'Scroogenomics,' a perfect gift
Saturday, December 18, 2010
Beth Cody, Writers' Group member
Iowa City Press-Citizen

I ran across an interesting little book while browsing in the local consignment store, Houseworks – one of my favorite stores, in spite of their legendarily-surly service. One of the great things about used bookstores, consignment stores and thrift stores is you never know what you will stumble across. (It was in Houseworks, for example, that years ago I chanced onto a book that I credit with leading me to discover and embrace libertarianism. Such is serendipity.)

But back to the pocket-sized book I found: Scroogenomics, by Joel Waldfogel. The book's premise is that Christmas gift giving is responsible for a fairly obscene amount of economic waste each year.

This may seem obvious to anyone who beholds the wasteland of wrapping paper detritus and hastily-tossed aside gifts strewn across a living room floor immediately following a large family Christmas gift exchange, but Waldfogel, an economics professor now at the Carlson School of Management at the University of Minnesota, is actually able to quantify the national amount of waste.

His point isn't that we shouldn't give gifts (despite the book's Grinchful subtitle: "Why You Shouldn't Buy Presents for the Holidays"), or that all gifts are wasteful – unlike many who decry the "commercialism" of the holidays. Rather, he is concerned only with the economic value that is destroyed when people buy gifts for others that they do not want.

This mostly occurs when people who do not know each other well are forced by tradition or etiquette to purchase gifts for each other: gifts for bosses, distant relatives who will be visiting, older grandchildren, nieces and nephews. The chances are high that these purchases will be of little use to the receiver, who will politely thank the giver and re-gift, donate, sell or simply allow the item to languish at the bottom of a dusty closet.

When purchasing things for themselves, people generally buy only the things that they expect will yield them a benefit that is at least as great as the price. But gifts break the link between purchasing decisions and the value of items to consumers. The economic waste is the difference between the cost of the item and the value of it to the recipient.

Waldfogel has calculated from surveys that gifts produce on average only 82% of the satisfaction that items chosen by the user provide. (Grandparents, aunts and uncles are responsible for the lowest satisfaction rates, as might be expected.) He also estimates that we spend an incredible $66 billion each year on Christmas gifts, leading to a total waste of about $12 billion annually.

$12 billion. A rounding error in government waste, I know, but nonetheless some real money, equivalent to the GDP of Iceland.

So what does Waldfogel recommend to reduce this shameful waste?

Well, since close relatives and friends know gift recipients well, they actually do a pretty good job of choosing gifts that are valued by the recipient. Parents and friends respectively provide 97 and 91 cents of satisfaction per dollar spent, siblings 99 cents and significant others indeed a surplus of satisfaction equal to 102 cents per dollar spent.

However, he advises more distant relatives and acquaintances to purchase gift cards (to stores near the recipient, I might add – I still have a card for Toys-R-Us in Cedar Rapids from when my seven-year-old was born, no doubt worthless).

Yes, nearly 10% of total gift card value is never redeemed, but that value is not destroyed (like the deadweight loss of ill-chosen gifts), it is merely transferred to shareholder profits. And Waldfogel proposes that large retailers should begin issuing cards that donate any unused funds to charities, which might make people feel better about buying them.

Scroogenomics is an entertaining little book, easy to read – and just the right size for the Christmas stockings of close friends and family who like to read popular economics books like Freakonomics.