Government "Stimulus" Schemes Fail Because Demand Does Not Create Supply

By popular thinking, the key driver of economic growth is the increase in total demand for goods and services. It follows then that by means of increases in government spending and central bank monetary pumping the authorities can grow the economy. However, is it the case that government can prevent the US economy from a recession?

Supply Precede Demand

• In the free market economy, wealth generators do not produce everything for their own consumption
• Part of their production is used to exchange for the produce of other producers
• Production precedes consumption, with something exchanged for something else
• The demand of a nation is equal to its power of purchasing
• When goods are carried to market what is wanted is somebody to buy
• But to buy, one must have the wherewithal to pay
• Thus, the collective means of payment which exist in the whole nation constitute the entire market of the nation

Expanding Pool of Savings Is the Key to Economic Growth

• Without the expansion and enhancement of the production structure, it will be difficult to increase the supply of goods and services in accordance with the increase in the total demand.
• The expansion of the infrastructure hinges on the expanding pool of savings
• It is not possible to lift overall production without the necessary support from the flow of savings.

Government Does Not Generate Wealth

• Government does not produce wealth, so an increase in government outlays cannot revive the economy
• Fiscal and monetary stimulus appear to improve the economy if the flow of savings is large enough to fund government sponsored activities while still permitting a growth rate in the activities of wealth generators
• However, overall real economic activity cannot be revived regardless of any increase in budget outlays and monetary pumping by the central bank

Conclusion

• In popular thinking, increases in government spending and central bank monetary pumping strengthen the economy's overall demand, leading to the belief that "demand creates supply."
• However, if individuals do not allocate enough savings in order to support increases in the production of goods and services, the economy cannot expand
• Supply drives demand, not the other way around

https://mises.org/wire/government-stimulus-schemes-fail-because-demand-does-not-create-supply