Santanomics 101

By   /   October 24, 2014  /   23 Comments

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So, for now, putting aside who will actually incur the financial cost, if the Auckland Council was to offer $150,000 to a firm (say, Auckland Installers and Dismantlers [AID] Ltd.) who would do the required work, what would the costs and benefits actually be, and to whom?

Christmas-Whitcoulls-Santa--Getty-Images

Santanomics could mean a number of things. It could be the study and practice of giving. Or it could mean the study and practice of rampant end-of-year commercialism. However, for me today it is the economics of erectingAuckland’s giant Santa in the Heart of the City (NZ Herald, 23 Oct 2014).

For the miserly it’s a no-brainer. The $150,000 (or thereabouts) financial cost of installing, maintaining and dismantling Santa is just a waste of money. The real answer to this matter of cost, however, is ‘it all depends’. In particular it depends on whether the city has unemployment, or full employment.

Keynes noted in the General Theory:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
[JM Keynes, Book 3, Chapter 10, Section 6 pg.129 The General Theory]

(Keynes, by the way, as a source of famous quotations probably comes third, after the Bible and Shakespeare.)

So, for now, putting aside who will actually incur the financial cost, if the Auckland Council was to offer $150,000 to a firm (say, Auckland Installers and Dismantlers [AID] Ltd.) who would do the required work, what would the costs and benefits actually be, and to whom?

Case 1: Unemployment scenario. AID would be paid the $150,000, causing most of that to be spent, by the otherwise unemployed workers hired, on other goods and services. Most of the extra income from this spending will in turn be spent by others, and so on. Globally the initial ‘injection’ of $150,000 of spending would actually multiply into about $400,000 of spending, most of which would be in Auckland. This would mean that society overall would be better off by $400,000 worth of goods and services ($150,000 of this amount being the erected Santa). The only economic cost would be the foregone (and unwanted) leisure of the otherwise unemployed workers. Society is better off both by the happiness that Auckland’s Santa brings, and by the extra $250,000 goods and services that will be enjoyed by workers who would otherwise have been un- or under-employed. This is Keynes’ answer.

Case 2: Full Employment scenario. AID would have to forego other work. The cost would thus be the value of these other goods and services not produced and enjoyed. The benefit would be the enjoyment arising from Auckland’s Santa. The cost could well be greater than the benefit. This is the ‘neoclassical’ economic argument that always deploys the assumption of full employment. When the assumption is challenged, the retort is usually some variant of: ‘the economy generally works as if there was full employment’.

So, from a societal perspective, if Auckland has an unemployment problem, then Santa’s installation creates substantial benefits with no actual costs (except any unhappiness incurred by those who dislike giant Santas). (There is a proviso that an alternative spending project might give even greater benefits. Nevertheless Big Santa is probably worth more than Keynes’ old bottles.) If Auckland really does have full employment, however, the costs will most likely outweigh the benefits.

Neoclassical economics is a special theory of full employment economics. Keynes gave us a general theory which encompasses neoclassical thinking (as a special case) rather than refuting it.

 

Who Should Pay for Santa? (Assuming Case 1)

If the Auckland Council was to pay the $150,000 (or pay it to Heart of the City) to erect Santa, then there would be a public financial cost. It would presumably add to Auckland Council’s debt, while creating substantial private benefits to those for whom the $400,000 of enabled spending represented income.

Economically, it’s a difference between the benefits of employment and the ‘benefit’ of unemployment. Financially, the Auckland Council would see the Auckland public as losers however, unless they believed that Aucklanders got $150, 000 worth of happiness from Santa. Thus the Council would need to be persuaded to see the bigger picture. Likewise some private benefactor(s) might see the bigger picture.

It looks like Santa will be erected in 2014, thanks to Mansons TCLM and Sky City. While indeed it is a case of these benefactors seeing the bigger picture, such firms can be quite picky and choosy about what projects to support. The overall benefits of the spending injection are the same, if there is unemployment, whoever the initial spender might be. And, in times of full employment, the costs of such frivolity are the same whoever the frivolous might be.

The wider lesson is that any organisation (or person) with deep pockets or a good credit rating should aim to spend, in a counter-cyclical way, at times of significant unemployment. The most prominent such organisation with financial capacity is of course the national government. The benefits of governments’ incurring financial costs for greater economic and social good are overwhelming. Debt – certainly deficit spending – becomes the solution, not the problem.

