Romesh Vaitilingam interviews Joel Waldfogel for Vox

December 2009

Transcription of an VoxEU audio interview [http://www.voxeu.org/index.php?q=node/4425]

Romesh Vaitilingam: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam, and today's interview is with Professor Joel Waldfogel from the Wharton School at the University of Pennsylvania. Joel and I met in London in December 2009, where we spoke about his new book, "Scroogenomics: Why You Shouldn't Buy Presents for the Holidays." I began by asking him to explain his interest in what he calls "yuletide economics", a subject he first wrote about back in the early 1990s.

Professor Joel Waldfogel: This is a side project, I do have serious interests. But it is true, I've been interested in this for about 15 years. And after I got my PhD in economics and I'd really been steeped in how we should and how we do allocate resources, it just struck me one year, '91 or '92, that holiday gift-giving was not at all like the way we describe resource allocation, didn't at all obey the kinds of principles that seem to govern usual, or efficient, resource allocation. It just got me thinking, and so I started surveying my students about their gifts.

Romesh: OK. So talk me through how you go about doing the research on what you call the "dead-weight loss of Christmas" in your first paper.

Joel: Well, first, the theory, then we'll get to the empiricism. So the theory's quite simple. Normally, if we see something that costs $50, we'll only buy it if it's worth at least $50 to us. So normal spending produces some measure of satisfaction. Gift-giving is different. If I set out to buy you a gift and to spend $50 on you, I could spend $50 and buy something that's worth nothing to you. So there's nothing that guarantees, nothing that requires each of these purchases to be worth more than their price to the recipient.

So that got me thinking how inefficient or efficient is gift-giving as an allocation mechanism? And so I started surveying my students, asking them, "List the items you received as a gift. Who gave it to you? What do you think the giver paid? What would you have been willing to pay for that item, as an item, not including the sentimental value, but just as an item?" Eventually, a few years later, I began to also ask people about items they had purchased for themselves. Same set of questions.

And so, in all the surveys I've done using the comparison of items received as gifts to items purchased for oneself, I come to the conclusion that, per dollar spent, recipients value items they received as gifts about 20 percent less than the items they purchased for themselves.

Romesh: Economists and other researchers have been doing experiments on students of this kind for many years. Why should we believe that what students tell you is going to be representative of the whole population?

Joel: Well, it's a challenge. But there have been a range of students, from undergrads to grads, and I think the variation across the results, as varied as I can find in these populations, moves plausibly the way you might expect it to, so I think that I'm happy thinking about this as being relevant to a larger population.

Romesh: And you've replicated the study later, by looking at other groups of students, later in time, other parts of the world?

Joel: I have. Most recently, I had a set of surveys administered in various sites in Europe, and so I'm beginning to think this is universal.

Romesh: So tell me what you mean by the dead-weight loss. What does it actually represent in terms of the US economy and perhaps other economies of the world?

Joel: At one level, the question is how should we think about this thing I call dead-weight loss. A way to think about it is, this 20-percent number is really the difference between the satisfaction that any given amount of spending produces when I do it for myself versus the amount of satisfaction produced when others make decisions for me in the context of gift-giving.

So, I would say 20 percent of the spending is really missing satisfaction. So in the US, we spend about 65 billion a year on holiday gifts; that's a conservative estimate. And so 20 percent of that is about 13 billion. There's 13 billion in missing satisfaction, or I would say dead-weight loss, in the US, from gift-giving each year.

Around the world, the spending is more like 145 billion, around the OECD countries, and 20 percent of that is about 25 billion. So I would say $25 billion is missing in satisfaction, or is destroyed, each year in the process of holiday gift-giving.

Romesh: And it's not just a US phenomenon. It's not an issue of a country that we think of as being excessive consumers. You see this around the world.

Joel: Well, yeah. I really had thought, going into this-- this is new to the book and not at all in the original papers - I did some international comparisons, and I simply assumed that America would be the world leader. We're the world leader in so many things, good and bad. We lead the world in obesity and in gasoline consumption and other things. So I figured we'd be way ahead on what some might term vulgar commercialism, at Christmas.

But, as it turns out, the US is quite far down the list. Both measured as a size of the December spending spike relative to the months around it, or even in per-capita spending terms, the US is nowhere near the top. Which is good news for America's self-image, but it's actually really bad news for the magnitude of this problem. It's not a US problem, it's a worldwide problem. And instead of being a $13-billion annual US problem, it's a $25-billion worldwide annual problem.

