Why Say’s Law Tells us Unemployment Checks Don’t ‘Stimulate’ the Economy
The N&O recently published an article discussing the negative consequences from the expiration of the federal government’s $600 weekly supplemental unemployment benefits.
Much of the article focused on the harm to recipients when the aid is ended, but there was a short passage inserted that includes a very harmful economic fallacy that once again deserves being addressed.
In referring to the UI benefits, the article states; “It doesn’t just help those who have lost their jobs. It helps support the economy during a recession – or a pandemic. “(emphasis added)
One may justifiably ask how paying people to not work helps support the economy.
The response would be: “we need to put money in the hands of consumers to boost demand, getting consumers spending is what stimulates the economy.”
This is textbook left-wing Keynesian policy that has been debunked many times.
One tool that helps us understand why giving people “money for nothing” won’t help the economy is called Say’s Law.
This law of economics can be attributed to 19th Century French economist Jean Baptiste Say. It’s been mischaracterized by Keynesians for generations, but the basics of the law, as described in this Foundation for Economic Education article, states “one’s supply constitutes the means by which he can demand the consumer goods he wishes to own.”
For instance, imagine a simple barter economy. In order to acquire goods, you must first create goods to use in exchange for the goods you want. Say you are an apple farmer and desire some oranges. In order to effectively demand any oranges, you must first create a supply of apples to use to acquire the oranges.
“Say’s Law reminds us of what should be obvious: consumption follows production, both logically and temporally. To consume more, we must increase our real demand for goods in the only way possible — through greater production,” as noted in the FEE article.
When people get money for nothing via unemployment checks, however, this link is broken. Rather than enabling their consumption via previous production, recipients of unemployment checks are acquiring goods via green pieces of paper acquired for nothing. Instead of exchanges of something for something, the economy transitions to an exchange of something for nothing.
Put simply, government checks being sent to consumers will not magically translate into an increase of productivity or more goods and services being produced.
Wealth is properly measured as the amount of goods and services available to satisfy the wants of members of society.
True increases in demand come from increased production. If you want to demand more oranges, you must first produce more apples.
But in exchanges of something for nothing, i.e. consumers spending unemployment checks on goods, demand is increased without increased production.
The result is less wealth being created. And because government needs to pay for unemployment benefits by borrowing money, this represents a shift in resources from savings to consumption when the government borrows saved funds to send to unemployed consumers.
A decreasing pool of savings means fewer resources to invest in or maintain productive capital goods that produce the stuff being consumed. As economist Frank Shostak described it recently, “(G)enuine wealth generators are left with fewer resources at their disposal, which weakens their ability to grow the economy.”
As consumption continues without investment and maintenance of capital goods, capital consumption ensues. In short, the economy’s stock of productive resources declines, hindering its ability to produce goods and services to satisfy society’s needs.
And with a limited and depreciating stock of productive resources, the decreased productive capacity of the economy requires fewer workers. Job opportunities dry up.
This is the exact opposite of “supporting” the economy as the N&O describes, but a recipe for economic stagnation and job loss. As Say’s Law teaches, demand unbacked by previous production is mere consumption, and comes at the expense of wealth and job creation – hurting low-income and low-skilled households the hardest.