Black Friday, the day after Thanksgiving, is the single most manic, delirious shopping day of the year and, of course, the official beginning of the holiday-buying frenzy. Holiday binge-buying has deep roots in American culture: department stores have been associating turkey gluttony with its spending equivalent since they began sponsoring Thanksgiving Day parades in the early 20th century. And to goose the numbers, they’ve always offered huge promotions too.
Black Friday relies on a few simple retail strategies that, with tons of customer data and forecasting software, have become fairly precise. One method is to sell everything as cheaply as possible and magnify a tiny profit through volume. Other stores mark down only a few high-profile items — even selling them at a loss — in hopes that customers will also throw a few full-priced items in their carts. Regardless, Black Friday is essentially a one-day economic-stimulus plan and job-creation program. Retailers use TV commercials and deep discounts, rather than tax breaks and infrastructure spending, but the effect is the same: billions of dollars, which would otherwise never be spent, make their way into circulation.
In some years past, big sales on Black Friday have meant a good year for the retail sector, which makes up about a fifth of the U.S. economy. (This year, retailers are predicting a so-so year, with just tiny growth in sales.) But lately, the data have been much harder to read. On a spread sheet, broke people buying on deep discount look an awful lot like people who feel flush, but they’re not the same thing. In the recent recession, solid Black Fridays have been followed by lousy sales once the special offers went away. It’s another indication of how hard it is to understand the real state of our economy and what we can do to make things better.
One attractive approach to the latter would appear to be effectively having a few months of extended Black Friday discounts. In theory, it’s a way to end an economic downturn: when the economy slows, consumers stop spending. Then businesses slash prices, people buy at discounted rates, warehouses empty and business picks up. But this cycle was a lot easier to maintain before, roughly, 2001, when the United States so dominated the global markets that it also determined the cost of raw materials. When U.S. sales fell, global commodity prices followed. As a result, American companies could lower prices on consumer goods without firing a lot of workers or cutting their pay. But not any more: demand from China, India and Brazil, among others, is now sending the prices of oil, grains, metals and other commodities higher than ever. U.S. companies — stuck with a higher bill — have cut costs by laying off workers rather than by slashing prices. This holiday season, for example, retailers have the smallest number of workers per sales dollar in the last decade.
While Black Friday can be an amazing stimulus for one day, it can be destructive if it goes on too long. The main problem with an extended period of price discounts is that if companies end up with lower profits from smaller margins, they may need to fire even more people, thus raising unemployment even further and making shoppers even less likely to spend. If they go on too long, deep discounts could also lead to one of the scariest phrases in economics, “a deflationary spiral,” in which consumers and businesses are in a miserable stalemate — not spending, not hiring. When everybody expects prices to keep falling significantly, things get worse. Why shop today if everything will be cheaper tomorrow? Why build a new factory and hire workers if profits are just going to fall?
There is, however, a way to achieve a healthier, extended Black Friday. It also results in consumers shopping and businesses hiring, but, paradoxically, it’s achieved through raising prices rather than cutting them. And it is truly one of the other scariest words in economics: inflation. Like a defibrillator, inflation is a blunt tool that, used exceedingly sparingly, can sometimes save the patient. The Federal Reserve can create inflation by pushing more dollars into the economy, a huge influx of which makes every dollar we have worth a bit less.
Article source: http://feeds.nytimes.com/click.phdo?i=de43bc094328e0c82328897d8fcfaf0f