Romesh: Let's look at it over time as well. Is this something that dates back decades, or even hundreds of years?

Joel: Well, here again, I assumed… every generation thinks it invented sex, and probably thinks it invented the vulgar commercialization of Christmas. But in the US, I have data going back to 1920s, even earlier, and as a share of the economy, holiday gift-giving has declined.

So, in a period when the US economy grew by a factor of five, holiday gift-spending grew by a factor of three. So it's actually become a smaller share of the US economy. And by the way, that also implies that in this period when we've gotten much richer that we spend more but proportionally less. That implies that holiday gift-giving is a necessity and not a luxury.

Joel: Yeah, that's right. So there's both the historical evidence. There's also cross-sectional contemporary evidence on spending. And both ways of looking at this, the income elasticity for holiday spending is below one. It's pretty close to the income elasticity for gasoline. So we're talking about a necessity, and not an especially glamorous one.

Romesh: We're talking about this enormous amount of value destruction. Economists tend to think that the world will not find itself in a bad equilibrium, which is what we seem to see. So what's going on? How did we find ourself in this place that you think is so bad?

Joel: Of course, we think that when people make voluntary choices that they do good things. And we also tend to think that inefficient institutions will not persist, that we'll develop alternatives. And I'm sympathetic to those arguments, but I think there are two points to make here.

First question is, is this gift-giving really voluntary? Well, there is no law that says I have to give my mother a gift. But if I don't give her a gift, I will suffer some certain social sanctions. Our friends, the sociologists, understand quite well that individualistic motivations aren't the only explanations of behavior. After all, why do we all set the table with the fork on the left and the knife on the right? I mean, there are lots of normative behaviours - that's their meaning of the word - things that we do because we do as opposed to because of individual self-interest.

So the point of all that is that if gift-giving isn't entirely voluntary, then we can't infer optimality from the fact that people do it. It's not revealed preference, it's revealed constraint. So that's one.

On the question of persistence, I think that when bad things happen to good people, economists like to point to problems in the incentive structure as an explanation, as in the financial crisis. With gift-giving, think about givers who tend to give gifts that are unappreciated. A good incentive structure, from an economic standpoint, would be for the recipient to say, "You know, Grandma, I hate this gift. This is awful. Don't ever give me something like this again." Of course, as a human being, I think that would be a terrible thing for junior to do. Junior doesn't do that.

And so there really aren't sharp feedbacks in this process. I think this process persists because there's an obligation on the giver's side to do something and there is a constraint on the recipient's side not to provide sharp feedback.

Romesh: This is fascinating. Can we go a little bit more into sort of the economics of gift-giving, if you like, how economists think about the whole process of giving and receiving between people?

Joel: There's giver motivation. So why do givers give is an interesting question. I've said that they have an obligation to give. There's also, I think, an issue that they seem not to be able to give cash, for reasons of cash being a stigmatized or awkward gift. But givers seem to derive some pleasure from giving. And in fact, one criticism of my perspective on Christmas is that it's missing out on the joy of giving and that somehow the joy of giving would justify bad giving as good giving. So let me make the argument and then say why it's wrong.

Suppose I give you a sweater. Costs $50. It's only worth $30 to you. So, so far, it looks like a loser as an economic transaction. But if I as the giver derive 30 more dollars worth of joy from giving, then I'm producing 60 worth of satisfaction on a cost of 50, and it sounds like an economic winner of a transaction.

Some folks have made this argument to say that I'm confused. But I guess my response would be, if I also derive joy of giving from giving something that you actually enjoy, worth at least 50 to you, I would have produced 80 or more worth of satisfaction with the good gift, compared to the 60 with the bad gift. And so, relative to that better gift, the bad gift still misses out on some satisfaction.

And so I guess my argument would be we can't really rescue bad giving with the joy of giving. The joy of giving's important, or potentially important. And if it exists, and I suspect it does, that means we can't just say, "Let's not give, " because not giving means foregoing the joy of giving. So it means that we have to give. If we're going to give, we have to give differently, and we have to give in ways that still give givers joy but at the same time give recipients more satisfaction.

Romesh: What can we learn from the kind of thinking in psychology and some of the stuff that's coming up in behavioral economics, the kind of lessons we learn about people not being rational, not understanding their preferences, making different decisions based on whether they own something or whether they're offered it? Can you use that to shed some light on this discussion?

Joel: I think so. So, on the one hand, the purely neoclassical perspective here would be that the recipient knows best what he or she wants, and so the best thing we could possibly do is to give him or her cash, with which he or she chooses exactly what he wants. That perspective seems to miss some features of common sense, and also, perhaps, behavioral economics.

