olds - or, no, these were younger. These were, like, 3 and 5. And there, again, kids started to cry.

(LAUGHTER)

KENNEY: Because they got things they didn't want?

WALDFOGEL: Exactly. Like, kid, you had nothing. Now you have something. You could trade it. But they were crying. And so I learned...

KENNEY: This was my point about the candy. These kids were just giving them a five. And I was saying, hey, wait. You had no candy before we...

WALDFOGEL: I know.

KENNEY: ...Walked in here this morning.

WALDFOGEL: But the thing that's nice - so great about your experiment is you did it with kids old enough that they could actually do the trading. You know, I learned that economics kind of works only for kids who are maybe, you know, 10 and over.

KENNEY: It's probably not surprising that us adults have figured out ways to deal with the inefficiency of the holiday season. That's why parents intercept letters from Santa. That's why we have gift cards. That's why we have gift receipts and generous return policies.

(SOUNDBITE OF SONG, "CHRISTMAS IN HARLEM")

TAYLOR: (Singing) Then we gon' hit the mall...

KANYE WEST: (Rapping) I'm like "Bad Santa," though.

TAYLOR: (Singing) Even though we ain't balling...

WEST: (Rapping) You might have to sit on my lap.

TAYLOR: (Singing) ...Feels like we bought it all. The mistletoe's right here.

KENNEY: As always, we'd love to hear what you thought of the show today. Please email us - planetmoney@npr.org. You can always find us on Facebook and Twitter. And whatever holiday you're celebrating this season, we here at PLANET MONEY hope you enjoy it. I'm Caitlin Kenney. Thanks for listening.

(SOUNDBITE OF SONG, "CHRISTMAS IN HARLEM'")

CYHI THE PRYNCE: (Rapping) Tell my family that I'm sorry that I've got to stay. I'm with Ye at the Macy Day parade, letting the snow fall on my aviator shades. Even though I'm in New York, I'm still repping for the A.

TAYLOR: (Singing) Christmas in Harlem.

CYHI THE PRYNCE: Cyhi.

TAYLOR: (Singing) ...Right after autumn falls. Soaking it all in, then we gon' hit the mall. Even though we ain't balling, feels like we bought it all. The mistletoe's right here.

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