[Insight & Opinion] Re-examining 'Scroogenomics' in an Age of Inequality

[Asia Economy] During the year-end and New Year holidays, gift exchanges among family, relatives, lovers, friends, and neighbors are abundant. Although these are very natural expressions of affection and friendship, they can become a burden in an era of high inflation. While people sometimes inform others in advance about the gifts they want, social conventions dictate that gifts remain a secret, often resulting in receiving unnecessary presents. Like the mismatched gifts of the “watch chain” and “hair comb” exchanged by Jim and Della in O. Henry’s novel The Gift of the Magi, such misplaced gifts can sometimes express deep love for each other, but the economics of reality occasionally demands cold rationality.

Viewing such gift exchanges as a problem of preference matching and resource allocation, the book Scroogenomics, which analyzes this from the perspective of deadweight loss in economics, comes to mind again as we welcome the new year 2023, expected to face economic challenges such as a recession. This book was written in 2009 by Joel Waldfogel, a colleague of the author during his time as a professor at the University of Minnesota.

In fact, Scrooge is a character from Charles Dickens’ 1843 novel A Christmas Carol. The novel is set against the backdrop of severe wealth disparity in London caused by the early Industrial Revolution in England. At that time, the upper class opposed social security policies under the pretext that income redistribution hindered national growth, and the novel satirizes these people. According to the World Inequality Report 2022, South Korea today also shows a continuous increase in income and wealth gaps since its economic development. As of 2021, the top 10% hold 46.5% of total income, while the bottom 50% have only 16%. The asset distribution is even more severe: the top 1% own 25.4% of assets, the top 10% hold 58.5%, whereas the bottom 50% possess only 5.6%.

In this era of inequality, Scroogenomics offers significant implications not only for individual gift exchanges but also for government and local governments’ income redistribution and support policies for low-income groups. According to the book, gift exchanges in the form of goods can cause considerable inefficiency due to mismatched preferences from a resource allocation perspective. Even with the same gifts or resource allocation, the method can greatly affect individual utility as well as the overall utility of the national economy. The author estimates that in the United States alone, gift exchanges cause a deadweight loss of $12 billion annually, and globally, the loss amounts to $25 billion. This loss is equivalent to one-tenth to one-third of the annual deadweight loss caused by government income tax imposition.

So, what is the “right” way to give gifts? Although it may seem somewhat cold between individuals, asking the recipient what they want and purchasing accordingly, or giving gift certificates or cash, which have higher liquidity than goods, is more efficient. While this is an obvious solution, changing social customs is equally challenging. Additionally, during periods of high inflation and high interest rates, it is necessary to reduce the scale of gifts themselves. For children, investing the equivalent amount in tuition or long-term funds rather than giving goods can be a good alternative.

The same applies to governments and local authorities. They should refrain from giving gifts from public institutions during the year-end and New Year holidays and, if possible, provide support to low-income groups in forms close to cash. This could include food vouchers, rent support, or partial medical expense reductions. Expanding this, it is desirable to concretize a social welfare service voucher system that allows broad cross-utilization according to needs such as food, housing, education, and health. Local governments could also issue local currencies in ways that minimize liquidity restrictions as an alternative.

Professor Kim Gyu-il, Michigan State University

This content was produced with the assistance of AI translation services.