First of all, we aren't fully informed about all the options available to us. I mean, there are search costs. So it is possible for givers to know about things that we don't know about. If they know enough about us and enough about some items we don't know about, they could very possibly choose things for us that we would like better than what we would have chosen with cash.

It's not so much behavioral. It's more, really, just a search-cost kind of a story. But still, it's a bit of a departure from the notion that cash would be perfect. And that's plausible. And I think, if you look at the actual micro-level data on how much recipients value stuff, you do see a whole range.

Although the average is 20-percent value destruction, there are some gifts that are valued more, on average, than stuff people buy for themselves. Those are more likely from people who are in more frequent contact and so forth. But there are these situations where people give you things that are better than what you would have done, and that's part of the reason why I frankly don't think people should entirely stop giving gifts.

There are other circumstances, I think, in which gift-giving can even do better than cash. For example, suppose I want to buy something fancy, but I really feel I need permission from my family, from my wife, to do so. Well, left to my own devices, I wouldn't buy this thing, even though I think I want it. But the gift-giving could come in the form of permission to buy this thing, in which case I'd actually do something I wouldn't have done on my own.

That's behavior that's not like what's in the textbooks. It's behavior that requires me, frankly, to be an idiot. But I think people often are idiots. And so I think there are contexts or situations in which gift-giving can get around idiocy and help people do things better than they would have done for themselves.

Romesh: Can we talk a little bit more about the problem of giving cash? It seems to me it's fine for me to give my nephew and my niece 100 bucks at Christmas, and I often do that, rather than trying to pick something out for them. But it's frowned upon in most other relationships to give people cash. Is it something because the recipient would like to think, "Actually, this person who's giving me the gift has spent some time thinking about it. They've actually invested some search costs, as you would say, to go and pick this out for me"?

Joel: I honestly don't know why there is a stigma of giving cash, but I fully recognize that there is.

Psychologists have actually studied this. For the most part, at least in Western cultures, cash is a stigmatized gift. There are certain exceptions. It is permissible, for example, for grandparents to give cash to grandchildren. I think it's permissible for aunts and uncles to give cash to their nieces and nephews. But in general, cash-giving is perceived as awkward. And so I don't advocate giving cash, because I don't advocate doing things that are painful or unpleasant, since this is all about producing satisfaction.

One interesting thing, though, is the development or the huge adoption of gift cards, at least in the US. They've gone from maybe a blip 15 years ago to something like 80 billion a year, throughout the year. That's not just for Christmas. And maybe a third of holiday gift-giving comes in the form of these gift cards.

On their face, from an economic perspective, gift cards are sort of idiotic, because it's cash with constraints, right? It's cash that only works somewhere. But for whatever reason, these avoid the stigma.

It's like money laundering. I can give money without stigma. They're very desired by recipients. Of course, they're not that personal. But if you think about those situations where givers have to give a gift - and I think there is a lot of obligatory gift-giving - but they have no idea what to get, this is a much more attractive option than buying something that's quite likely to be unappreciated.

Romesh: We've had quite a lighthearted discussion. The books feels lighthearted. You're having a lot of fun with it. You've obviously had a lot of fun with it over the years, and economic journalists have, too. How seriously do you think we should take it? What is the real damage? Are there issues, for example, about the kind of debt that people get into to finance their Christmas gift-giving?

Joel: At the end of the day, I'm claiming we're destroying $25 billion worth of value with the way we're giving gifts. I don't think that all of that could even conceivably be saved for better uses, but I think a fair bit of it could. Even a small fraction of that would really make the world a better place.

Part of my pitch here is not just about producing satisfaction for recipients, although that's sort of the main economic pitch. But I also am on a bit of a soapbox about trying to encourage giving to charity.

And so, one of my ideas involves these gift cards, again. They're very attractive, but something like 10 percent of the value of these things never gets redeemed. And so, in effect, it gets transferred to the retailer. Now, I understand that retailers are people, too, and I also understand that profit is a form of surplus, so I'm all in favor of those things. I'm a Wharton professor, after all.

But, I don't think that transfers to retailers were what givers had in mind when they bought these gift cards. So one of my soapbox suggestions - and I'm told this is about as likely as world peace - is that it would be nice if retailers issued gift cards that defaulted to charity after 24 months, so the unspent balance goes straight to a good cause. Maybe there could be some service fees. Again, I'm not against covering costs and so forth.

