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Better to give nothing

Holiday spending, says an economist, is ‘an orgy of value destruction’

By Joel Waldfogel
November 29, 2009

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Each year between Halloween and Christmas we are barraged with reports taking the economy’s pulse based on holiday spending. Are we spending enough to stimulate the economy? Are we on track to beat last year’s numbers? And, indeed, holiday spending is important for retailers, many of whom sustain themselves on activity between the goblins’ departure and Santa’s arrival. While December is only one-12th of the year, it brings at least a sixth of the year’s business at department and jewelry stores.

But is holiday spending even good for the economy? The surprising answer is somewhere between maybe and not really. The problem is that gift-giving is a very sloppy method for matching stuff with people. As an economist, I look at the estimated $65 billion in holiday spending coming this year, and I see an orgy of value destruction.

To understand this, consider that every transaction in the economy has two parties, a seller and a buyer. Sellers benefit from a transaction by getting a price that covers their costs and delivers some surplus in the form of profit. Similarly, the sellers’ employees and suppliers get some surplus that brings them to work chipper. In normal - nongift - transactions, buyers also get some surplus. They see an item for, say, $50 and only buy it if it’s worth at least $50 to them. This surplus is a big deal: When your child is crying with an ear infection, you’d gladly pay hundreds or perhaps even thousands of dollars for a cure. Antibiotics, available for a few dollars, provide enormous surplus for buyers.

Compare this to what happens when you give a gift: When you spend $50 on me, you’re operating at significant disadvantage. You don’t know what I like. I might not have been willing to pay anything for the item you purchase for me with $50. While $50 in spending normally produces at least $50 worth of satisfaction, there’s no guarantee that $50 in gift spending will produce nearly as much satisfaction for the recipient. And if you buy me something worth nothing to me, you have destroyed at least $50 worth of value. You may as well have lit that sweater on fire.

Over the years, I’ve conducted numerous surveys to compare the satisfaction derived from gifts with items people purchase for themselves. The answer that emerges is that people value items they buy for themselves nearly 20 percent more. This means that the $65 billion in annual holiday spending generates about $12 billion less satisfaction than it would if we spend the money on ourselves.

It gets worse. Massive holiday spending is of course not limited to the United States. While Americans lead the world in obesity and gasoline consumption, our per capita holiday spending is far back in the pack, behind Norway, the United Kingdom, Italy, Finland, and France, among others. The United States is 12th among 26 large world economies in holiday spending. The good news is that we’re not the world’s most vulgar commercializers of Christmas. But the bad news is worse: Worldwide, earthlings spend nearly $150 billion on December gifts per year, destroying about $25 billion in value. It’s a worldwide orgy of value destruction. Perhaps you see a potential flaw in my reasoning: What about sentimental value, you might ask? Sure, the sweater that Aunt Sally got me for $50 was worth only $10 to me. But counting both the joy that she got from buying me something (let’s say $20) and the sentimental value I attach to the gift (what the heck, let’s say another $20), the gift breaks even and destroys no value. It costs $50 and produces $50 worth of satisfaction all around.

But I doubt this possibility can rescue gift giving as efficient. If Aunt Sally also enjoys giving you something that you like - and if you would attach the same sentiments to items you like - then Sally’s gift produces less value than the gift of an equally costly item that you actually wanted. If she had bought you a typical item you’d willingly buy yourself with $50, it would be worth $55 to you. She’d still get her $20, and you’d still get your extra $20, bringing the total value to $95, or $45 more than the total value of the lousy gift. So, relative to the better item, Sally’s gift choice created $45 less in value. Putting it less charitably, Sally’s choice destroyed $45 in value.

Not all givers are equally skillful at choosing items for us to consume. People who know us well and see us often - close friends, spouses, even parents - do pretty well. People who see us less frequently - grandparents, aunts and uncles, in-laws - do a lot worse.

OK, Mr. Smart Guy economist. You’re telling me that we celebrate Christmas with an orgy of value destruction. So, what do we do about this? How can we fulfill our obligation to give without destroying so much value? First, go ahead and give gifts to people you know well and care about. You have a good sense for what will suit them, so you won’t destroy much value with bad choices. Young kids especially are hard to disappoint and would be devastated without gifts under the tree. Second, give gift cards to people whose wants you don’t know as well. Gift cards allow the recipient to choose an item they want, and they top many most-wanted gift lists. Gift cards would be even better if retailers pledged their unspent balances - 10 percent by many accounts - to charity. But that’s another story.

Finally, charity gifts are an attractive option. We see evidence of their appeal from household spending patterns. Richer households devote a higher share of their spending to charity, making charitable giving a textbook luxury. To the extent that we’d all spend more on luxuries if we could, we can infer that we’d also give more to charity if we were richer. The Charity Navigator organization offers a charity gift card called the Good Card. When you buy one and give it as a gift, the recipient gets to act like a rich guy and do good at the same time: He gets to choose which of the many charities that Charity Navigator evaluates gets the money. This is probably a lousy gift for an 11-year-old boy. But it sounds pretty darned good for your brother-in-law. Better than another golf-themed tchotchke.

My favorite kid’s book was “Fortunately, Unfortunately,” in which a kid endures an alternating series of good and bad events. The boy is falling from an airplane toward a haystack with a pitchfork, and we’re told, “Fortunately, he missed the pitchfork. Unfortunately, he missed the haystack.” A lot like Christmas this year. Unfortunately, we may not be spending as much. Fortunately, we didn’t really want a lot of the stuff we’re not going to get. Christmas is coming, and the National Retail Federation gloomily predicts that holiday spending will be off a percent relative to last year. As if that were bad news.

Joel Waldfogel is the Ehrenkranz Professor of Business and Public Policy at the University of Pennsylvania’s Wharton School. His new book, ”Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays,” is now available, just in time for the gift-giving season.