Frank's Blog

Are you wasting your money? Not when you GIVE The Gift of Giving

Tue, 08 Dec 2009 21:42:00 GMT

You Shouldn't Have
The economic argument for never giving another gift.
By Joel Waldfogel
Posted Tuesday, Dec. 8, 2009, at 7:04 AM ET
With just three weeks till Christmas, the Red Bull-infused phase of the holiday shopping season is upon us. If recent history is any guide, the month of December alone—with just 8 percent of the year's shopping days—will bring 23 percent of the year's sales at jewelry stores, 16 percent at department stores, and 15 percent at electronics stores. U.S. December retail sales can be expected to exceed sales in other months by $65 billion. Finally, some good news for the economy. Or maybe not.

Normally—during the 11 non-December months of the year—I'll spend $50 on something only if it's worth at least $50 to me. Typically, measures of spending provide a lower-bound on the value of the satisfaction that buyers expect to reap from their purchases. While some of our own purchases ultimately disappoint, we generally buy well for ourselves, so using spending as a barometer of consumer satisfaction makes sense. Spending on gifts is different. When I set out to spend $50 on you, I operate at a significant disadvantage. I'm not certain about what you have or what you want, so when I spend $50 on a gift, I may buy something worth nothing to you. There's no guarantee that consumer satisfaction meets, exceeds, or even comes close to the amount spent on the gift.

How much satisfaction do we purchase with the $65 billion worth of stuff we put under the tree? Over the past 15 years, I've done a lot of surveys asking gift recipients about the items they've received: Who bought it? What did the buyer pay? What's the most you would have been willing to pay for it? Based on these surveys, I've concluded that we value items we receive as gifts 20 percent less, per dollar spent, than items we buy for ourselves. Given the $65 billion in U.S. holiday spending per year, that means we get $13 billion less in satisfaction than we would receive if we spent that money the usual way—carefully, on ourselves. Americans celebrate the holidays with an orgy of value destruction. Worldwide, the waste is almost twice as large.

But doesn't this analysis ignore the joy of giving? you ask. Can't that joy make up for the inefficiency of gift giving? Let's consider an example. Your Aunt Mildred buys you a $50 sweater. You don't hate it, but you don't love it, either. In all likelihood, you'd have bought it for yourself only if it was a steal—let's say you'd have been willing to pay no more than $30 for it. So far, her gift appears to destroy value. But suppose Mildred got joy in giving the gift, and while it would be hard to do so with any precision, let's suppose we can attach a dollar value to Mildred's joy. For the sake of discussion, let's say it's another $30. That would bring the total benefit of the transaction to $60, $10 more than its cost. But wait: If Aunt Mildred got the same joy from giving you a sweater you actually wanted—worth its $50 price tag to you—then the transaction could have created $80 in value. Relative to this, the bad gift misses out on $20 worth of satisfaction. So even accounting for the joy of giving, our gift-giving is inefficient. Of course, it's also possible that Mildred enjoys giving you only sweaters you do not like, but if so, then Mildred is a sadist. And I doubt that sadism motivates the vast lot of gift giving.

Hold on there! Isn't spending good for the economy? The economy consists of buyers and sellers. In normal transactions, the seller gets a price exceeding his cost and therefore makes some profit, while the buyer gets an item she values at or above its price (in which case the buyer receives some surplus). A well-functioning market maximizes the joint surplus experienced by sellers and buyers. With gift giving, the seller still gets his profit, but the ultimate consumer (the gift recipient) gets an item that produces less satisfaction than an equal amount of spending would have led to if she had purchased an item for herself. So, is holiday spending good for the economy? It's good for sellers, but it's not sufficiently good at producing satisfaction for the ultimate consumers. And most of us are, after all, consumers rather than sellers.

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.

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.

The Gift of Giving in The Denver Business Journal

Fri, 04 Dec 2009 15:40:00 GMT

Last year, Frank and Jennifer Callahan launched a new, Denver-based nonprofit organization called TheGiftofGiving.com. There, gift buyers purchase charitable gift cards, which are mailed to recipients. The latter then choose from among nearly 150 nonprofit organizations at TheGiftofGiving.com to receive contributions.

