Blog to check out

Just in case you miss my snarkiness during my blogging absence (due to the dreaded finals week), check out one of my favorite behavioral economics blogs, written by Tim Harford.

CASH: The most thoughtful gift this season?

With financial strain facing many American families, consumers look for ways to maximize their gift-giving utility. Though consumers flocked to department stores in droves, coupons in hand, on Black Friday, traditional gifts are not the best use of limited Christmas funds.

Gift cards have long been viewed as a “middle ground” in the gift-giving realm. Though more thought is exerted in choosing the origin of a gift card, there is less worry that it will go underappreciated.

According to research by TowerGroup, Americans spent $92 billion on gift cards last Christmas season, and Nielsen projects that even more money will be spent this year. Consumer Reports estimates that approximately 62 percent of Americans purchase gift cards during the holidays.

Though a preferred present among consumers, gift cards prove to be inefficient in terms of generating Christmas cheer, both for the giver and the receiver.

The sobering truth is that nearly 30 percent of consumers never redeem their gift cards. Last year alone, $6 billion of card contents were siphoned from fees and expiration. The extent of unwanted gift cards is so vast that auction websites specialize in gift card swaps.

Pressure from Congress has curbed gift card waste by amending Regulation E of the Electronic Funds Transfers Act to extend expiration dates of credit and bank-issued gift cards to five years and eliminate fees on cards that remain inactive for 12 months. The act does not protect gift cards issued by individual stores and restaurants, which typically carry one-year expiration dates.

Despite the waste in gift card spending, giving physical gifts produces even less overall utility. Close friends and relatives may be able to purchase a favorable gift, but typically gifts are not well-matched to their recipients, creating deadweight loss of utility. Post-Christmas surveys reveal that utility of gifts are valued only at 80% of their actual cost to the giver.

Monetary gifts are the only sure way for both the giver and receiver to maximize the utility of a present. Though it may seem tacky, the gift with the most love and sentiment this Christmas season is a gift of cash.

 

 

"A crisis is a terrible thing to waste."

This rather witty quote attributed to Paul Romer is particularly poignant during this sluggish economy. A leader in the “New Growth Theory,” Romer advocates the notion that long-term growth is propelled by spending on education, research & development, and new business subsidies.

This rather recent economic view takes opposition to core aspects of Neo-Classic Economic theory that focuses more on the short-term stimulus by way of capital inputs and labor efficiency. With economic forces fueling job loss and cost cuts, slashes in expenses often manifests in wage cutbacks, keeping the Keynesian prescription for growth stagnant.

However, despite funds being diverted away from labor costs, spending on Research & Development has actually increased over the past year.

Apart from big industry companies, like Detroit auto-makers, thirty of the largest companies have, on average, sustained their R&D spending, despite a revenue loss of 0.7 percent the past quarter. 3M, Intel, and Microsoft are keeping up their R&D spending with a clear vision of future profits. Apple is the research success story – their aggressive spending in the early 2000s, despite drops in revenue, came to fruition with their iPod and iTunes success.

Technology is constantly improving and if companies want to stay ahead of the curve, they need to think of the long-term when dolling out limited resources. Globally speaking, China and India have surpassed U.S. growth in R&D spending (4%) by three percent.

Although the 10% unemployed Americans may clamor over limited revenue being allocated to expensive research that may or may not pan out several years in the future, economically speaking, it is a risk worth taking. If American companies slack on R&D spending in favor of keeping more employees on the payroll, they could lose technological ground to their Asian competitors.

So in order to take advantage of these bleak economic times, instead of cutting investment in research, companies should ramp-up their spending and hope for the best. Though no research is a sure-fire recipe for success, betting on the research is the safest method of investment for struggling companies. 

Beware of Free Lunches

During the first day of Introduction to Microeconomics courses, students become acquainted with the ominous phrase, “There is no such thing as a free lunch” – no wonder that cynicism results from years of economic study. With the knowledge that everything has a “price,” whether or not that price has a denomination attached, certain skepticism is needed to navigate purchasing options, especially the tempting offers that seem “too good to be true.” 

With recessionary worries on the forefront of everyone’s minds, the promise of “free money” is especially alluring. With vulnerability at an all-time high, malicious businesses can pounce on unsuspecting victims in pursuit of keeping in the black.

Despite my scrutiny of questionable corporate tactics, even I was astonished at a recent scheme that hit too close to home.

My dad received a small refund check in the mail from his credit card company. Assuming that he must have overpaid the bill, he deposited the check – big mistake. On the next month’s bill, while perusing the list of charges, he spotted an anomaly – there was a charge to an unknown company for credit card insurance. Though the charge was relatively small, my father immediately called the company to inquire about the charge.

Apparently, by the depositing the “refund check,” the company immediately enrolls the customer for credit card insurance. The customer receives the money from the check, but is then charged for the insurance – indefinitely – until the service is cancelled. Of course, at least one month of coverage is charged before the statement is released. Luckily, early scrutiny of the bill staved off any further charges, but I am sure that many unsuspecting customers are not so fortunate and wracked up more charges before realizing their error.

The lesson to be learned from this entire debacle is not only the deceptive methods that struggling agencies stoop to in order to cull business, but also the absence of free lunches, especially during these economic times. If something seems too good to be true, it probably is.