Washington today ignores that saving and investing must precede consumption.
Egg first. As legislators play a game of chicken with “infrastructure” bills, there is a huge misconception about how the economy actually works. Last week Moody’s economist Mark Zandi said more government spending on infrastructure and social programs like Medicaid “will lift productivity.” Does he even know what productivity is? He thinks you can give people money and they’ll spend it, prime the pump and boost the economy. That is backward. An economy has to produce first, then consume.
Reagan-era supply-side economics has been badmouthed for so long, and given monikers like voodoo and trickle-down, it has more or less been discarded. Why? Probably because it worked, taking power away from Keynesian big-government power mongers and their cheerleading economists. So let me suggest something else. Let’s call it Produce First or, if you insist, Supply First.
Here’s how capitalism works—pay attention if you took the social-justice version of Econ 101. SIPPC: Save. Invest. Produce. Profit. Consume. Save means postponing consumption, money and time. Only then you can invest, especially your human capital, in something productive. Usually this means doing more with less, being efficient and effective. This is when innovation happens.
Wealth comes only from productivity, not from giving away money. And despite the Federal Reserve’s dollar printing, profit is the only way real money is created. That dollar in your pocket is just something convenient to exchange that represents what you already produced profitably.
Supply first and then consume. “How can you have any pudding if you don’t eat yer meat?” Supply First is the fundamental nurturing of economic creation, creating incentives to put money into the hands of entrepreneurs and clearing a path for them to innovate by getting government out of the way.
For example, the Biden administration’s proposed 43.4% top capital-gains tax rate is an investment killer, stealing savings and investment from productive producers. President Biden’s demand-side thinking is “to rebuild an economy from the bottom up and the middle out.” But workers need good jobs, not handouts paid for by capital-gains taxes. Long-lasting jobs are created by savings invested in new production.
There are no shortcuts. You can’t induce demand without supply. Didn’t the lockdowns prove that? Stimulus checks did little good given that there were few places to spend them until businesses were allowed to reopen. We’re now perversely sitting on almost $3 trillion in excess savings and even more new government debt. Yet the government stimulus mentality continues in Congress.
Critics invoking dead economists say Supply First is merely Say’s Law, often misinterpreted as “supply creates its own demand.” A better way of putting it: Supply of one good is demand for another good. Pretty direct. Even simpler: Buyers demand something via the supply of something else. You can’t simply demand a Lamborghini or even Sonic’s Powerade Mountain Berry Blast Slush. You’ve got to supply them first. Egg, then chicken.
Through taxes and currency depreciation, demand-side spending steals savings needed to invest in future supply, which is why it never works. It is why the Great Depression lasted so long, why Japan lost two decades, and why 2009-16 saw subpar U.S. economic growth.
When demand drops, government spending and giveaways make things worse. The only solution to kickstart production is to increase investment and make jobs more plentiful by cutting taxes and easing regulation. And hint, hint to entrepreneurs, don’t keep supplying the same products into the downturn. Zoom is so 2020. Come up with something new, exciting, innovative and productive so your supply jumps off the shelves. That is how you can create demand for other goods.
Modern Monetary Theory, known as MMT—what economist John Christensen called the “Magic Money Tree”—is the worst of demand-side nonsense. MMT believers think that to boost aggregate demand we can have government print money and spend, spend, spend. We tried this in the 1960s and ’70s with Great Society programs, but without productivity as a guide, most failed. It wasn’t until Reagan’s investor-friendly tax cuts that the stock market took off, providing access to capital and market discipline for innovators to flourish.
Price signals tell entrepreneurs what to supply. But price signals are only as good as their inputs. Minimum-wage laws mess up labor price signals. Tariffs mess up trade price signals. The Federal Reserve’s bond-buying blowouts mess up interest-rate price signals. A return to “normal” interest rates, like 2% on the short end and 4% to 5% on the long end, would end today’s “fund everything” stock market flurry. That is OK, but policy makers then better get it right to make sure supply is taken care of by limiting regulation and not crowding out savings.
The good news is savvy entrepreneurs plan well past the next year or even next administration and look for long-term trends and solutions that they can supply to the market. They incubate eggs. The rest of us, having supplied something else with our hard work, can then, and only then, consume juicy rotisserie chickens.
Write to firstname.lastname@example.org.
Appeared in the July 26, 2021, print edition
Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved.
All material on this site is for educational purposes only.