Expanding Pool of Savings Is the Key to Economic Growth
Consequently, it does not follow that an increase in government outlays and loose monetary policy will lead to an increase in the economy’s output. It is not possible to lift the overall production without the necessary support from the flow of savings. Assume the baker has decided to build another oven in order to be able to increase production of bread. The building of the oven here is supported by the production of bread.
If for whatever reasons the flow of bread production is disrupted, the baker would not be able to pay the oven maker.
Government Does Not Generate Wealth
Government does not produce wealth, so an increase in government outlays cannot revive the economy. Various individuals who are employed by the government expect compensation for their work. One of the ways it can pay these individuals is by taxing others who are generating wealth. By doing this, the government weakens the wealth-generating process and undermines prospects for economic recovery.
In this case, the more government spends and the more the central bank pumps, the more will be taken from wealth generators, thereby weakening any prospects for a recovery. Consequently, the production of bread will actually decline. Similarly, other wealth generators, because of the increase in government outlays and monetary pumping, will have less savings at their disposal. This in turn will hamper the production of their goods and services and will retard and not promote overall real economic growth.
As one can see, not only does the increase in loose fiscal and monetary policies not raise overall output, but on the contrary, it leads to a weakening in the process of wealth generation in general.
Conclusion
In popular thinking, increases in government spending and central bank monetary pumping strengthens the economy’s overall demand. Increases in government spending result in the diversion of savings from the wealth-generating private sector to the government, thereby undermining the wealth generating process.
Source: FRANK SHOSTAK | MISES.ORG