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Seventy years later the world economy, now led by the United States, is on a dangerously parallel path. In the 1990s received economic wisdom has substituted for the gold standard deficit reduction as the central instrument, with zero inflation as the central goal, of economic policy.

The effects are disturbingly similar to those of the orthodoxy of the 1920s before Keynes's General Theory suggested that deliberate government deficits could be used to stimulate employment. In recent years the richest nations in the world have suffered increasing unemployment (and in the United States increasing inequality) and social unease even in good times, with worse to come when the cycle turns down.

Keynes contended that Churchill had erred because "lacking . . . instinctive judgement, he was deafened by the clamorous voices of conventional finance; and, most of all, because he was gravely misled by his experts." The same is true of Bill Clinton. In his first few months as President he surrendered the traditional liberal Democratic stress on expanding demand, leaving conventional finance in possession of the field. This not only weakened the government's ability to increase the demand for labor but also made impossible more than nominal investment in programs to improve the adaptability of job seekers to available jobs. One major reason for the President's defection was that his own experts in the ranks of academic economists and in his Administration had turned to pre-General Theory orthodoxy. Therein lies an important part of the tale that climaxed but did not end in the 1994 Republican congressional victory and the great budget battle of 1995-1996. A high point was the President's acceptance, in mid-July of last year, of the Republican goal of a balanced budget in seven years. By then the only real issue that remained was the rate of federal withdrawal from support of the economy and of those left behind by prosperity.

With balance as the sole criterion for budgeting, and zero inflation as the sole objective, what used to be called full employment has been forgotten, even though the Humphrey-Hawkins Act of 1978 still mandates it as a central national goal. The problem is one of long-term change, not recession. Even the low unemployment rates of the good times of the 1980s and 1990s almost match the highs of the 1950s and 1960s. Unemployment of six to seven percent was severe recession then; now when unemployment dips below six percent, storm warnings go up: too low an unemployment rate might be inflationary.

At the same time, inequality of earnings and income has been increasing among wage and salary earners and among American families. The rich have been getting much richer, the poor significantly poorer. And the future looks bleak to the insecure middle class, whose fearful members are tempted to blame their ills on those who are worse off than they are. Economic stimulus is not the cure for all these problems, but lacking stronger economic growth than we have had, no remedy is possible.

When the business cycle turns down again, and unemployment rises from its already high lows, the political and social effects may go beyond grumbling and petty meanness to expanding extremism in many areas of American life.

When the collapse of oil prices in the early 1980s made possible a return to both lower unemployment and lower inflation, the Reagan Administration tried "supply-side" economics. The resulting deficits were so huge that the Federal Reserve had to raise already high interest rates to unprecedented levels to avoid overstimulation of the economy. Supply-siders had contended that cutting tax rates would raise tax revenues, but David Stockman Reagan's budget director, knew better. He later admitted that he had deliberately used the deficits to paralyze government social spending and "dismantle" federal programs put in place since 1933.

Stockman's scheme worked. The Democratic economists of the Clinton Administration contend that although the deficits are not the fault of the Democrats, their huge presence must nonetheless dominate the Administration's fiscal policies.

Their line of argument:

• Over the past several decades the increase in U.S. productivity has slowed.

• Productivity is increased primarily by increasing capital investment, but investment has been decreasing.

• A major reason for the shortfall in investment is that because deficits must be financed by borrowing, they compete with private investment for borrowable funds, thus raising interest rates and crowding out productive investment in the private sector.

• The argument that productivity increases have slowed ordinarily compares the decades before 1972 with the decades thereafter. Increases since then have in fact been slower than those of the 1950s and 1960s, but once the petroleum problems of the 1970s stopped affecting the system, productivity began to increase significantly more rapidly.

• The quantity of investment is only one factor in increasing productivity, and not the strongest one. Technological change, including organizational change, contributes virtually twice as much, and improving worker education almost as much. And in any case, business investment in plant and equipment, as a percentage of GDP, has in fact been relatively high since the end of the oil shocks.

• The crucial issues have to do with the crowding out of private-sector investment and with interest rates. In the world of classical economics, in which involuntary unemployment is by definition impossible, the total quantities of productive resources available at any time, including borrowable funds, are fixed. Thus any funds used by government must be taken away from private uses, and taking them raises interest rates for those wanting to borrow for private investment. But in the Keynesian (and the real) world, if demand is so slack as to make most investment expenditures seem risky, low interest rates may have little effect. Attempts to use monetary policy in such circumstances have been likened to pushing on a string.

Economists never have arrived at a satisfactory theory for weighting the various factors that affect investment. The cost of borrowable funds is certainly one of them, but only one. Taxation may also have important effects on investment incentives: if the returns from investment are increased by tax reduction, investment will increase. That is the central point of supply-side economics. It is a good point in the abstract, but the relative weight of the tax effect remains open to debate.

Perhaps the most important determinant of investment, however (so most economists of the 1950s and 1960s held), is the demand for products produced by new plant and equipment. If, for example, demand for automobiles is expected to increase, Ford or Honda may invest in a new plant. Whether Honda will do it in Honshu or in Ohio is a question that suggests that economic policies must increasingly be considered on the international level. Regardless, market demand remains a crucial factor in determining investment. And fiscal policy contributes directly to market demand. If the economy is operating at less than full employment, then increased government spending or tax reduction or both can increase demand for goods and services and consequently increase investment in capital goods to make products to supply the demand.

