Despite having a stake driven through its heart after being identified as the primary cause of the Stagflation of the 1970s, a failed economic policy has arisen from the dead. Yet the consensus evident at the recent G-20 Meeting is that governments can create jobs and end recessions simply by spending more money.

The myth that higher public spending is good economic policy is so resilient that its supporters are unperturbed by all the evidence that contradicts it. Consider that Japan 's policy makers began throwing massive amounts of money at the local economy in the late 1980s to re-ignite it.

This constant flow of deficits brought only a growing mountain of public-sector debt with the economy regaining its long-term growth trajectory. Nor did it deter Japan from officially ushering in yet another recession.

More recently, the Economic Stimulus Act of 2008 gave so-called tax rebates worth US$100 billion to U.S. households in May, June, and July. But the rise in spending was very small since most went into savings, including paying down debt.

Despite this recent failure, President-Elect Barack Obama promises he will direct government spending to create jobs. But numerous studies show that one-time tax rebates cannot bring higher economic activity.

This is because temporary increases in disposable income do not create incentives to increase consumption over time. The only certain thing is that stimulus packages based on increased public-sector deficits will add to the national debt.

Belief in the efficacy of deficit spending is based on a naove notion that consumption is the important driver of economic growth. It is as though consumer goods and services are merely gifts of nature. Such nonsense has been appropriated by profligate politicians and bureaucrats to promote inappropriate overreach of public-sector spending.

But reality demands that the path for sustainable economic growth is for there to be more saving so that there can be more capital goods. As it is, capital goods are the basis of higher output and increased wages by boosting productivity. And the provision of capital goods requires that consumption be deferred.

It seems that saving is not only a natural instinct, but it is also promoted by many fables, Biblical and otherwise, that show the merits of thrift. In recent years, central bankers removed the incentives to save by driving interest rates to unsustainable and artificially-low levels while inducing more consumption.

This leads to a "paradox of spending" whereby consumers, deterred from saving by low deposit rates, are lured into low-interest borrowing to boost their current living standards. This distortion in credit markets induces individuals to make decision that lead to greater misery in the future for themselves and for others. Indeed, increased spending may cause incomes to fall by a greater amount since the attempt to buy more today backfires in that there are fewer jobs and less to consume later.

Buying more now can leave everyone worse off in the future in the same way that a community suffers from eating its seed-corn. Therefore, policies that aim to raise consumption now lead to less capital being available for future production so there will be less future consumption.

An enduring fable has it that governments can "create" jobs either through public-spending to employ people in the public-sector or to increase overall demand. During his campaign, Barack Obama promised to use $150 billion to promote windmills, solar panels and 'energy efficiency' that would supposedly create 5 million "green" jobs.

In the first instance, government spending to "create" jobs costs more than jobs created in the private sector since public-sector recruitment involves massive bureaucracies. And since adding workers to the public payroll creates a new burden on taxpayers that have less to spend or invest, this means that there can be no net gain to the economy.

In all events, government-funding to "create" Green jobs may be the worst of both worlds. Much of the support for Green projects is that they create more jobs because they involve more labor-intensive production.

For example, supporters of initiatives for alternative fuels insist that they would boost employment than would the building of conventional power stations. But conventional power stations operate with enormous economies of scale that bring lower unit costs so that more jobs can be created throughout the economy.

Job creation based on real economic merit does not require government involvement. But providing subsidies to support inefficient technology raises the labor-to-capital ratio so that the demand for labor will be lower and real wages would fall.

It would be bad enough that deficit spending on job creation was simply ineffective. What is worse is that government spending schemes that expand public-sector debt imposes several burdens on future generations. Most obvious is their additional tax burden they must pay for debts incurred in the present.

By spending beyond their means to conjure up jobs, governments undermine or eliminate employment that would have been created in the private sector in the future.

If increasing the share of GDP claimed by government leads to lower long-term economic growth, "creating" jobs today will mean fewer jobs in the future.

The best way to avoid a future of booms and busts is to consign zombie economic theories that support public-sector deficits to the dustbin of history. Alas, this is unlikely since they serve the interests of opportunistic politicians and avaricious bureaucrats too well.

The writer is Research Scholar at the Centre for Civil Society in New Delhi and Visiting Professor of Economics at Universidad Francisco Marroquin in Guatemala .

Popular

Great Barrier Reef hit by record bleaching

Govt to undo latest curbs on personal imports

Middle East on edge as Israel and Iran trade threats