Philanthropic foundations can achieve such deficit spending without incurring debt. Governments however (except those of the likes of Norway, Qatar and Singapore) can only achieve such deficit spending by incurring more debt. In principle that debt can be paid down, at least in part, at other times of the economic cycle. Governments should – indeed governments must – incur additional debt at times of significant unemployment. They can (and should) repay that debt (or at least some of it) in times of the cycle when ordinary households and businesses are undertaking deficit spending.

Financial costs must always be seen in a long-term perspective. Further, if households and businesses do not spend freely at least some of the time, then adding to government debt – even huge government debt (such as that of Japan) – still represents the solution rather than the problem. Governments and philanthropic organisations must compensate during those frequent periods of private sector austerity.

When nobody pays for Santa we all become worse off (unless we really are living in the neoclassical special case of full employment). It is the societal economic costs and benefits that matter, not the individual financial costs. That’s how the Golden Gate and Sydney Harbour bridges were built in the midst of the Great Depression. Someone saw the bigger picture.

Auckland’s Santa hardly compares with these icons of course, but it’s the same principle on a smaller scale. Affordability is not about money. Rather, it’s about the availability of workers and other resources. I have little doubt that Auckland has enough available resources to erect Santa, and to give people credit for doing so.

 

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23 Comments

  1. Draco T Bastard says:

    This would mean that society overall would be better off by $400,000 worth of goods and services ($150,000 of this amount being the erected Santa).

    That would depend on if an extra $400k of spending was a ‘good’. Considering pollution, resources depletion and climate change it very well may not be. This is a major problem with measuring economics solely by monetary means as we actually don’t know if it’s a good or not.

    Debt – certainly deficit spending

    That is something else we need to change. Deficit spending by the government should not incur debt and needs to be seen for what it is – growth in the economy (well, it would be if it wasn’t going to enlarged profits).

  2. Lee says:

    Well I deserve applause by me, I read the whole thing, but I’d still throw it across the room if I could.

    The line of thought in the article deserves one star for at least refusing to confuse charity and philanthropy. That in itself is rare. Very rare. But like most politics that does not originate from the people it seeks to use, it has made an assumption of meaning. While it correctly states that a Giant FRP Santa and the Golden gate bridge are not the same visually, economically or as an “icon”, they also hold two totally different values of practical meaning, least of all, you can’t drive a truck or car of any purpose, over Santa. The analogy fails.

    The meaning it presumes is that “the people” all would feel happier in the presence of Giant Santa. No one asked the people, did they. Is there a representative of the people here who, having heard what each township thinks, perhaps through community meetings or a vote, can report the overall impression? No? Then this economic theory is too hypothetical for anything other than, say, winning a credit as part of a course of Modern Folk Tales 101. Good Day to you Mr. Keynes, GOOD DAY!

    • Aaron says:

      Guys this was just an article looking at how we discuss council (and government spending) and it’s benefits. From what I can see, it’s an attempt to enlarge the mainstream debate from just looking at the number of dollars being spent to understanding the economic effect that spending has.

      The comments you and Draco bring up might be important but they belong beneath a different article I expect.

      For me I’m happy to learn some basic economic facts because we’ve left the field to the neo liberals for way too long.

      • Draco T Bastard says:

        The comments you and Draco bring up might be important but they belong beneath a different article I expect.

        Nope. If we’re going to talk about economics then we need to talk about economics which includes how the present financial system is destroying that economy.

        We also need to discuss how the present system rewards the rich for being rich while penalising the poor.

    • Nic the NZer says:

      Pretty sure you have missed the point here Lee. Keynes hypothetical analogy of burying money in bottles only to have the private sector dig it up again constitutes an entirely wasteful activity. The people engaging in it however are still employed and receive an income (depending on how much cash treasury buried). In the case of Auckland’s Santa, Keith is just gently pointing out that the people who erect Santa receive an income to do so, and Santa is not such a public nuisance that his existence outweighs the benefits of having people employed and contributing to the festival to erect him, especially if these people will not be otherwise employed (and contributing nothing, which is a waste)!

      • It’s interestiung to note that some of the biggest corporates and highly paid people are in the movie/entertainment industry.

        One could ask; what possible physical benefit is there to lavish hundreds of millions of dollars on three epic movies based on a fantasy trilogy about mythical characters; a magic ring; and a quest?

        Will it build houses? Roads? Bridges?

        Or, like Santa, is it designed to create enjoyment for those who watch the movies?

        Probably the greatest change in human civilisation is the growth of entertainment/relaxation industries.

        A couple of hundred years ago, skiing was not the multi-million (billion?) industry it is now. You learned to ski from family or friends.

        Now we spend big bucks on ski instructors.

        So Keith’s story about Santa isn’t far off the mark when he presents it as a case for possible economic benefit.

