Gary North's REALITY CHECK
Issue 405 December 21, 2004
SANTA CLAUS ECONOMICS
Anyone who wears a red suit and has a beard remarkably
similar to Karl Marx's (http://snipurl.com/marx_santa) is
not to be trusted. I start with this principle.
I'm not saying that Santa is a Commie, despite his
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.
THAT MAN KEYNES
John Maynard Keynes ["canes"] was a mathematics
student (B.A., 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.
SHOP TILL YOU DROP
This time of year, Keynesianism gets its annual media
shot in the arm. Week by week, from Thanksgiving 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? Are the
shopping malls jammed with shoppers?
While all this is relevant for retailers who
specialize in toys and Christmas items, it is irrelevant
for assessing the state of the American economy, 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.
CONSUMPTION
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 industrialized 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 traditional
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 will
they buy it? (1) With their savings? That will reduce the
supply of funds available for producing capital equipment:
reduced future output, meaning reduced wealth. (2) With
their wages? Then they must be producing something of
value to other consumers. (3) 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. (4) 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, like the German inflation of
1918-23, was accompanied by a declining division of labor
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 labor shrank. Wealth declined.
In the German inflation (also Austrian and Hungarian),
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 labor shrank. Wealth declined.
The point is, we can suffer declining output in a
depression, when the money supply shrinks, and in 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.
BOOM TIMES OR GLOOM TIMES
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.
Non-Keynesians look closely at saving. Is the economy
in capital-creation mode or capital-consumption mode? Is
the typical consumer spending everything he earns? If so,
then he is consuming his seed corn. He is not planning for
his future.
When most consumers take this approach to the future,
the economy reflects their demand for consumer goods rather
than production goods. The producers respond to consumer
demand: more toys, fewer tools. The economy reflects the
present-orientation of spenders.
In a free market society, people should be allowed to
do what they want with their money. When the government
taxes people, this affects their decision to save money or
buy consumer goods. There are no revenue-neutral taxes.
All taxes shape taxpayers' spending patterns. Because
modern governments tax everything they can get their hands
on, the best strategy to retain private owners' authority
is to vote for lower taxes across the board. This
delegates more authority for people to decide how they want
to allocate after-tax assets: present goods vs. future
goods.
When do you want boom times: now or later? When are
you likely to be more dependent on others' productivity:
now or later? When do you want passive income: now or
later? Your answers to these questions will shape your
allocation of funds: consumer goods vs. producer goods.
It has been a characteristic feature of American
workers to be future-oriented. They have been thrifty.
They have understood that they will be dependent on their
children in their old age unless they take specific steps
to prepare for old age through investing. This outlook has
begun to change over the last decade. The savings rate has
fallen. If this continues, America will move in the
direction of a low-output economy. Capital will not be
provided by Americans to extend the division of labor. It
will be extended, if at all, by foreign investors, who will
receive the income generated by capital. This will be nice
for their retirement, but not for ours.
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SANTA'S LITTLE HELPERS
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/Medicare is fake.
If economists were more perceptive, they would figure
out that Keynesianism is fake.
In each case, the story rests on the idea of something
for nothing. 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 who live north of the Rio Grande are
unwilling to face the reality of the Santa Claus economy.
In the Santa Clause economy, 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.
CONCLUSION
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/Medicare, Congress is
still unwilling to admit the truth to all those smiling
faces. Congress has the Social Security System's trustees
prepare three forecasts: pessimistic, optimistic, and
intermediate. The trustees use the intermediate. The bad
news is always projected to arrive decades later. This
allows Congress 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.
****************************
Appendix 107
Case study #459 comes from a psychological therapist.
We have an outpatient psychological clinic
specializing in relationship issues. We do
psychotherapy and workshops for singles and
couples who want to create healthy relationships.
This is the story of a specialist who neglected to
find out which type of client produces the most revenue
long-term.
We have gotten great success from application of
many Abraham concepts, but none more than
utilizing the Lifetime Value of a Referral. We
had been in business for about 7 years when we
made a detailed analysis of the Lifetime Value of
a Referral.
There are two concepts here: the lifetime value of a
customer and the value of a referral to generate a new
client. This specialist had neglected breaking down his
statistics. But at least he had kept statistics, which
most small business owners neglect to do.
At first I calculated it by taking the number of
clients who paid for a service and dividing it by
total revenue. The number came out lower than I
expected, so I did some further analyses.
I suddenly noticed that the lifetime value of a
referral varied tremendously depending on which
service new clients entered our business on. We
have seven different services that people can
enter our system on, with varying degrees of
price and commitment of time. Our workshops were
very well known in our community and we thought
they were generating a great deal of therapy
referrals. However, when we analyzed it closely,
we found that people who entered our system
through workshops first had the lowest lifetime
value to our business.
This was a tip-off that his marketing strategy was
wrong. He had not calculated the long-term payoff for each
of his client-recruiting strategies.
Those that started with individual or couples
therapy, however, had the highest lifetime value
-- almost triple that of the workshop people --
because they were much more likely to use
numerous additional services in the future.
Unfortunately, we realized that we had been
devoting about 90% of our marketing time and
money to our workshops and only 10% to our
therapy, because the educational component of our
business was a core part of our USP [unique
selling proposition -- G.N.].
Here is a case where the business owner had adopted
the wrong USP for the business. It had hampered the
operation for seven years. It had shaped his marketing, as
a USP should. But it was the wrong USP.
Moreover, we found that therapy clients divided
themselves into 2 groups: those that came 1 or 2
times and those that came 3 or more times. Those
that came 3 or more times as their points of
entry into our business had the highest lifetime
value of all.
It had taken him seven years to identify the group at
which most of his marketing budget and efforts should be
targeted.
So we made 2 major changes based on this
analysis: we started a new referral system, where
we rewarded existing clients with a gift
certificate or a free session, if someone they
referred to us attended at least 3 sessions. This
alone generated many more referrals for therapy.
Secondly, we shifted our marketing focus,
especially with display ads and direct mail, to
our therapy services. Again, our referrals for
therapy increased significantly, and by
cross-selling and upselling the therapy clients,
our workshop income increased as well, despite
less marketing devoted to them.
Bottom line is that we are now spending 30% less
on marketing than we were and have increased
referrals by 31% and income by 42% over the
previous year.
This is a case of "less is more." The business had
not been focused on the 5% of the clientele that produce
half of the income.
Lessons:
1. Be sure to have many points of entry to your
business.
2. Analyze Lifetime Value of Referral for EACH
point of entry separately.
3. Focus marketing efforts on the point(s) of
entry which have the highest Lifetime Value.
4. Develop a strategic method to upsell/cross-
sell these clients once they are in your system,
since they will give you the biggest bang for the
buck.
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