The Economic Downturn Will Have Major Effects On Corporate Philanthropy

Thu, 05 Mar 2009 17:41:00 GMT

I beieve that indivduals will continue to support charities to the level that they do now, but, unfortunately, corporate philanthropic donations may see a significant downturn.

Charities Say Tax Changes Add to Pain

Thu, 05 Mar 2009 17:35:00 GMT

The real question is why do people give to charity. Do you give to charity for a write-off or do you give with the hope of making a difference?

Club Generosity

Mon, 01 Dec 2008 23:13:00 GMT

There are some serious givers among our nation's wealthiest. We may never match the number of zeros on their bank statements, but that is not the point. They all give to causes that they believe in and so can you.

Don't just spend less. Spend better.

Thu, 27 Nov 2008 03:22:00 GMT

Consumer Reports finds that 78 percent of people surveyed plan to spend less this season. I say give a gift that truly makes a difference.... THE GIFT OF GIVING.

What is the story of stuff? Who knew?

Thu, 16 Oct 2008 03:13:00 GMT

The Story of Stuff exposes the connections between a huge number of environmental and social issues, and calls us together to create a more sustainable and just world. It'll teach you something, it'll make you laugh, and it just may change the way you look at all the stuff in your life forever.

Presidential campaigns raise and spend a lot of money, but people give a lot more to those in need.

Thu, 04 Sep 2008 18:22:00 GMT

Presidential campaigns raised $580.4 million in 2007, according to the Federal Election Commission. That is less than one-quarter of one percent of the $306 billion raised for charitable purposes.

by Giving USA FoundationTM

Now that is a bit of positive news.............

Thu, 04 Sep 2008 18:18:00 GMT

U.S. charitable giving estimated to be $306.39 billion in 2007

Up 3.9 percent despite worries about gas prices, mortgage crisis and housing market

by Giving USA FoundationTM

Sometimes it is just more stuff

Fri, 22 Aug 2008 21:05:00 GMT

Remember that stuff does not define self-worth. It's cliché but true. Money can't buy you love or happiness.
I suspect that YAWNs, like anyone else, find fulfillment in personal relationships and social causes because those are things that last. Why waste time, energy and money trying to impress other people with designer clothes, fancy cars and palatial mansions? Those are merely distractions. It's the things that money cannot buy that best define your life.
Ray Sidney, 38, a former software engineer at Google, made bank when the company went public in 2004. Instead of living it up, he quietly retired to Stateline, Nev. He says he probably doesn't qualify as frugal -- he owns two planes to shuttle between home and the Bay Area -- "but I could certainly live a more fancy-pants life than I do."
With his means, there's a lot of temptation to buy, buy, buy. But the habits he learned years ago as a strapped student are well-ingrained. "I only buy things I know I'll use," he says. "Why buy something to just sit there and take up space?"
Give back. Many young adults aspire to leave the world a better place than they found it. And those with considerable wealth are having an awakening.
"You start to realize: What's the point of spending money when you can think of so many better ways to use it?" says Sidney, who has helped fund a high school football field and helped pay for a local arts center, among other donations. With his latest pet project, he's aiming to do something for Mother Earth: He's building an affordable, eco-friendly housing development in Nevada.
Feeling generous but strapped for cash? You may not have the bankroll of millionaires, but you have just as much time in a day as they do. Give of yourself if not of your wallet. (See "A dozen creative donations" for more no- or low-cash ways you can give to charity.)
Whatever your financial situation, being charitable and socially conscious can be rewarding -- not to mention that it's good karma.
I like how Knight Kiplinger, the editor-in-chief of Kipinger.com, puts it: "Your own financial security depends far more than you may think on the financial, physical and spiritual health of others in your community, our nation, our world. When you share your good fortune by donating your money, time and talent to charity, you help create a stronger economy and a healthier, safer world."
This article was reported and written by Erin Burt for Kiplinger's Personal Finance Magazine.