Santa Claus Economy

Nigel Aitkins - Fri 24 Dec, 2004

"...A heart-warming look at the real meaning of Christmas today...amidst the 21st centurys galloping consumption..."

Anyone who wears a red suit and has a beard remarkably similar to Karl Marx's is not to be trusted. I start with this principle.

I'm not saying that Santa is a Commie, despite his red wardrobe. Officially, he preaches "to each according to his deeds," not needs. He makes a list and checks it twice, focusing on who has been naughty or nice. Unofficially, however, everyone seems to get plenty of presents, even Bart Simpson. There is no indication that Santa's factory is a government-owned operation, but it's not clear exactly where the money to pay the elves comes from. The whole operation is suspicious.

The more that I examine the evidence, the more I am convinced that Santa is a Keynesian. In fact, he is the original Keynesian. The man is obsessed with consumer demand. He never says a word about the wisdom of thrift.

John Maynard Keynes was a mathematics student (BA, 1905), whose father was an economics professor at Cambridge University. His father got him a job as an economics lecturer at Cambridge in 1908, even persuading his colleague A.C.Pigou to pay his son's salary. The father then guaranteed his son an equal amount. It always helps to have friends in high places.

Keynes spent his entire academic career reversing himself on economic policy: tariff policy, monetary policy, fiscal policy. Early in his career, he became an advisor to the British Treasury. His influence increased during World War II. He died in 1946.

In 1936, Macmillan published his book, ‘The General Theory of Employment, Interest and Money’. This book offered a new economic theory that defended government deficit spending policies that had already been adopted by most major governments. His ideas conquered the academic world in the 1940s and 1950s. The International Monetary
Fund was his brainchild in 1944. America's Full Employment Act of 1946 is pure Keynesianism. Both legacies faltered in the stagflation of the 1970s.

This time of year, Keynesianism gets its annual media shot in the arm. Week by week, from Thanksgiving in America to the  week before Christmas, we hear reports on consumer spending. How much money are retailers pulling in, compared to last year? Are retailers having to offer discounts to get sales? How crowded is Wal-Mart or Marks & Spencers? Are the shopping malls jammed with shoppers?

While all this is relevant for retailers who specialise in toys and Christmas items, it is irrelevant for assessing the state of the Anglo-American economies, let alone the Asian economy. Yet every year, we are reminded by TV reporters, standing in malls, that this year is good or bad or mediocre for retailers. Why does anyone care, other than retailers and discount-seeking shoppers?

The public cares because we have been conditioned by decades of Keynesian propaganda. For Keynesianism, consumption is everything. Thrift is nothing - and maybe a liability.

A century ago, the word "consumption" referred to tuberculosis. The disease consumed the lungs. If not reversed, it brought death. The success of the various wonder drugs of the 1930s overcame this dread disease. It is no longer common in the industrialised West.

At about the same time that consumption ceased to be a threat biologically, the word became a touchstone for economists seeking to offer cogent advice to governments on how to overcome the unemployment produced by the Great Depression. Under the influence of Keynes after 1936, increased consumption became regarded by mainstream economists as the best technique for overcoming the Great
Depression. The more money that the public spends on consumer goods and services, the better for the economy, Keynes said. Conversely, the more money they save, the worse for the economy. He turned traditional economics upside down. He moved economists away from the old idea - "If you produce it, they will buy (at some price)" - to a new one: "If they buy it, more will be produced."

The key analytical question is this: With what money will consumers buy these goods?

With their savings? That would reduce the supply of funds available for producing capital equipment: reduced future output, meaning reduced wealth...

With their wages? Then they must be producing something of value to other consumers...

From increased government spending? The government must get the money from someone. The money that is spent by the government isn't spent by someone else. It's a wash...

With newly created fiat money? Then the government/central bank is creating a system of something for nothing. That's nice for the people who get immediate access to the newly created money, who then spend it to buy consumer goods at yesterday's lower prices.

