The Black Friday effect: Let's stimulate the economy with inflation

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.

Most of the time, the rate of inflation is so low that we barely notice it. When it’s out of control, as it is right now in Zimbabwe, it makes money effectively worth nothing. But a bit of extra inflation can work miracles. With, say, 5 percent inflation — a bit more than double the current rate — $100 today will only buy $95 worth of stuff next year. That’s frightening, which is the point. We actually want consumers to realize that prices are rising and that money in their bank accounts is losing value if they don’t start spending. The same goes for companies too, which will be compelled to build and hire rather than sit on earnings, as many are now.