Various tools and machinery that individuals have produced were produced in order to better produce consumer goods. The quantity and the quality of various tools and machinery—capital goods—places a limit on the quantity and the quality of the production of consumer goods. Through the introduction of better capital goods, greater output can be secured more productively and efficiently. The increase of capital accumulation and the enhancement of the structure of production requires prior saving to support various individuals that are engaged in developing more roundabout processes of production as well as the maintenance of the existing infrastructure.

It is previous savings—a subsistence fund—that support individuals employed in the various stages of production. Through increased savings a better infrastructure can be built and this, in turn, drives economic growth. Economic growth also leads to greater production of consumer goods at lower prices. This allows for further saving and capital investment for further economic growth. With expanding saving, production, and capital investment more advanced infrastructure can be generated.

Wealth-generators save and employ their savings in the buildup of the infrastructure through capital investment. The savings of wealth-generators are employed to sustain various individuals who are specialized in the making and maintaining the structure of production. Savings also sustain individuals that are engaged in the production of consumer goods.

Since government doesn’t produce any wealth obviously it cannot save. Hence, for the government to engage in various activities it must necessarily divert savings and production from wealth-generators. The public sector must take from the private sector in order to do anything. As a rule, such activities amount to providing support to various non-productive activities, wasting resources and crowding out private production and investment.

Since government activities, in essence, only consume and neither produce nor generate savings, obviously, government cannot grow an economy. An increase in government spending means a weakening of wealth-generators, thus weakening economic growth. This is despite much popular opinion and even what seems to be some empirical evidence. How then are we to reconcile the so-called empirical “facts” that are supposedly presented by various econometric studies that purport to show that government can grow the economy? …

Government cannot increase its spending without reducing the means of wealth-generators. Once the ability of wealth-producers to generate savings curtailed, economic growth follows suit and no amount of money that the government pushes into the economy can make it grow. According to Mises,

…there is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens’ spending and investment to the full extent of its quantity.

Furthermore, according to Mises,

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund, which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself. …

The government can force various non-market projects. The government, however, cannot make these projects economically viable. As time goes by, the burden that these projects impose on the economy through higher taxes and a distorted structure of production undermines real economic growth. Thus, these projects are an economic burden.

What about the lowering of taxes on businesses? Surely this will give a boost to capital investment and strengthen the process of wealth formation? Any decrease in taxes would be great, but if this tax lowering is not matched by the lowering of government spending and the distortionary effects of inflationary credit expansion, savings will still be channeled to investments that would not be otherwise undertaken. In other words, economic growth is still distorted and inhibited.

What undermines economic growth has to do with the amount and extent of government spending. The larger the government outlays, the worse it is for real economic growth.