Only supply constitutes demand

Other than straight out socialist plunder, no better way to comprehensively ruin an economy is to think public spending and monetary expansion can raise living standards and promote employment growth. Here’s an article by Richard Salsman published at The Hill in the US that tries to point out just that: Fiscal-monetary ‘stimulus’ is depressive.

Politicians, policy wonks and pundits like to classify as economic “stimulus” the $6 trillion in recent deficit spending and Federal Reserve money creation. But subsidies for the jobless, bailouts of the illiquid and pork for cronies are purely political schemes — and they depress the economy.

What is the case for “stimulus”? Many economists believe public spending and money issuance create wealth or purchasing power. Not so. Our only means of obtaining real goods and services is from wealth creation — production. Under barter no one comes to market expecting to buy stuff without also offering stuff. A monetary economy does not alter this key principle. What we spend must come from income, which itself must come from producing. Say’s Law teaches that only supply constitutes demand; we must produce before we demand, spend or consume. Demand is not a mere desire to spend but desire plus purchasing power.

Believers in “stimulus” also claim that government spending entails a magical “multiplier” effect on aggregate output, unlike most private sector spending. They tout a government’s greater “propensity to consume.” But consuming is the opposite of producing. Welfare states certainly consume and redistribute wealth. They divide it up. But math teaches that nothing – wealth included – can be multiplied by division. The so-called “multipliers” imagined by today’s economists are, in fact, divisors. Many studies have verified the principle.

It should become a pre-req for anyone to become a political leader to have successfully run a business for at least five years. Speaking of which I must also say how much I loved Tafkas’ post today.

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15 Responses to Only supply constitutes demand

  1. stackja

    It should become a pre-req for anyone to become a political leader to have successfully run a business for at least five years.


  2. Roger W

    Many thanks for, to a non-economist, the best explanation yet of the issue.

  3. I think the language of economics makes it very difficult for the average person to see the argument about supply being the driver of an economy.

    People understand ‘needs’ and supply is what assuages people’s needs, whether they realise it or not. Be it essential needs (better quality, greater variety, cheaper food) or non-essential needs (who asked for an iPhone?).

    This is why politicians and economists get away with saying demand (and government spending) drives the economy, because the language appears to make sense to the average person.

    I’m not sure if what I’ve said makes sense, but it’s the best that I can explain.

  4. Mother Lode

    A lot of people think ‘Demand’ is the same as ‘want’, rather than demand for products available.

    There are nations in famine in Africa which are full of people who want food, shelter, medicine etc. Doesn’t seem to lead to stronger economy.

    Also, before they made iPhones was there a demand for them? People did not know what they would be. Doubtless a lot of people had occasional, vague, and differing thoughts like ‘I wish my phone could do this’ and ‘I wish my phone could do that’ but they still really had no idea what iPhones were going to be. Or LED lights.

    What things are going to appear next year that we have no idea of, but which we will demand when there products are supplied to the market?

  5. OldOzzie

    Debt-hit states told to rein in spending


    States face a $45bn debt blowout over the next few months that will push combined state and federal government debts above $1.2 trillion — or 60 per cent of GDP — by 2022, according to new analysis that warns states to rein in expenses or lose their AAA credit ratings.

    More than 40 per cent of states’ revenue sources — including GST receipts, and property and gambling taxes — were vulnerable to a “severe decline” that would contribute to a $15bn slump in their combined revenue this quarter, and a further $30bn before the year’s end, the Centre for Independent Studies finds in a new report.

    “That’s on an optimistic basis,” said Robert Carling, the report’s author, who said total debts across both tiers of government could climb to $1.35 trillion once non-­financial corporations such as the NBN and state-owned electricity and water utilities were included.

    The states’ revenue shortfall is the biggest contributor to a deterioration that would include about $10bn in extra stimulus and about $4.5bn in extra money to boost health systems, the report says. “The impact of the pandemic will both add to expenses and, more severely, sap various major sources of revenue, at least for a time,” Mr Carling added, pointing out that GST revenues of about $65bn last year, highly vulnerable to a sharp drop in household consumption, made up almost a quarter of state revenues.

    “Much will have to go right over the next several years if individual states are not to see their credit ratings downgraded, their policy options become much more constrained by their debt burdens, and their exposure to future shocks and the challenges of population ageing elevate,” he said.

    Among the eight jurisdictions, Tasmania and the Northern Territory were the most vulnerable, having 50 per cent or more of their revenues in the “vulnerable” category, while Western Australia was the least vulnerable, with just 27 per cent

    “WA receives relatively little GST revenue, allows very little gambling, already had depressed levels of real estate activity before the crisis, and relies more than other states on mining royalties, which have been little affected by shutdown,” the report says.