        Otherwise, you have to wonder why Hollywood and this government have pulled out all stops to go after one particlar well-known German. Because entainment (and consequently, IP), is very, very, big business.

        • Dennis Dorney says:

          I dont think this analogy works. It is true that that people are willing to spend millions of dollars to be entertained for an evening. It is also true that a lot of people will get enjoyment out of seeing the Auckland Santa.
          The argument breaks down when you ask “Who pays the bill?” and “Who gets the pleasure?” In the cinema the person who expects to be entertained also foots the bill so it becomes a purely private decision. The people who get pleasure from the Santa will be mostly kids. The people who will foot the bill will be ratepayers, who may feel badly used since they weren’t given an option.
          Perhaps the bill should be paid by a person rattling a tin on the street corner, but it wont pay the $150,000. And if it did wouldn’t that mess up Keith’s economic argument?

          • Draco T Bastard says:

            In the cinema the person who expects to be entertained also foots the bill so it becomes a purely private decision.

            Which is the excuse for rich people. If we worked collectively we could have provided the cinema to those that wanted to go for free and it would cost far less than the privatised and individualised method which results in far too much money going to far too few people.

            The people who will foot the bill will be ratepayers, who may feel badly used since they weren’t given an option.

            Perhaps they should be given that option:

            http://www.loomio.org

            In fact, I think it’s time that we took the decisions out of the role of the elected representatives and made the decisions ourselves with government being there to carry out those decisions as our servants.

            • Dennis Dorney says:

              I certainly agree with your last paragraph, but now we really are outside the realms of economics.

  3. Ian says:

    At the Palmerston North Husting last night (23/10) David Parker was the only candidate that talked about both equality of opportunity AND equality of outcomes and a more egalitarian society. In fact he reiterated this at the end of his speech as well.

  4. mikesh says:

    A government could simply print the money rather than borrow. This may or may not lead to price inflation. If not, no harm done; if so, then any measures taken to control that inflation would have to be regarded as a cost.

    • Draco T Bastard says:

      It wouldn’t lead to price inflation if it was done properly but it would lead to having lots of money being worthless.

      • Dennis Dorney says:

        “It wouldn’t lead to price inflation if it was done properly” I agree with that. ” but it would lead to having lots of money being worthless.” But this is surely wrong. All money is technically worthless since it is only a token (according to the Bank of England), representing the value of the labour incurred in creating our national wealth. Providing Auckland with a Santa for a few weeks, has value in giving someone pleasure, and so is deserving of a token. But tokens to a value of $150,000 could be better used elsewhere.

        • Draco T Bastard says:

          You seem to have lost track there.

          I wasn’t talking about the santa there but on the government creating money as they need it. Under such a scenario a single person/family having a lot money drops in value to become worthless as the government will always be able to provide all the money it and society needs without borrowing.

          It’s not inflation that upsets the rich but the lack of interest payments (effectively government guaranteed income for nothing) made to them by the government.

  5. Mike in Auckland says:

    It proves again, Auckland Council is leaving much of what is being done within the city to private enterprises, and that means too often, big players like Sky City, and also Mansons. The Council is set to impose substantial cuts to reduce costs of community projects, to balance the budget and to keep rate rises within certain limits.

    Santa just so happens to be a smallish example, perhaps symbolic really, of what goes on in Auckland at a larger scale.

    Look at the Auckland Unitary Plan, the hearings now taking place, and who the main submitters are, all there with their armies of mercenary lawyers, planners and consultants.

    The ones that will decide and shape the future of your city will be them, large business enterprises, CCOs, and a few other large organisations. The individual submitter, no matter how concerned, and wishing some input, will largely be rolled over by bulldozers at work.

    And Santa is again just a little symbol, of what really goes no. Merry Christmas all, I hope the tills will be ringing, to keep the investors and shareholders happy. They create jobs too, some of them at Sky City, precarious, and low paid, too many of them.

    And we have not even got the city rail loop being on track yet.

    How “social” and “caring” of them all.

  6. Murray Simmonds says:

    Rather than resurrecting two alternative approaches within outdated classical and/or neoclassical and/or Keynesian theory, I’d have preferred to see an analysis in terms of the CONTEMPORARY alternatives to neoliberalism. See for example:

    http://www.neweconomictheory.org/

    Keynesian economic theories and for that matter, all classical and neoclassical economic theories are irrelevant to the 21st Century. They are perpetuated by the ruling elite ONLY because they serve the needs of the ruling elite – which is of course, to preserve the economic status quo. By this means, the 1% preserve THEIR status and position of dominance within society at the expense of the rest of us.

