It’s that time of year to search out long-forgotten seasonal Christmas gear and sparkle up your house.
Accordingly, FT Alphaville thought it might be worth dusting off some economic theories from Christmas past. One that caught our eye - thanks to today’s Gartman Letter - is the “Santa Claus principle”, as made famous by Ludwig von Mises, father of the Austrian School of Economics.
What’s more, the following quote does seem eerily apt:
An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off. The Santa Claus principle liquidates itself.
According to the theory, measures like the Tarp and general government bailout funds only threaten the capitalist system - by creating the perception that the government is an agency dispensing benefits like Santa Claus.
While the Santa Claus principle can work in a growing economy, once credit expansion ends the principle inevitably has to “liquidates itself”. This is because the constant supply of wealth into the fund is depleted as people’s incomes and profits are reduced. The only solution is incresed taxation, which only exhausts private wealth further. All of this leads into an increasingly vicious cycle as wealth is further depleted and eventually the capitalist system chokes.
So according to Mises, the very worst thing the US administration can do is increase the bailouts - especially to what are proven inefficient enterprises like Chrysler, GM and Ford. As he explains (our emphasis):
An illustrative example is provided by the methods applied in the operation of nationalized and municipalized enterprises. These enterprises very often result in financial failure; their accounts regularly show losses burdening the state or the city treasury. It is of no use to investigate whether the deficits are due to the notorious inefficiency of the public conduct of business enterprises or, at least partly, to the inadequacy of the prices at which the commodities or services are sold to the customers. What matters is the fact that the taxpayers must cover these deficits. The interventionists fully approve of this arrangement. They passionately reject the two other possible solutions: selling the enterprises to private entrepreneurs or raising the prices charged to the customers to such a height that no further deficit remains. The first of these proposals is in their eyes manifestly reactionary because they believe that the inevitable trend of history is toward more and more socialization. The second is deemed “antisocial” because it places a heavier load upon the consuming masses. It is fairer to make the taxpayers, i.e., the wealthy citizens, bear the burden. Their ability to pay is greater than that of the average people riding the nationalized railroads and the municipalized subways, trolleys, and busses. To ask that such public utilities should be self-supporting, is, say the interventionists, a relic of the old-fashioned ideas of orthodox finance. One might as well aim at making the roads and the public schools self-supporting.
The notorious principle that, whereas private expenditures depend on the size of income available, public revenues must be regulated according to expenditures, refutes itself. Henceforth, governments will have to realize that one dollar cannot be spent twice, and that the various items of government expenditure are in conflict with one another. Every penny of additional government spending will have to be collected from precisely those people who hitherto have been intent upon shifting the main burden to other groups. Those anxious to get subsidies will themselves have to foot the bill. The deficits of publicly owned and operated enterprises will be charged to the bulk of the population.
Related links:
Ponzi, the USA edition - FT Alphaville
Bailout geology and credit rocks - FT Alphaville
The crises of interventionism - Mises Institute