    While federal government fin­ances had been steadily improving since the pandemic, most states’ net operating balances — which strip out capital investment — had already been deteriorating and total state debt was poised to roughly triple to $150bn over the three years to 2022.

    “Frequent calls for more spending on infrastructure to stimulate the economy seem to have missed the point that an infrastructure boom is already happening,” Mr Carling said, pointing to “pressure on available construction resources and major cost overruns”.

    Mr Carling, a former senior NSW Treasury official, found total government net debt — state and federal — would rise from 22 per cent to 40 per cent by 2022, and in gross terms from 43 per cent to 60 per cent, equivalent to about $1.2 trillion.

    “From zero 10 years ago, general [state] government net debt is heading for a level more than 60 per cent of revenue, and broader non-financial public sector net debt is rising from 35 per cent to ­almost 90 per cent of revenue,” the report says.

    The analysis singles out Victoria and Queensland for increasing their public sector headcounts by 10 per cent, adjusted for population, over three years.

    “Given the recent history of rapid expenditure growth in Victoria, it should not be difficult to achieve a slowdown, but that same history warrants scepticism about the assumed degree of future restraint,” Mr Carling said.

    NSW and Victoria, with the two biggest housing markets, were the most vulnerable to declines in stamp duty. “Property stamp duty — a notoriously volatile source of state revenue — is certain to fall steeply, mainly in response to a fall in the volume of turnover but also as prices weaken,” the analysis said, noting it made up $19bn or 6.6 per cent of state revenue.

    Rating agencies S&P and Fitch have already warned the federal government it could lose its AAA credit rating. The report came as the NSW government moved to freeze the pay of its 410,000 public sector workers, and the federal government berated states for keeping borders closed without sufficient medical reason.

  6. Iampeter

    Wish you had more good posts like this, Steve, instead of all the pro-Trump stuff which contradicts all this anyway.

    It should become a pre-req for anyone to become a political leader to have successfully run a business for at least five years.

    That won’t help. Running a business successfully is a real skill but it has nothing to do with politics. Because of this businessmen are some of the worst politicians.
    Funnily enough, the prerequisite for becoming a political leader should be actual knowledge of politics.

  7. JC

    Steve, while I agree about the spending side, the monetary one is a different kettle of fish. We don’t have a system that allows for adequate adjustments when there is deflation. Sticky prices are real and debt is measured nominally.

  8. David Brewer

    Salsman is right of course. Subsidising non-production is not stimulus, it’s anaesthesia. What is so hard about this? If you want more useful goods and services, you must stimulate the desire to produce them – not pay individuals and businesses to do nothing, or to produce things that only the government wants.

  9. Squirrel

    Very timely, with the NSW public sector pay freeze likely now to be blocked in the Legislative Council of that State, and the arguments for blocking (aside from an outraged sense of entitlement) including that State public servants would have extra money to spend, to “stimulate” the economy.

    The economic impacts of the virus, and the consequent adjustment of attitudes and expectations, are going to be hugely challenging.

    And thanks to OldOzzie for the Adam Creighton article – sobering, to say the least.

  10. Terry

    ‘you must stimulate’

    No need to stimulate. Just stop strangling would be more than enough.

    Individual aspiration and drive are all that is needed. Just get out of the way and allow it to flourish.

    Politicians, most of them B-grade humans at best, almost universally overestimate their contribution, influence, and involvement in the economy. Take their outlandish proclamations regarding how many jobs they have created/saved for example. They invariably do far more harm than good. They need to stop “helping”.

  11. Watch Your Back

    I appreciate this post, and others recently byTafkas and even Sinclair.

    You can bet your bottom dollar that the left is going full tilt at Socialism, by means of Keynesianism and government control of the economy and everything. This has been brewing for a long time, since Rudd at least. The Left think this is their best chance to achieve permanent revolution, or whatever they call it nowadays.

    They need to be resisted and beaten back at the every turn.

  12. Entropy

    Demand is not a mere desire to spend but desire plus purchasing power.

    Best description ever.

  13. Tel

    Only supply constitutes demand …

    You make the assumption of a just world.

  14. thefrollickingmole

    Wouldnt it be easier just to close your eyes and drift off into oblivion and pretend MMT is real.
    sure to be a cushy job in a government think tank as long as you don’t price self respect too high.

  15. MatrixTransform

    supply is physical, demand is rhetorical

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