The fiscal and monetary response to the economic shutdown embodies the federal government’s most recent rejection of Say’s law of markets.
Contrary to the actions taken and the assurances made by these authorities, the economic fallout from COVID-19 is not due to a scarcity of money, but a scarcity of goods and services.
Although J.B. Say developed his law of markets to dispel the idea of general overproduction, he also captures the shortcomings and consequences of policymakers’ response to the virus. Say’s law brings to light the fact that the supply of a good is what constitutes demand. In other words, it is production alone that brings about the means for consumption. Say reminds us that there is no need to worry about a lack of consumption, because production always falls short of man’s wants. This is especially true under current economic conditions.
Say’s law reveals that a deficiency of production is what ultimately limits demand and consequently wealth and living standards. Therefore, the federal government is not only resorting to unproductive consumption through fiscal and monetary stimulus efforts, it is not even generating real demand. Say points out that for demand to exist, goods must be produced for the purpose of exchange, goods which the government does not provide. Monetary and fiscal authorities exercise control over the medium of exchange and where it shall be spent, but they do not contribute to supply.
Since mid-March, Congress and the Federal Reserve have responded to the shutdown by making several attempts at economic relief. They have also rung up quite the tab for the American public in the process. The Federal Reserve has effectively set rates to zero and expanded its balance sheet by trillions of dollars in the form of loans and asset purchases. Congress followed suit with the passing of the $2 trillion CARES Act (Coronavirus Aid, Relief, and Economic Security Act), perhaps with more on the way. Despite these efforts, the economy remains in an unproductive halt and only continues down this path with each passing day of quarantine.
The economic shutdown has severely hurt many industries, including airlines, restaurants, retail stores, and even food supply chains. Virus fears and stay-at-home orders have required businesses to close doors and lay off workers at unprecedented levels. More than 175,000 business have closed and around 30 million Americans have filed for unemployment since mid-March. Say’s law shows that current economic conditions are unable to foster the level of production that is required to sustain demand.
Congress and the Federal Reserve have engaged in a surrogate consumption that acts as a false cushion to support this fall in output. In reality, the several-trillion-dollar credit expansion and spending plan generate an illusion of demand that does not allow prices to reflect the increased scarcity of goods and services resulting from the lack of production. The result is a continuing economic decay spurred by resource misallocation and increased consumption of a diminishing supply of goods, or capital decumulation. Calls for even more monetary growth, coupled with a Fed official’s reminder of their infinite money printing capabilities, indicate that fruitless policy measures may not cease any time soon.
Say’s timeless contribution to economics reveals that no matter what levers are pulled by the fiscal and monetary authorities, stones will not be turned into bread. The longer this economic shutdown lasts, the more critical it becomes to end it.