Sunday, November 30, 2014

Does Holiday Shopping Boost the Economy?

Does the holiday shopping season boost the economy? Or does it matter? Or is the economy actually harmed by it?

Or does it depend on the state of the economy? 

By tradition, Black Friday is when retailers, when their sales are summed out over the year, first start netting a profit. ( If so, we can figure that retailers net on average over 10% profit, figuring total sales over the month of December to be even slightly more than the average month.)

But we follow the money.  First, consumers only have so much to spend over the course of a year. No matter how their spending is distributed, it doesn’t affect how much they have to begin with, and that is what limits how much they have to spend. If they spent less during the holiday season, they would have more to spend during the rest of the year. From that point of view, the holiday shopping season doesn’t affect the economy at all, except to make its activities uneven.  

However, suppose the season motivates people to take on a larger debt burden than they otherwise would.  This in the long run might lead to a decrease in growth in the real economy.  This is the consequence of the fact that, when we subtract the cost of borrowing, that is the interest paid by the consumer, the consumer has less to spend in the long run.  Of course, that interest is someone else’s income.  Since borrowing is by the poor from the rich, and the rich spend a lower percentage of their income, the implication is that total demand is reduced, and will grow more slowly. And so the economy with it. Also the distribution of wealth is changed, further concentrated on the rich, and this is not a good thing.

Supposing instead, on average, the existence of the holiday shopping season induces people to save more. Then in the long run, they would have more to spend, because of the interest, and this would lead to greater demand, and increased growth.  In the long run. But evidence doesn’t suggest increased savings to be the case. 

There is the additional cost of increased competition, the cost of stores open on holidays, and longer hours, the increased burden on infrastructure.  This additional destruction of resources makes us all a bit poorer.

There is the time and opportunity cost to consumers, waiting for their place in line, when they could be doing something more productive, and that makes them, and all of us, poorer.

If the economy was at full capacity before the holiday season, the increase in demand might lead to production bottlenecks, and inflation. This might be harmful. In a slack economy, it is hard to see this would be a problem, and might temporarily help the employment situation.  However, it shouldn’t affect the employment averaged over the course of a year.   

Anyway, at best, in net, we conclude the holiday shopping season has a slightly negative effect on the total economy.  Further, the compromising of the holiday of Thanksgiving, (and some might argue of Christmas also,) in the unseemly pursuit of profit, and the induced and equally unseemly pursuit of bargains, must be counted a social negative, and evidence that we cannot evaluate the well being and progress of a society merely by the measurement of economic factors.