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Will Keynes Return By Popular Demand?

IS a ``Keynes boomlet'' ahead?

Robert Kuttner, co-editor of The American Prospect, a left-of-center quarterly magazine, argues in his latest issue that persistent high unemployment in most industrial nations and a second volume of Robert Skidelsky's biography of John Maynard Keynes will revive interest in the famed British economist.

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Will Hutton, economics editor at the Guardian, a British newspaper, takes a crack at the same topic in an article titled, ``Back by Popular Demand.'' He writes: ``The recent experiment in free market economics whose falsities Keynes exposed has not proved notably successful. As our economies have become more marketized, growth has slowed and unemployment has risen.''

Mr. Hutton's article freshens memories of the economic debates in the 1950s, 1960s, and early 1970s, when ``neo-Keynesians'' and ``neoclassicists'' - two schools of economists - hotly debated government's role in managing the economy. Milton Friedman, then at the University of Chicago, led the neoclassicists. Paul Samuelson, a Massachusetts Institute of Technology professor, led the neo-Keynesians.

Simplifying complex theories, the neo-Keynesians urged governments to use federal tax and spending policies to manage the business cycle. When United States' manpower and machinery were underutilized, Washington should use fiscal policy to lift the economy out of its slump, they said. The problem was that politicians enjoyed passing tax cuts and extra outlays in a recession, but were reluctant to boost taxes and restrain spending in an inflationary boom.

(There was an echo of this controversy last year when the Clinton administration proposed $30 billion of economic stimulation. Congress didn't pass the measure.)

In the area of monetary policy, neo-Keynesians gave prime attention to interest-rate trends.

Dr. Friedman held that typically both fiscal and monetary policy have been pro-cyclical rather than anti-cyclical. Because it takes so long for Congress to act, legislative measures usually worsened recessions and heightened booms. The Federal Reserve, not knowing accurately the status of the business cycle when it shifted policy, did the same. Friedman called for smaller government involvement in the economy. Monetary policy, he argued, should ignore interest rates. Rather, steady growth in the money supply would best stabilize the economy.

The two schools had a different way of looking at the economy. Neo-Keynesians likened the economy to a stubborn mule that sometimes needs a whack on its hind quarters to get it moving - in other words, some government stimulus. Neo-classicists or monetarists saw the economy more like a dog straining on a leash, always eager to move forward. In this analogy, the leash is the money supply. So the economy does not need much government help to thrive.

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Herbert Stein, President Reagan's first chairman of the Council of Economic Advisers, has become skeptical of both theories.

``We know less than we thought we did 30 years ago,'' he says. Monetarists are divided between those following a narrow measure of money (M-1), which has been expanding rapidly in the past year, and those watching a broader measure (M-2), which has grown little. M-1 might signal a boom; M-2 slow growth.

The relation between the actual economy and the money supply doesn't seem to be predictable, Dr. Stein complains. Similarly, economists aren't able to forecast the short-run impact of fiscal changes on the economy. Stein describes the Clinton fiscal stimulus package as ``a last gasp'' of fiscal activism. Although the package was killed in Congress, economic output has been growing faster than Clinton economists anticipated. ``How do they explain that?'' Stein asks.

Nowadays, some economists see ``structural problems'' as the equivalent of the Keynesian complaint that the reluctance of labor and business to spend can keep an economy enmeshed in a recession. For example, Michael Keran, chief economist of Prudential Economics, argues that the move to tighten capital standards for commercial banks and insurance companies has restrained their loans to small- and medium-sized business and thus economic growth. That is temporary, Mr. Keran holds. But he is not predicting when it will end - perhaps ``three years.''