Scroogenomics | Joel Waldfogel

Summary of: Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays
By: Joel Waldfogel

Introduction

In ‘Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays’, economist Joel Waldfogel challenges the conventional belief that holiday spending is good for the economy. He emphasizes how sentimental gift-giving often proves inefficient and generates a high level of ‘deadweight loss.’ The book addresses the impact such loss has on society and explores the roles and satisfaction levels of gift recipients, the relationships between gift-givers, and alternatives to traditional gift-giving. The introduction to ‘Scroogenomics’ sets the stage for a thought-provoking and eye-opening examination of the values we attach to holiday gifts and offers ideas for a paradigm shift in our gift-giving habits to optimize satisfaction and economic efficiency.

The Economics of Gift-giving

The popular practice of gift-giving may not always be economically efficient. According to economists, gift-giving often results in an ill-matched item for the recipient, leading to a substantial loss of value. Rather than generating employment and income, inefficient spending may harm the economy. In this context, cash seems to be the most rational gift choice. However, behavioral economists argue that valuable gifts are those that are rare, thoughtful, or personalized. Variables such as taste, knowledge, and affordability are crucial to finding the perfect gift that maximizes the consumer’s surplus.

Holiday Spending Trends

US Christmas Spending Compared to Other Countries

In December 2007, US spending during the holiday season reached $430 million, mainly driven by the gift-giving tradition. The Organization of Economic Cooperation and Development (OECD) analyzed spending from 26 nations and found that countries in Europe all experienced a rise in December spending. Japan similarly treated Christmas as a “commercial event,” resulting in a sales increase of 21%. The only exceptions were Israel, China, and South Korea, where Christians are rare. Wealthy countries with a large Christian population such as Norway, the UK, Italy, Finland, and France were among the top spenders, with the US ranking twelfth out of 26 countries.

The Science Behind Gift-Giving

A Yale study found that gift-giving results in a “deadweight loss” of at least 13% as the recipient may not value the gift as much as a self-purchase. Personal choice creates 18% more enjoyment than receiving a gift. However, satisfaction rates vary based on the recipient’s relationship to the gift giver and their age. Distant, older relatives provide the lowest level of satisfaction, while significant others deliver the most satisfaction. Knowing the recipient leads to greater appreciation of the gift.

The Economics of Gift-Giving

The act of gift-giving is often motivated by three economic rationales: redistribution, paternalism, and altruism. Redistributors take from the rich and give to the poor, while paternalists give gifts that benefit the recipient. Altruists strive to satisfy others’ needs and wants. The US government’s giving programs usually fall under paternalistic in-kind transfers such as food stamps. However, this approach may not always be efficient, as people may prefer cash over in-kind transfers. Cash gifts, while seemingly altruistic, fall under the social taboo, and it decreases their perceived value. If people were open to the idea of cash gifts, then it would make gift-giving more efficient and altruistic.

The Evolution of Holiday Spending

US consumers have been spending on Christmas similarly to their predecessors since 1935. As the economy fluctuates, the December peak spending remains consistent with a few small spikes. Even though holiday spending has tripled, its contribution to GDP has decreased by almost half. High-income households donate more and at a higher percentage of their income than lower-income ones. Previously, consumers would save up for Christmas, but access to credit has made it easier to spend in December and pay later, with two-thirds of annual holiday spending charged to credit cards.

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