Today, shoppers across America will participate in the largest shopping day of the year: Black Friday. The National Retail Federation is estimating that 164 million customers will be shopping between Thanksgiving Day and Cyber Monday. This estimate is unchanged from 2017. The actual result from 2017 was 174 million between Thanksgiving and Monday. A similar adjustment to the predicted value for 2018 would mean 174 million actual shoppers.
The NRF estimates that total sales for the holiday season will be between $717.45 billion and $720.89 billion, up from $687.87 billion in 2017. This would be an annual increase of 4.3 to 4.8 percent. The estimate for 2016 was between $678.75 billion and $682 billion, suggesting that the total sales for 2018 may be closer to $727.09 billion. This year, the NRF estimates that retailers will hire between 585,000 and 650,000 seasonal employees, compared with the actual 582,500 they hired during the 2017 holiday season versus an estimate of 500,000 to 550,000. We may therefore expect that retailers will actually hire about 685,000 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 $1,007.24 in 2018, up from the 2017 estimate of $967.13. 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 17.58 percent and a minimum payment of 4.0 percent, a debt of $1,007.24 would take 5.75 years to pay off and would cost $1,468.05. This is $460.81 wasted on interest payments that could have been kept in one’s accounts or put toward a productive purpose. Multiply this by the 174 million shoppers predicted earlier, and the result is that as much as $80.18 billion could be spent on interest payments. In 2017, the credit card interest rate was 16.72 percent, and the average debt of $967.13 took 5.5 years to pay off with a total cost of $1,372.85.
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. Although 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, there is a noticeable hangover effect on the economy. A look at the average monthly returns on the Standard and Poor’s 500 shows that while the worst month for investments is September, the next three worst months for investing are February, May, and March. (April would likely be bad as well if not for income tax returns providing an artificial economic boost.) An economic downturn occurs in the historical average following the holiday season, but as this has become an expected annual occurrence, many analysts simply do not look for an explanation of these results, as they are perceived to be natural. Even so, this appears to be a small-scale business cycle that repeats annually.
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.