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People correctly complain that prices are going up faster under Nixon than they did under President Johnson, but the blame belongs to the Johnson Ad ministration. In the mid-1960s, Lyndon Johnson pressed ahead simultaneously with both the Great Society and the Viet Nam escalation, without requesting an increase in taxes. Between 1965 and 1968, federal spending jumped 47%, and the Government put much more money into the economy than it took out. Johnson feared that if he asked for higher taxes, Congress would balk at paying for what some economists now call the "marriage of the warfare and the welfare states." When Johnson belatedly asked for a tax increase in 1967, Congress dallied for ten months before enacting it. By the time the sur charge took effect a year ago, the fed eral deficit had swelled to $25 billion.
The Federal Reserve compounded the difficulties by unwisely permitting the money supply to grow much too fast, partly because it had to supply funds to finance the Government debt. Last summer the board's governors rroneously concluded that the surcharge might jolt the economy into recession. The board then expanded the money supply at an annual rate of 11%, which meant that there was more money around than the increased output of goods warranted. Naturally, prices went up faster than be fore. So far this year, the board has not increased the money supply at all, but its mistake of 1968 set back the campaign against inflation by about six months. With 20/20 hindsight, Arthur Okun, who was President Johnson's chief economist, concedes that "it has just been too easy to raise prices and wages. Nobody was scared of losing markets or jobs. Management knew that competitors would follow them rather than fight them. The villain of the piece was just too much demand."
The Awkward Months
How long before inflation will be stopped? Changes in monetary policy usually take six months to a year to be felt through the entire economy. Since the money supply was tightened only six months ago, White House Economist McCracken figures that the U.S. is now going through the "awkward months" of waiting for the effects to become vis ible. When money is restricted and taxes raised, the usual sequence is that pro duction slows down after some months, then profits drop and businessmen cut back on hiring. Prices are the last to fall. Usually they come down only after demand slackens substantially; some times, they rise right through a recession.
McCracken says that "we may be see ing the early signs of the cooling of inflationary pressures" — and many other experts agree with him. The nation's out put of goods and services is expanding; only half as fast as a year ago, and that growth may stop entirely during the summer. The volume of retail sales has been sluggish for a year, and un employment, still a low 3.5%, is up slightly from 3.3% earlier this year. Of the three principal forces in the economy, two have lost most of their lift. Government spending and consumer spending are relatively flat; only businessmen's extremely large capital in vestments are keeping the economy expanding at all.