The economic argument for never giving another gift.

The search for better economic policy.
Dec. 8 2009 7:04 AM

You Shouldn't Have

The economic argument for never giving another gift.

(Continued from Page 1)

It's bad enough that we buy a lot of stuff that no one wants. It turns out we buy it using money we don't yet have. It wasn't always this way. In the 1930s, almost 10 percent of Christmas spending was financed with money squirreled away into Christmas clubs—bank accounts paying little interest but helping consumers save for the holiday. Participants promised to contribute weekly, frequently as little as $0.25 at a time. These accounts were popular because they helped even unsophisticated consumers—many of whom didn't have another bank account—avoid the temptation to fritter their money away. Since 1970, by contrast, the explosive growth in consumer credit has had the opposite effect, helping consumers fall prey to their lack of self-control when it comes to borrowing. In recent years, one-third of holiday spending is still not paid off two months after Christmas.

OK, Professor Scrooge, I can't really just not give anyone gifts—do you have any advice for how to give better gifts? First off, keep giving gifts to people you know well and see often, especially kids. When you know your recipients' wants and needs, your gifts are far less likely to destroy value. Gifts from givers in daily or weekly contact are, on average, about 10 percent more satisfying, per dollar spent, than those from givers in only monthly or yearly contact. In fact, the right gift can, in some circumstances, be even more satisfying than what the recipient would have done with cash. While textbook economics views people as fully aware of all the things they might like to buy, in reality our friends sometimes know about things we'd like before we learn of them. In those situations, well-chosen gifts can allow us to enjoy wonderful items that we did not know existed.

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Second, while cash is in principle an appealing gift, as it allows the recipient to choose something she actually wants, it's considered tacky in our culture. Gift cards are probably the next best thing, although you need to be careful about fees and about losing them. Gift cards would be even better if their unspent balances—10 percent of spending by some accounts—went automatically to charity after a few years. With about $80 billion in annual gift card sales, there's $8 billion at stake here.

Finally, gifts to charity on behalf of recipients deserve a look. Such gifts can allow your friends and family to experience a luxury they probably can't usually afford. While luxury evokes images of jewelry and fancy chocolates, if you look at household spending data, one of the clearest luxuries—that is, an item whose share of expenditure rises with income—is charitable giving. So charity gift cards (offered by Charity Navigator or TisBest.org), which allow recipients to choose which charity gets the money, make it possible for recipients to act like rich guys, while transferring resources to high-value uses. Admittedly, these would be terrible gifts for 11-year-old boys, but they may be an ideal way to fulfill your giving obligations with other adults. Like it or not, we are about to go on our annual holiday spending sprees. That spending can be a force for waste or a force for good. Think twice before you put that sweater on your Visa.

Joel Waldfogel is the Ehrenkranz professor of business and public policy at the Wharton School. This article is drawn from his new book, Scroogenomics: Why You Shouldn't Buy Presents for the Holidays.

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