Thursday, November 19, 2009

Scroogenomics: Why shouldn't we buy gifts for Christmas?

Ever since the publication of his 1993 AER paper "The Deadweight Loss of Christmas", Wharton School economist Joel Waldfogel has built something of a reputation as a Christmas killjoy (see comments on this piece here, here and here). In that short essay, Prof. Waldfogel argues that holiday spending is "a massive institution for value destruction" because of the fact that so many gifts -- billions of dollars' worth -- match up so poorly with what recipients would have bought for themselves. Instead of the Friedmanian argument that "nobody spends somebody else's money as wisely as he spends his own", Prof. Waldfogel seems to argue for the contrary (although a little bit twisted), that "nobody spends his own money (on somebody else) as wisely as somebody else spends his money (for her own)". Moreover, there might be another possiblity here -- what if the welfare gains for the gift-buyers outweigh the possible welfare losses for gift-recievers because of this resource misallocation? Is the measure of welfare gains valid in the first place? Finally, economists always tend to argue that the reason why some instituition or mechanism exists is exactly because under some circumstance, this institution or mechanism is more efficient than some alternative ones. So it seems to me that the more interesting question to ask is not whether gift-giving is efficient or not, but to ask under what conditions, gift-giving is more efficient than its alternatives, say, giving money or giving gift cards?

In his new book, Scroogenomics: Why You Shouldn't Buy Presents for the Holidays (see his interview here), lively and informed, Prof. Waldfogel illustrates how our consumer spending generates vast amounts of economic waste --to the shocking tune of eighty-five billion dollars each winter. He also seems to provide solid explanations to show us why it's time to stop the madness and think twice before buying gifts for the holidays.

While giving presents may lead to a huge amount of efficiency loss, and giving cash is considered inappropriate or cold, gift cards may probably become the best alternative -- which now represents up to a third of holiday spending. However, 10% of the value of gift cards goes unredeemed each year -- retailers could be more than happy because of this.

Anyway, it is up to you whether to buy this book or not, but when you decide to buy it, DO NOT give it as a holiday present to someone else, because that is all this book about.

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