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Meanwhile, shortages have begun turning up everywhere. Aluminum is in short supply, and such companies as Boeing and McDonnell Douglas must place their orders far in advance to have enough on hand to meet aircraft delivery schedules. Metalworking machinery is also scarce, as are the steel forgings needed by automakers. That, in turn, has helped create shortages of small, fuel-efficient cars, and boosts imports of competing foreign models. There is even a squeeze on fans for people who want to save money by turning off air conditioners, and shortages of insulation for homeowners who are eager to cut winter fuel bills.
True, Keynes argued that excessive demand and price rises could be countered by reversing the cycle—that is, by reducing government spending. But that required a degree of wisdom seldom seen in the spend-and-spend, elect-and-elect politicians of a democracy. Apostles of Keynes contended that to maintain the proper level of demand, the Government regularly had to "fine-tune" the economy with just the right amount of stimulus, either tax cuts or spending increases, or maybe both at once. As Feldstein puts it, the nonstop jiggling and juggling amounted to "an embellishment of Keynes beyond anything that he had claimed."
The reckoning came with Viet Nam. Lyndon Johnson's Keynesian economic advisers warned him not to finance both the war and his cherished Great Society programs without asking for a tax increase, but he refused to take the unpopular step until much too late. From 1965 to 1969, more than $42.5 billion in Government deficit spending flooded into the economy, which was already surging ahead at nearly full capacity. Result: inflation leaped from 2.1% in 1965 to 6% in 1969.
No quick fixes have lastingly slowed the spiral. Temporary cuts in Government spending, coupled with a tight rein on monetary growth, as Richard Nixon tried in 1969, brought on recession and aggravated unemployment, but inflation stayed strong. Freezing wages and prices, as Nixon did in 1971, merely built up pressure for huge price increases later on.
The period from 1975 to the spring of 1979, when the third recession of the decade probably began, is often called "the longest peacetime expansion in U.S. history." Some expansion! Unemployment stands at almost 6%, and to keep the rate from climbing even higher than its 1975 recession peak of nearly 9%, both the Ford and Carter Administrations have had to stuff the people's pockets with almost as much inflationary funny-money, in the form of Government deficit spending, as was generated in all of World War II.
Inflation has, of course, been seriously aggravated by a host of outside or "exogenous" factors that lie beyond the power of economists to control. They cannot be held accountable for poor grain harvests, such as occurred in 1972, for the harsh winters of 1977 and 1978, or for the weather of last year that cut into harvests in the citrus belt. Government economists also argue that price gouging by foreign oil producers is exogenous. True, but only partly so. Not only did inflation in the industrial countries encourage the 13-nation OPEC cartel to quintuple its prices in 1973-74, but the accelerating U.S. price spiral provides the cartel with its only excuse for raising its prices still higher.