But for those on fixed incomes, it's a system of nothing for something: prices rise faster than their income does. It's a wealth-transfer system, not a wealth-creation system.

The Great Depression in America, like the German inflation of 1918-23, was accompanied by a declining division of labour and falling real income. In the Great Depression, people did not have enough money to buy today's output at yesterday's higher prices. The money supply shrank because of collapsing banks. People hoarded cash. There were layoffs. The division of labour shrank. Wealth declined.

In the German inflation - and also the Austrian and Hungarian inflations - people did not have enough goods available to buy with their ever-increasing quantity of money. Resource owners hoarded goods. Producers stopped selling goods because they could not locate raw materials because of the hoarding. They went out of business. There were layoffs. The division of labour shrank. Wealth declined.

The point is, we can suffer declining output in a depression, when the money supply shrinks, and during an inflation, when the money supply increases. If there were relatively stable money most of the time, such as with a pure gold coin standard and non-fractional reserve banking, the booms and busts that are created by fiat money inflations and contractions would cease to exist.

Investors and consumers could make better predictions and then plan accordingly. They would not be confused by unpredictable changes in the money supply. This is not our world today.

Keynesians look closely at consumer spending. When consumers take on more debt, Keynesians are unconcerned. Keynesian economists may say a few kind words about the need for saving, in the same way that they say a few kind words about the desirability of balancing the federal budget or fighting inflation. But whenever a recession hits and the savings rate rises because of consumers' fears about the future, Keynesians issue dire warnings about the need for more spending, especially government spending.

The question is: Where will the government get the extra money to spend? From lenders or from the central bank? In the first case, there must be more saving. In the second case, there must be monetary inflation.

Santa has elves. Who provides the tools of production and raw materials for these elves? If children were more perceptive, they would figure out that the whole Santa Claus story is fake.

If their parents were more perceptive, they would figure out that Social Security and State-funded healthcare is fake.

If economists were more perceptive, they would figure out that Keynesianism is fake.

Children don't ask about elves' salaries. Parents don't ask about the demographics of retirement and aging. Keynesian economists don't ask about how the government can increase spending to fight recession, while not relying on either public thrift or central bank inflation.

We live in an international society in which Europeans and North Americans are unwilling to face the reality of the Santa Claus economy...where there are always elves who are willing and able to work year-round to keep the wheels of commerce going. These elves somehow get their hands on capital equipment and raw materials. They work all year in order to bring wealth for all at the end of the year, in one glorious day of consumption. The entire system of cause and effect rests on faith: the suspension of disbelief.

There comes a day when parents are forced to admit to their suspicious children that there is no Santa Claus. The joy associated with make-believe ends that day for both parents and children. That is why parents delay the day of truth for as long as they can.

With respect to Social Security and State-funded healthcare, politicians are still unwilling to admit the truth to all those smiling faces. Government has the civil service prepare three forecasts: pessimistic, optimistic, and intermediate. The bureaucrats use the intermediate. The bad news is always projected to arrive decades later. This allows government to defer each year any announcement to the public regarding the inevitable revolt of the elves.

As for Keynesian economists, the federal budget is always to be balanced later, price inflation will be eliminated later, and thrift will become necessary later. Elves will always work for government IOUs. That is their nature.

Keynesians still dominate economic policy-making. This is why the Santa Claus economy is still in place.

Children want to believe in Santa Claus, but they eventually grow up. Unlike faith in Santa, faith in government-supplied prosperity is widespread among most adults. This is why they refuse to follow the money. They refuse to ask why elves stay on the job. But without elves, Uncle Santa is out of business.

Everyone wants to open presents on Christmas morning. Nobody wants to be an elf 364 days a year. Politicians promise endless presents at the expense of wealthy elves, who must be compelled to pay their fair share.

Result: everyone winds up wearing curly-toed shoes.


Best wishes for a Merry Christmas,

Gary North
for the Daily Reckoning