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Keynes, who held that deficit spending could pump up a slack economy. Johnson later balked at the pleas of his Keynesian advisers to pay for the Viet Nam War with higher taxes in order to keep the economy from overheating and pushing up prices. Nonetheless, so prestigious had Keynes' views become that even Republican President Nixon could declare in 1971, "I am now a Keynesian."
But the woes of the '70s shattered the esteem in which Keynes had been held. Reeling from two energy crises, a severe recession and other shocks, the economy began to behave in ways that the experts had once thought impossible. Most disturbing, high levels of inflation and unemployment came together in a painful new ailment dubbed stagflation. Keynesian prescriptions seemed only to make that malady worse.
The troubled decade left U.S. economists in brawling disarray. The monetarists, who stress the importance of gradual growth of the money supply to a sound economy, and Keynesians set up a clamor of conflicting claims. Members of the rational-expectations school argued that deficit spending could not work over the long run. And a small but vocal group of economists known as supply-siders called loudly for incentives to save and produce.
To add to the confusion, each school makes use of economic models that reflect its pet theories. Some supply-side predictions have been overly bullish, for example, while the Keynesian and monetarist outlooks have mostly been too cautious.
Says Economist Robert Eggert, who compiles 46 forecasts in his Blue Chip Economic Indicators: "The model that would probably work best would be a combination of supplyside, Keynesian and monetarist views. But it exists only in the forecasters' heads."
In the war among economists, conservative thinkers now seem to be ahead. Says Harvard's Feldstein: "All mainstream practitioners are more monetarist, more supply-side oriented, and less Keynesian today than they used to be."
Still, Nobel Economics Laureate James Tobin, an outspoken Keynesian, can persuasively describe the current boom as _ mainly a result of deficit spending. Far from being a supply-side victory, he says, the recovery represents "an accidental and classic Keynesian dose of fiscal and monetary stimuli."
But for all their conflicts, economists still share a surprisingly large number of views. "Our disagreements have actually become much smaller,"says Friedman, the leader of the monetarist school. Virtually all economists espouse free trade, and most would analyze a wide range of policy prescriptions in similar ways.
Forecasters also like to point out that while people may rem member bad predictions, they tend to forget the times when projections have been right.
Lawrence Klein, winner of the 1980 Nobel Prize for pioneering the development of modern econometric models, is proud of his Wharton forecasts. They correctly predicted that the 1973 Arab oil embargo would result in a recession and higher inflation, and that the 1981 tax cuts would swell the federal budget deficit far beyond Government estimates. Says Klein: "At least econometric models can give you a quick on-line response to any major event like an embargo or a change in fiscal and monetary policy."