    • Murray Simmonds says:

      You are right MIKESH. Printing money is not the bogey-man that it is made out to be in classical economic theory. THE USA has been engaged massively in the printing money since the onset of the recession – Thet call it “Quantitative Easing”, but it is the printing of money nevertheless. It hasn’t caused massive inflation in the USA.

      But it has reduced the need for them to borrow yet more from China – a debt that, really, they have no hope of ever repaying, without engaging in something akin to money-printing.

    • mikesh says:

      Keynesian and classical economics are still relevant, though both have been abused over the last hundred years or so.

  7. Nitrium Nitrium says:

    Erecting the Santa and then taking him down again (spending hundreds of thousands of dollars doing so) being somehow of net economic benefit sounds a bit like “The Broken Window Fallacy” to me: http://en.wikipedia.org/wiki/Parable_of_the_broken_window
    …unless you can somehow PROVE that Santa brings some sort of “boost” or “stimulus” to the economy (exceeding the money spent) that otherwise would not have taken place – something I personally find somewhat dubious. That said, in the grand scheme of the eye-watering money wastage by councils and the Government, I guess it’s not all that significant either way.

    • Draco T Bastard says:

      You’ve fallen in to the neo-liberal trap of assuming that government always waste money when the research coming out show that it’s private business that wastes money and the government that is highly efficient. We only have to look to our own history to know that.

      • Nitrium Nitrium says:

        I never suggested Governments “always” waste money. But jebus, do you seriously think military spending, for example is of net economic benefit? Do you think what the US is doing to Iraq/Afghanistan/(insert enemy of the day) is of net economic benefit to EITHER Iraq/Afghanistan/(insert enemy of the day) OR the US?
        How about medical expenditure? Is spending MILLIONS on drugs/treatment/equipment that at best prolongs life for a few years of net economic benefit to anyone other than drug/equipment companies (none of which are in NZ)? People don’t like putting a price tag on health care, but the providers sure as shit do. And there IS a line – we all know there is, but we don’t like to discuss where it lies. No country (or individual) would spend a billion dollars say, to save/prolong one life. Right? No? Well how about a trillion? 10 trillion? There is a line, and imo we’ve already crossed it.

        • Draco T Bastard says:

          But jebus, do you seriously think military spending, for example is of net economic benefit?

          I consider it to be a necessary evil and should only be done for defense.

          Do you think what the US is doing to Iraq/Afghanistan/(insert enemy of the day) is of net economic benefit to EITHER Iraq/Afghanistan/(insert enemy of the day) OR the US?

          Nope and I don’t consider it defensive either.

          How about medical expenditure? Is spending MILLIONS on drugs/treatment/equipment that at best prolongs life for a few years of net economic benefit to anyone other than drug/equipment companies (none of which are in NZ)?

          There’s always been a price tag put on Healthcare but people don’t want to admit that and some of those drug and health companies are in NZ and NZ owned, i.e, Fisher and Paykel Health are one of the leading health machinery producers in the world.

          The real problem is that we’ve been conditioned to think of economics in monetary terms and that causes us to fail to understand the economy.

          How much would it cost, in real terms, to provide all of NZ with all of the healthcare we need? At a guess I’d say about 10% of the population and that would include the people needed to provide the education, the mining for materials, the R&D to produce the machinery and the farming to ensure that they’re all fed and to provide the basis for the drugs.

          When you start thinking in real terms rather than that of money economics starts to take on a completely different aspect.

  8. Mike in Auckland says:

    The most hilarious and entertaining “Santa” I ever met was in Continental Europe (won’t mention the place), who was sufficiently “inebriated”, but not too much, but in good, humorous spirits, and who entertained a whole shopping lane and bordering areas for days before Christmas. He would crack jokes, be funny, always good mannered, was highly popular with kids and parents, and he was photographed, got tips and more, and enjoyed himself also.

    This is not an uncommon scene there, and some do this voluntarily, some get paid a little, and they are all doing very well.

    Instead of having an over-sized, virtually “dead” “Santa” nailed to a building corner on Queen Street, rudely waving his plastered finger at you, we could hire a dozen or so, pay them well for the same money, and have them walk up and down Queen Street and side streets, and entertain children, parents and others very, very well, for at least two or three weeks leading up to Christmas.

    I’d rather have such “live” Father Christmas’ or “Santa Claus” impersonators, as they would bring life and character to Auckland’s CBD, and also bring a HUMAN face to the festive season. Forget that “nailed onto the wall” figure, and replace it with as I suggested, it will do much more good for us all.