Today, shoppers across America will participate in the largest shopping day of the year: Black Friday. The National Retail Federation is estimating that 165.3 million customers will be shopping between Thanksgiving Day and Cyber Monday.[1] This estimate is higher than the 2018 estimate of 164 million.[2] The actual result from 2018 was 165 million between Thanksgiving and Monday.[3] A similar adjustment to the predicted value for 2019 would mean 166.3 million actual shoppers.

The NRF estimates that total sales for the holiday season will be between $727.9 billion and $730.7 billion, up from $701.2 billion in 2018.[4] This would be an annual increase of 3.8 to 4.2 percent. The estimate for 2018 was between $717.45 billion and $720.89 billion[5], suggesting that the total sales for 2019 may be closer to $711.95 billion. This year, the NRF estimates that retailers will hire between 530,000 and 590,000 seasonal employees, compared with the actual 554,000 they hired during the 2018 holiday season versus an estimate of 585,000 and 650,000.[4] We may therefore expect that retailers will actually hire about 502,500 seasonal employees. On the surface, this may appear to be a marvelous celebration of free market capitalism. But let us look deeper through the lenses of the broken window fallacy and the idea of malinvestment.

To view holiday shopping as a boost to the economy ignores the fact that people could either be spending that money in other ways or saving it. In other words, such an approach is an example of the broken window fallacy because it focuses only on what is seen and ignores opportunity costs. If people would save their money rather than spending it on various holiday gifts, then this money would be invested in one thing or another. As Henry Hazlitt explains in Chapter 23 of Economics in One Lesson, saving is really just another form of spending, and one that has a greater tendency to allocate resources where they are most needed.

Per capita spending is predicted to be $1,047.83 in 2019[6], up from the 2018 estimate of $1,007.24.[7] The above problems get even worse if people use credit cards to spend money that they do not currently have. With a current credit card interest rate of 17.44 percent and a minimum payment of 4.0 percent, a debt of $1,047.83 would take 5 years and 11 months to pay off and would cost $1,526.20. This is $478.37 wasted on interest payments that could have been kept in one’s accounts or put toward a productive purpose. Multiply this by the 166.3 million shoppers predicted earlier, and the result is that as much as $79.55 billion could be spent on interest payments. In 2018, the credit card interest rate was 17.58 percent, and the average debt of $1,007.24 took 5 years and 9 months to pay off with a total cost of $1,468.05.[8]

When people purchase unwanted gifts and/or buy gifts with money they do not currently have, their choices encourage malinvestments. A malinvestment is an investment in a line of production that is mistaken in terms of the real demands of the economy, which leads to wasted capital and economic losses. The holiday shopping season contains a subset of shopping which creates systematic and widespread mistakes in investment and production. However, the effect is not as severe as what occurs during an Austrian business cycle bust and is both caused and resolved in fundamentally different ways. A look at the average monthly returns on the Standard and Poor’s 500 shows that the holiday season is strong for stocks, with November and December being the best months for investments. But January and March are middling, while the average February has losses. (April is likely higher due to income tax returns providing an artificial economic boost.)

With these arguments in mind, would we all be better off if we just canceled the holiday shopping season? It is an open question, but the Austrian School of economics suggests that we could have a better economy if the burst of economic activity in late November and December were spread throughout the year and people did not spend money they do not have on items they do not need.

References

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