I actually think that socially conscious retailers might be able to make some hay out of it because, after all, this would provide assurance that the money spent on the gift card is either going to your loved one or some worthy cause, and it brings people into the store. It might make your gift cards more attractive than someone else's. So it's not entirely a wide-eyed, idealistic idea.

I also think a related suggestion about gift-giving is that people could make gifts to charity in the name of the recipient. The hard-headed logic behind this is that if you look at spending data, whereas holiday gift-giving looks like a necessity, cash gifts to charity look clearly like a luxury. If you look at the Consumer Expenditure Survey, higher-income households devote a higher share of their expenditure to charitable giving. So this is a luxury activity.

Now, what are we trying to accomplish with gift-giving? Well, of course, many things. But one of the things we're trying to accomplish is to let our recipients experience a luxury they can't normally afford. Well, how about, instead of chocolates or jewelry, let them experience the luxury of giving to charity.

Now, this is probably not a very good idea for an 11-year-old boy. But those situations where you have an obligation to give to some other grownup, you have no idea what he or she wants, so your inclination is to buy the golf-themed mug or something that they don't really want but it discharges your obligation to give, how about instead giving to charity in their name, or giving one of these charity gift cards that allows them to choose a charity? Wouldn't that be better? No value needs to be destroyed, and we could all feel good about doing something useful this time of year.

Romesh: Aren't those two different things, though? Isn't the act of giving someone a gift and making a donation to charity a different kind of thing? There seems to be this trend, people say, "I didn't buy you a gift this year. I didn't send you a card this year. Instead I've bought a goat for a poor family in Africa." Isn't that confusing two separate things?

Joel: So there are a few different kinds of these. One would be, literally, I just say, "I made a gift to charity in your name."

Another kind, there are literally these charity gift cards, where I give you a gift card and, with this gift card, you go to some website, organizations like tisbest.org or Charity Navigator, and you get to choose among a long list of charities. So you get to really make the decision of which charity gets it.

Now, again, it's not for everyone, but when you think about these situations where you have no idea what to do and you're just trying to discharge your obligation to give something, this could be an attractive option.

Romesh: Joel, it's interesting this book has come out at this time, when the world is in quite a serious economic downturn, and probably the governments, particularly in the US and the UK, are thinking, "It'd be nice if the consumers took up some of the slack of providing the stimulus to the economy." And your message is, "Actually, we don't want you to spend so much at Christmas."

Joel: Well, to be fair, I really have no problem with spending. I really don't like spending that appears to not produce very much satisfaction. And so I do say go ahead and buy gifts when you have some idea of what people want. So go ahead and spend there.

Buy gift cards. That doesn't really reduce spending. It just transfers a lot of it into January instead of December. And frankly, on the charitable-giving end, if these charities are sensibly chosen, the charities aren't going to bank the money; they're going to spend it. They're not going to spend it at Macy's, but they're going to spend it. So I'm not anti-spending at all. I'm pro-spending. I just would like to see spending produce the kind of satisfaction for the consumers that we expect spending to produce.

Romesh: Joel, in the book, you make these kind of comparisons between the waste, as you see it, of Christmas gift-giving and government handouts. Can you develop that idea a little bit more?

Joel: I think waste has enemies. Waste particularly has enemies when the waste is done by government. So people really are alert to wasteful programs. There's an organization in the US called the Citizens Against Government Waste. They're a watchdog group that grew out of the Grace Commission, and they monitor the federal budget every year, and they find wasteful programs, programs with benefits that fall short of their costs. In a recent year, they found $17 billion worth of such programs that they define as waste.

But if you define things where the benefit, on average, is below the cost as waste, you would presumably define all of holiday gift-giving as waste. And of course, my more modest definition of it would just be that 13 billion in the US is waste. But if you're exercised about $17 billion in programs with benefits below their cost, you ought to also be concerned about waste in the private sector, wasteful activities happening, even if they seem to be voluntary. So I'm just trying to point out to people that there's waste all over.

Romesh: Joel, final question. How do you react to your findings, personally? What do you do?

Joel: Well, I suppose everyone thinks he's a better gift-giver than he actually is, but I think of myself as a pretty avid gift-giver. I try to be careful. I certainly give gifts to my family, even significant things, as long as I feel fairly convinced that it's something, for example, that my kids actually want. The main effect of having done this work on my sort of gift-giving experience is that I receive a lot fewer gifts.

Romesh: Joel Waldfogel, thank you very much, and happy holidays.

Joel: Thank you.