Friday, December 25, 2015

Economists: Xmas Gift Giving Is "Wasteful" and "Inefficient"

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The Economists who've given us such things as the Pareto distribution, and tax cuts for the wealthy being more valuable than Social Security for the aged, have come in with a new twist: Christmas gifts are useless, wasteful and inefficient.

In yesterday's WSJ (p. A1, A8), we learn of one former Yale University economics specialist (Joel Waldfogel) who wrote a 1993 paper, 'The Deadweight Loss of Christmas', who actually calculated Yuletide waste by asking 86 students to assess the cost of presents they received, arriving at an average of $438. He then asked them how much they'd be willing to spend for the same gifts they got. The answer was an average of $313.  In other words, the recipients valued the actual gifts received at 71.5 cents on the dollar relative to what they'd have paid.

The prof concluded:

"Gifts leave the recipient worse off than if she had made her own consumption choice with an equal amount of cash"

The WSJ notes that "since then economists have enriched the Grinch school of economics."

Well, why be surprised? Remember this is the same lot that has argued that spending by the wealthiest is more "Pareto efficient" than spent say by an elderly guy on Social Security. Also, health dollars spent by the richest are more valuable than those spent by the hoi polloi, say on colonoscopies. In the same way, Pareto efficiency declares it  makes more sense to just give the unwealthy person say $134 NOT to visit the doctor and consume medical time and resources. Those resources are better left to the rich who can afford to pay the reservation price.   This is just the maximum price a person is willing to pay. Clearly these Xmas gift experiments disclose  the recipients are not prepared to pay the reservation price for the gifts received.

To fix ideas, a 2009 Journal of SocioEconomics paper actually measured the worth of gifts from books (which recipients valued at 74 % of the amount spent)  to footwear (92 % of amount spent) and kitchen gadgets (77 %).  Based on this the paper's authors concluded:

"We find  no evidence of significant welfare gains in any gift category. Hence, gifts represent a market failure"

But perhaps these geniuses were too focused on the recipients' assessments. We already know from elementary consumer psychology (see Benjamin Barber's book, 'Consumed' ) that economists have observed when people get things gratis they tend to undervalue them. (One reason why, when homeless are given new abodes to live in - say in Denver - they have to have jobs soon after moving in, to be able to keep paying rent)

Experiments conducted in the past have almost always shown that recipients undervalue social benefits, say even Medicare drugs or medical visits - mainly because they are getting them free or at vastly reduced cost to themselves. It turns out if they have to pay more for them - not outlandishly more,  obviously - they are more judicious in their uses or needs. This can well explain why Medicare is often overused by seniors, because they are getting "freebies" and hence tend to devalue the actual costs - which they'd see first hand if they had to pay themselves.

If people tend to undervalue social benefits perceived as "free", then it is logical to expect they'd do the same thing with Christmas gifts.

Again, please note this is not to necessarily make seniors pay much more (many of us already are, as we see premiums rise each year for Medicare supplements) but only make recipients more aware of the actual monetary value of the benefits.

I got a 'grade A' perception of the value of Medicare benefits after my (prostate) cancer treatment in 2012. While I had to pay some $1,300 that was vastly less than the total value (nearly $50,000 including labs, anesthesia, implant surgery, brachytherapy, CT scans and hospital stay until recovery)  Since then, I've been far more judicious in the use of medical services, and only reluctantly went to the orthopedic surgeon after fracturing a big toe.

I suspect a similar dynamic operates with these economic assessments of gift giving. Because the gifts are free and only assessed from the recipients' side, their value is bound to be lowballed, just as Medicare beneficiaries lowball the value of their medical benefits.

Indeed, one economist  - Sun Wong Sohn  - quoted in the WSJ piece, doesn't buy the economic inefficiency critique of Xmas gifts.  According to him:

"I don't think we should be analyzing this as an economic subject. We're talking about fun, holiday spirit".

Which is one way of looking at it. But still,  IF one did examine it from an economic perspective I believe the basis discussed above warrants consideration: that recipients will always tend to underestimate the value of gifts.

Not disconnected to this is the case of the numerous charity "free gifts" sent out yearly around this time. Already, I've received in the mail a calculator, a pen set, a pair of thermal gloves and numerous note pads, address labels and even calendars.

Whether I give a donation in return depends on a number of factors, including: the efficiency of the charity (how much is actually used for the defined purpose as opposed to purchasing these gifts, or administration) and how many other similar gifts I have received. I will always lowball the value of the latter, especially calendars - since given the oversupply of these freebies - the value is minimal. Hence, at the most I will acknowledge receipt with a $1 donation, especially if it's a charity I've never given to before.

In all such donations I've never given remotely what the items - e.g. pen set, gloves - might really be worth. Again, they gave it to me  "free" so I do not place as much value on the item as they might expect in donation - especially if it's a charity trying for the first time to 'lure' me in based on guilt. Their problem is I have no problem accepting all these gifts guilt- free and not giving a dime. They instigated the gift to me, I do not necessarily feel compelled to give a donation back of any value to reciprocate, particularly if I've never donated to that organization before.. That's life.

This also shows the tactic of many charities to send out "free gifts" to increase charitable donations from the recipients can often backfire.  They make the mistake of assuming everyone will react the same  way - feeling guilty at getting but not giving - but they don't.

Thus, just as one economist cited by the Journal agrees Xmas gift giving can be "wasteful" so also charities' tactical gift giving can be, if it doesn't translate into the donation benefit. (One analysis by givewell,org determined one charity - which shall go unnamed- spent 58 percent of its proceeds on 'gifts' to entice new donations. This is the epitome of a terribly inefficient charity)

Prof. Waldfogel, meanwhile, hasn't backed off from his assessment that gift giving is a losing proposition. The gift givers are"losers", and so are the recipients (since they will always undervalue the gifts). This - he estimates - will translate into a huge waste this Christmas when Americans are estimated to shell out about $830 each for gifts.

Waldfogel has published his take in his book: 'Scroogenomics - Why You Shouldn't Buy Presents for the Holidays'.  Interestingly "his phone rings every December with requests to explain his thesis"

Here's an easy explanation:

As long as people undervalue gifts or other freebies there is no point giving them if economic "efficiency" is the standard for giving.

If it isn't then people shouldn't be bothered. Heck, in the WSJ survey of the economists 51 of 54 admitted they 'broke down' and bought gifts for loved ones. The other three who at first declined to respond later admitted the same thing.

Who'd have thought?

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