Supply side vs demand side

Once again I hear the pundits on the Saturday business shows stating that the problem with the economy is not taxes and regulations. It's lack of demand. The implication being that if we just dole out more money, the economy will fix itself. Of course demand is great for business. The question is, where does demand come from.

Some pundits and economists believe that creating demand is a simple matter of putting more money in someone's hands. Wouldn't it be great if that were true? All we'd have to do when recession hits would be to cut everyone a government check. Recessions would last a few days rather than months or years.

The fact is that demand comes from exposure to new things. Once you get past the basic needs; food, clothing, shelter; demand becomes subjective. What came first, the iPhone or demand for the iPhone? You didn't know you had to have it before it existed, or at least not before the commercials for it existed.

The fact that innovation and creativity spur demand is what incentivizes companies and entrepreneurs to innovate and create. If this were not the case, and demand was simply a matter of individuals having more money, companies would only have to maintain inventory and have access to more. There would be no reason to spend anything on research, innovation and creation because they would be irrelevant.

But they're not irrellevant. If you suddenly came into some extra cash and you already have an iPhone 5, your not going to go out and buy another iPhone 5. You might buy a cool new add on or accessory for it, but you're not just going to buy more of what you already have or buy something you've already decided you don't need or don't want.

To create demand you must enable producers to produce, create, innovate. That means making the risk/reward ratio pay off. Most new products don't work out. That means there has to be room for failure. Lower tax rates, less regulation; in short less time spent complying with government demands and more time spent working on consumer demand. Yes, demand is important, but it comes from supply. The two work together, but trying to create demand for products with your boot on the neck of producers is a losing model.