WHEN PRESIDENT George W. Bush announced his economic package last week, towering in the background was the ghost of John Maynard Keynes.

The views of this British economist - once so reviled by conservative Republicans that "Keynesian" was a pejorative term - are now so entrenched that any president who does not at least appear to follow them risks severe political damage.

Before Keynes, business cycles were seen as something like the weather - there was not much you could do about them, other than complain.

But in 1936, in the midst of the Great Depression, Keynes published his most famous work, The General Theory of Employment, Interest and Money. It argued that governments should not just sit back, keep their fiscal houses in order and wait for the cycle to find its upside; instead, government had the power and the obligation to intervene, to prime the pump and get the country working again.

The world of economics - and of politics - would never be the same.

"He was immensely important," says E. Roy Weintraub, an economist at Duke University. "He transformed the way we talk about the economy and the way we think about the role of the state in economic life."

Since the acceptance of Keynes' ideas, presidents are virtually required to do exactly what Bush did last week - to use the financial power of the government to respond to an economic downturn.

"It is probably hard for a lot of people today to understand the fact that before World War II, Americans did not hold the president of the United States responsible for the economic health of the nation," says David B. Sicilia, a historian of economics at the University of Maryland, College Park. "Now we do, and Congress as well. That is really a pretty recent phenomenon."

Keynes was born in 1883 in Cambridge, England, son of renowned economist John Neville Keynes. With a degree in mathematics from Cambridge, Keynes first came to prominence while working for the British Treasury on economic issues during the negotiations of the Treaty of Versailles that ended World War I.

He resigned in protest, presciently saying that the reparations imposed on the Germans were so harsh they would keep that country poor and lead to its political instability. Keynes returned to Cambridge, his scathingly critical writings on the Versailles negotiations making him something of a celebrity.

Using interest rates

Keynes' writings in the 1920s concentrated on monetary policy, the way in which governments can affect the supply of money - and thus prices - with interest rates. The Great Depression caused Keynes to look for a new model.

Business cycles had been seen as self-correcting - wages would fall in downturns until full employment was restored, then demand would rise and the economy would head up again. Such cycles were seen as healthy, cleaning out the economic deadwood.

But in the Depression - for reasons both fiscal and psychological - the cycle was stuck on the downside. Keynes called on governments to intervene, running up large deficits if necessary to put money in people's pockets with public works programs and tax relief. The idea was that this would increase demand and get the cycle moving up again.

Even in the Depression, such ideas were a hard sell. The classic economics model called for a government to balance its budget.

"The pre-Keynesian view was reflected in the writings of Adam Smith that were really embraced by the founders of the United States," says Steve H. Hanke, a professor of applied economics at the Johns Hopkins University. "Smith wrote in The Wealth of Nations in 1776, 'What is prudent in the conduct of every private family can scarcely be folly in that of a great kingdom.'"

Kevin D. Hoover, chairman of the economics department at the University of California, Davis, says that balanced budgets still carry a political punch. "It's a very deeply held view of personal virtue and probity - 'Never a borrower or a lender be,'" Hoover says. "It's a false analogy because the situations of an individual family and of a sovereign government are so different. But it's always a good sell to people who don't have a good understanding of economics, and whichever political group can use it for an advantage will always do so."

In 1932, Franklin D. Roosevelt used it in his first campaign for president, denouncing Herbert C. Hoover for running a deficit during the first years of the Depression. Roosevelt promised to balance the budget.

Even before he published his General Theory, Keynes visited Roosevelt and encouraged more government spending. He made little headway. Michael Bradley, an economist at the University of Maryland, Baltimore County, says that Roosevelt was trying to deal with the Depression with monetary policy, by adjusting interest rates, instead of fiscal policy, by spending money. Keynes, Bradley says, compared that with "trying to get fat by buying a big belt."

To those who said the economy would adjust in the long run, Keynes retorted that in the long run we would all be dead.

Most economists agree it was World War II that put Keynes' theories to the test.

"Although the New Deal was very Keynesian in many respects, it was really the war experience with its very heavy deficit spending that convinced everyone Keynes was really onto something," says Sicilia. "Right after the war, you see the emergence of a real consensus among economists, including policy-makers, a whole new orientation around the idea that government not only could, but should, intervene in the economy, that the business cycle was not just a naturally occurring thing like the seasons ... ."

Having their say

This was codified in 1946 in the Employment Act that made it "the continuing policy and responsibility of the Federal Government ... to promote maximum employment, production, and purchasing power." The act set up the Council of Economic Advisors, ensuring that economists would have their say about public policy.

"The idea that government should have an economic policy that was overarching in its conception was not really present in the 1930s," says Hoover, of the University of California. "That was something that business did, not something that government did."

Keynes, whose health began to fail in 1938, died in 1946, spending his last weeks working on the post-World War II agreements that set up the World Bank and sought to bring stability to postwar economies.

In the ensuing years, his name became connected with policies calling for government spending and tax cuts to maintain high employment, even if that meant running a deficit. Republicans denounced such measures for years.

"Keynes became the equivalent of Saddam Hussein for conservatives of that era," says UMBC's Bradley.

His ideas became so orthodox that Republican Richard M. Nixon is widely reported to have said while president, "We are all Keynesians now."

In Bush's actions, Keynes' influence can be seen in the extension of unemployment benefits and the reduction of income taxes, measures that put money in consumers' hands to increase demand. Such measures as the elimination of the tax on dividends are aimed at the longer term and come out of the "supply side" school that arose in reaction to the Keynesians.

Missing the point

Many contend that the Keynesians have misinterpreted Keynes. Sicilia speaks of "bastardized Keynes, which was exactly the term economists used."

"Like a lot of economic ideas that get into the policy mainstream, it got oversimplified. ... There became this view among a lot of liberal politicians that they could spend their way out of any problem in the short term. It was a corrupted view of Keynes' ideas that allowed a real short-term way of thinking," says Sicilia.

Because Keynesian ideas were designed as a short-term response to the Depression, Hoover says Keynes would not have opposed many "supply-side" measures. "He also had ideas about the long term. Getting the tax structure right, long-term monetary policy right, would have seemed reasonable to him," he says.

Just before his death, Keynes was ready to renounce many of the measures used during the Depression that were not appropriate for an economy that faced inflation, says Hanke.

And Sicilia makes the point that misinterpreting Keynes can be a matter of political popularity because Keynes advocated not only priming the pump with lower taxes during hard times but also building up surpluses with higher taxes in good times.

"Somehow politicians are really good at the tax-cutting half but not very good at the tax-increasing half," he says.