Which economic policies will best increase productivity and growth thus remains an issue much more open than is suggested by current orthodoxy. President Clinton, Senator Bob Dole, Federal Reserve Chairman Alan Greenspan and Vice-Chairman Alice Rivlin, point in one direction: balance the budget to reduce competition for investable funds. Some very respectable economists but few politicians, in the United States or elsewhere, point the other way: increase investment by increasing demand.

The popular analogy is to a spendthrift family borrowing to live beyond its means. That analogy is dubious, for three reasons.

First, even thrifty families borrow for long-term purposes, many of which -- their children's education, for example -- may be expected to increase future income. A substantial part of federal spending is similar: it is investment to increase future national income. Indeed, more than half of the states' constitutions require balanced operating budgets, but they separate out capital budgets to allow borrowing for long-term investment projects.

Second, some government functions fall outside the family metaphor: if federal deficits can have major effects on employment and other crucial economic indicators, then national requirements for growth and stability may supersede the simple morality of balancing income and outgo.

Third, few families go broke because family members are borrowing from one another. Most federal borrowing is from citizens or institutions that are part of the American family; less than a quarter of our national debt is owned by foreigners. For that reason, although deficits burden our children with debt, debt also provides a good many of our children with such assets as government bonds, representing the ownership of that debt. The national debt is now about two thirds of the GDP. At the end of the Second World War it was greater than the GDP, but postwar prosperity worked the ratio down. What threatens our children now is not the debt, most of which they will owe to themselves. Rather, it is economic policy aimed at achieving slow growth at best, which will severely constrain their chances of finding good jobs.

Even if the analogy between federal and family budgets is a poor one, however, controlling spending is a valid and politically compelling goal. Advocates of fiscal stimulus need to dissociate themselves from any idea that all spending is good. Any proposed program that questions the current exclusive emphasis on budget balancing must equally insist on close examination of each government expenditure. That should include porky public works, entitlements, both individual and corporate welfare, and "tax expenditures" -- loopholes in personal and corporate taxes that, for bad reasons or good (for example, low-income housing), attempt to achieve the same purposes as appropriated expenditures. The current budget battle shows how difficult it is to do this in the face of entrenched interests. Both the Administration and the congressional Republicans have made brazen exceptions for special interests, even as they exchange rhetoric over budget-balancing purity.

• The debate should be reopened. Economists and political liberals should challenge the current acceptance of deficit busting as the sine qua non of economic policy.

• Concepts should be re-examined. Even conservative economists who put great emphasis on budget balancing agree that the annual balancing of nominal budget accounts (which imperfectly reflect federal spending) regardless of economic conditions makes no sense. A recession reduces tax revenues, but reducing expenditures to match can turn the recession into a depression. That's what Herbert Hoover tried. Economists should suggest an alternative, such as the structurally balanced budget -- one that would be balanced if the economy were performing well. In addition, the case needs to be made vigorously for a separate capital budget for public investment financed by borrowing.

• The debate should be internationalized. Whatever the United States tries to do with its own economy it probably can do. The American economy is strong, and the United States is a large enough market that the country can put its own economic policy into effect. The same could be true of the European Union if it were able to act as an actual union. It is still a collection of nations, however, with the economic power in Bonn and Frankfurt. If the Germans were willing to relax their anti-inflation constraints, West European economic policy could still turn the continent away from the instability exemplified by the strikes that paralyzed France in December of last year. Some French politicians and economists are beginning to propose movement in that direction, but France cannot reverse course without Germany. And early this year, as French unemployment moved to almost 12 percent and German to above 10, the president of the Bundesbank, Hans Tietmeyer, was giving no ground. Speaking at a worldwide economics conference in Switzerland, he said that the bank would not alter its monetary policy for the purpose of lowering unemployment. Meanwhile, on the other side of Eurasia, Japan's will to pull itself up by its economic bootstraps remains unclear. Yet coordinated stimulus in all three centers of the First World would be far more likely to succeed than individual national or regional efforts.

In the American political dialogue, going beyond the parroted slogans of a balanced budget is unlikely until the November election. It may also be unlikely afterward, no matter what the outcome of the election. If so, the United States can probably continue on the current economic course, at least for a while. Yes, inequality will increase and insecurity grow. But the economy will also grow, and if the rising tide is no longer lifting all boats, not many are being left in the mud.

Sooner or later the tide will go out. The real and deep danger is that if the economic cycle turns toward sharp recession, and if balanced-budget deficit-bashing remains the order of the day, either by constitutional amendment or by rigid budgetary enactment, then we could be back in 1932.

History tested then-prevalent economic theories in the 1920s and 1930s, and those theories failed their tests. The economic imbalances and orthodoxies of the 1920s led to the Great Depression, and that in turn opened the door to Nazism and to war. Economic theorists and, more important, economic decision-makers ignore such experience at great peril to the world.