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ECONOMIC VIEW

ECONOMIC VIEW; Friedman And Keynes, Trading Pedestals

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September 24, 2000, Section 3, Page 4Buy Reprints
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PERHAPS I'm showing my age (50 next month), but it seems like only yesterday that the Democratic Party wholeheartedly championed government stimulus as necessary to promote economic growth, while Republicans backed fiscal rectitude as the best policy to ensure a healthy economy.

John Maynard Keynes, who developed the theory that increasing government deficits stimulate a sluggish economy, was long the guiding light of liberal economists; Milton Friedman, who said the government should limit spending to the bare minimum and blamed ups and downs in the money supply for economic disruptions, inspired conservatives.

Indeed, in 1993, when economic advisers of the newly elected Bill Clinton recommended that he present a budget calling for tax increases and spending cuts, he moaned: Did we get elected only to become Eisenhower Republicans?

As it turned out, the answer was yes. But while a Democratic president found himself, much against his initial desires, turning his back on Keynes and championing budgetary restraint, Republicans united behind big, Ronald Reagan-style tax cuts as the solution to whatever might be ailing the economy.

Today, this 180-degree reversal of traditional party positions on fiscal policy is firmly enshrined in the presidential election campaigns of Al Gore and George W. Bush.

Mr. Gore, in presenting his own budget blueprint, called for paying off more than $3 trillion in federal debt over the next 10 years. By contrast, the centerpiece of Mr. Bush's campaign is a 10-year, $1.3 trillion tax cut that would reduce debt by a much smaller $1.7 trillion.

Economic thinkers have switched roles, too. ''Fiscal policy, as a tool of macroeconomic policy, is dead,'' says Robert Litan, director of economic studies at the moderately liberal Brookings Institution. ''The thinking now is that any fine-tuning should be left to the Fed.''

Yet Lawrence B. Lindsey, Mr. Bush's principal economic adviser, has said he fears that the economy may soon stumble badly, and he argues that an across-the-board tax cut is the best way to ward off a recession. ''You can hear in Larry's argument a kind of anticipatory Keynesianism,'' Mr. Litan said.

OF course, the parties have not abandoned their governing philosophies entirely. For Democrats, relying on much of the annual surpluses to pay down the national debt is a popular way to win support for spending on particular programs that benefit their prime constituencies. The Republicans' tax cuts would go mainly to the wealthy and would help prevent higher spending by starving the government of extra tax money rolling in from the economic boom.

Still, by trading places on economic policy, Republicans and Democrats have created all kinds of paradoxes. Many Wall Street economists, for example, are more worried about Mr. Bush becoming president than they are about Mr. Gore. A recent report from Goldman, Sachs warned that the Federal Reserve, already fearing that the economy cannot grow any faster without prompting higher inflation, would probably respond to a big package of stimulative tax reductions by pushing up interest rates sharply.

''Our analysis strongly suggests that the economy is more likely to be hurt than helped by a tax cut,'' the report said.

Or consider the views of Robert M. Solow, the liberal economist and Nobel laureate who long taught at the Massachusetts Institute of Technology. While he favors budget surpluses for now as a tool to help increase investment and productivity, he wrote recently in The New York Review of Books that Mr. Gore was making a mistake by calling for elimination of the federal debt as an end in itself.

Under these circumstances, it is no surprise that many economists contend that the best way to ensure continued American prosperity is to have one party control the White House and the other the Congress.

''Vote for gridlock,'' said Edward Yardeni, chief economist at Deutsche Bank Alex. Brown. ''It's good for Wall Street, and for Main Street, too. If we get gridlock in November, then tax cuts will be limited and so will new spending programs. We will have no choice but to continue paying off the federal debt.''

That may be a narrow perspective, but it could also prove a popular one right now.

''Times are good, incomes are rising, unemployment is low,'' said Robert Reischauer, president of the Urban Institute and a former director of the Congressional Budget Office. ''These days, the American people aren't looking to Washington to solve their problems.''

A version of this article appears in print on  , Section 3, Page 4 of the National edition with the headline: ECONOMIC VIEW; Friedman And Keynes, Trading Pedestals. Order Reprints | Today’s Paper | Subscribe

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