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Holiday Guide Feature

Stocking Stiffers

The author of Scroogenomics runs the numbers on holiday gift-giving

Jennifer Daniel

Special Issues 2009

The Busman's Holiday A short guide to giving what you know | By Emily Flake

Stocking Stiffers The author of Scroogenomics runs the numbers on holiday gift-giving | By Edward Ericson Jr.

By Edward Ericson Jr. | Posted 11/18/2009

Since 1993, Joel Waldfogel has made a cottage industry of Christmas. But unlike the eBay jockeys and mall-stand entrepreneurs who populate the commercial landscape in this Most Wonderful Time of the Year, Waldfogel, a professor of economics at the University of Pennsylvania's Wharton School of Business, concentrates on the waste inherent in a custom that requires 82-year-old grandmothers to divine the desires of the 11-year-old grandchildren they see for 72 hours a year.

In his new book, Scroogenomics (Princeton University Press), he imagines what one such boy might say after receiving his grandmother's best guess: "A friggin' kaleidoscope? What the heck were you thinking, you old bat?"

Of course, little Max never says this. He smiles sweetly and tells grandma he loves her, and then goes back to his bracing game of Grand Theft Auto IV. So, next year, grandma will probably blunder again.

Written in a breezy, engaging style (he quotes Homer Simpson, not Friedrich von Hayek), Waldfogel's book attempts to quantify the cost to society of millions of Grandmas, Aunt Beas, and Uncle Charlies bestowing incorrect sweaters, candles, and other dud gifts, and presents a couple of options to reduce that loss. (The book assumes that, but for the misallocation of some specific stuff, the orgy of consumption does the economy no harm.)

Scroogenomics is an update and expansion of "The Deadweight Loss of Christmas," a paper Waldfogel published in the December 1993 American Economic Review. For the paper, Waldfogel asked his students what they received for Christmas, how much it was worth to them in cash, and how much they figured their benefactors had actually paid. The difference between the two figures--imputed to the then $40 billion in national Christmas giving--resulted in an implied $5 billion to $13 billion in "value destruction."

The paper caused quite a stir in certain circles at the time, with media pundits protesting what they construed as an attack on Christmas itself, and academics questioning his methodology, suggesting that the way he conducted the survey skewed the results.

One critic of the study, Jason F. Shogren of the University of Wyoming, conducted a follow-up experiment in which he (and partner John A. List, now of the University of Chicago) first administered Waldfogel's post-holiday survey and then conducted a complex auction to see what the students would really sell their gifts for. According to the paper, the gifts sold for an average of $2 each.

Yet, the pair found that sentimental value actually increased the real asking price for the gifts, more than offsetting Waldfogel's deadweight loss. Shogren and List found that Christmas giving--even of candles and kaleidoscopes--actually creates value.

"We actually got a positive outcome," Shogren says by phone from his office. "Grandma Helga gave you that scarf and you many never wear it, but you still got it from grandma."

Waldfogel took the criticism to heart. "That was really a neat paper," he says. "Actually, it's what got me thinking."

For the book, Waldfogel improved on his original method, this time calculating not merely the difference between perceived value and retail price of the actual gifts received, but the difference between the recipient's perceived value of the gifts and their perceived value of what they would have bought for themselves with the same amount of cash.

He says the difference is about 18 percent. That is, on average, 18 percent of the value of gifts is wasted, because the gifts are that much less valuable to the recipients, per dollar spent, than what the recipients would have bought for themselves. In the United States, Waldfogel pegs the annual deadweight loss at $12 billion in 2007 dollars.

He figures the total is more than double that, world-wide.

One possible flaw in Waldfogel's method, noted by neither the academic critics nor the newspapers, is that he asks respondents to guess the purchase price of the gifts they received, like an impromptu, hidden game of The Price Is Right.

Waldfogel acknowledges the problem, but says it's probably not significant: "If you even look within items--CDs, say--specific familiar items where [study participants] know the cost, you still get the same answer." That is, an 18 percent loss.

Waldfogel pitches the book lightly, skipping over most of the figures and graphs that underlie the conclusions. He surveys Christmas spending across the world ($145 billion in 2006), over time (he finds that U.S. holiday spending was "a bigger share of a smaller economy three generations ago"), and compares spending per-capita income in rich and poor nations (on this sliding scale, Americans, surprisingly, spend a quite bit less than, for instance, the Portuguese and South Africans). The book has been received as a bit of a joke by some; a Wall Street Journal reporter opened his interview by asking Waldfogel the worst gift he had ever gotten.

"I'm trying to make a serious point in a light, humorous way," Waldfogel says. He wants to be clear, too, that gifts to people one actually knows well are usually not wasteful. He only wants to curb wasteful gifts.

"The idealized Christmas gift is a carefully chosen item that delights the recipient . . . and at the same time functions as a conduit of warm feeling between the giver and the recipient, meaning delivering him (or her) something that he would have loved to have, if only he had been aware of it," he writes. "In short, the idealized gift actually beats cash."

Waldfogel does have two ideas for improving our current gift-giving practices that may strike some Baltimoreans as especially relevant this holiday season, as our mayor faces criminal charges involving her alleged self-appropriation of gift cards meant to benefit poor children.

"The first is charity gift cards. On what other luxuries, besides retirement savings, do high-income individuals spend a bigger share of their income? Cash contributions to charity," he writes. "The obvious solution: giving people money that they can only use for making charitable contributions."

Indeed. Imagine the charity-only cards in the hands of our mayor. If only Ron Lipscomb, Pat Turner (and possibly others), had found Charity Choice, Just Give, or TisBest before they made their fateful purchases at Target, the city might have avoided much misunderstanding, pain, and expense.

Waldfogel's other idea is for store gift cards to be co-branded with charities such that any unused portion of the card goes to the charity. The expiration dates cards often have now could be used to remit the cards' value to the charity at a certain point as well, instead of the stores' bottom line.

"Think about those gift cards," Waldfogel says. "If I could just divert a tiny amount [of their unredeemed value] to a good cause, think of the good it could do."

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Holiday Guide Feature archives

More from Edward Ericson Jr.

Old Habits (7/28/2010)
Medicalization is the hot new thing in drug treatment. Just like in 1970.

Room for Improvement (7/14/2010)
Celebrated crime control measure actually a flop, former chief reveals

Shelling Out (7/7/2010)
Mortgage broker goes bankrupt, seeks mortgage modification as taxpayers face mounting bailout bills

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