Last week I stopped my narrative at the point where LBJ was forced to fight a war on many fronts against the destructive forces of inflation. In his book The Great Inflation and Its Aftermath, Robert J. Samuelson noted that presidential aide Joseph Califano recalled that the rise in shoe prices gave the administration the idea to impose export controls on hides to increase the domestic supply of leather. When color televisions became more expensive, Johnson called the Belorussian immigrant and CEO of the Radio Corporation of America (RCA) to hold the prices down. The rise in lamb prices led to an order to the Defense Secretary Robert McNamara to buy cheaper meat from New Zealand to feed the troops in Vietnam. According to Samuelson, the control freak in the White House soon was issuing decrees concerning household appliances, paper cartons, newsprint, men's underwear, women's hosiery, glass containers, cellulose, air conditioners, etc., etc. When the price of eggs went up, Samuelson wrote, the commander in chief made the Surgeon General "issue alerts to the hazards of cholesterol in eggs."
The new Keynesian doctrine promised a silver bullet to a politician who simultaneously wanted to defeat poverty at home (the vision for the Great Society) and communism abroad (starting with a war in Indochina). The MIT experts in charge of the economy were confident that they could squeeze more guns and butter from our resources at no cost. Healthcare (starting with Medicare and Medicaid), infrastructure (the founding of the Department of Housing and Urban Development and the Department of Transportation), military victories-like FDR, LBJ wanted it all. Economist John Kenneth Galbraith hailed the ascendancy of the progressivists' humane version of fascism, openly admitting that "we have an economic system which, whatever its formal ideological billing, is in substantial part a planned economy." The plans were not working. Disappointed that the market was not following his orders and taking heavy losses on all fronts, Johnson chose not to run for reelection.
The next president, Richard Nixon, would soon realize that the biggest threat to his administration was not a conflict on the other side of the world. Keynesian policies during the Kennedy-Johnson years had failed to bring "full employment" as inflation had quadrupled and the worst was yet to come. By that time Milton Friedman had tried to warn the government and the American people that following the "new economics" doctrine would predestine the country to a cycle of worsening recessions and accelerating inflation. Forty years later Paul Krugman admitted, "By predicting the phenomenon of stagflation in advance, Friedman and [Edmund] Phelps achieved one of the great triumphs of postwar economics."
At first Nixon seemed willing to abandon the standard Keynesian "income policies." In a TV address in early 1970, he promised, "I will not take this nation down the road of wage and price controls however politically expedient that may seem. … To the explosion that follows when you try to clamp a lid on a rising head of steam without turning down the fire under the pot, wage and price controls only postpone the day of reckoning. And in so doing, they rob every American of a very important part of his freedom."
A few months later, Nixon ordered "a freeze on all prices and wages throughout the United States for a period of 90 days." Friedman's warning was ignored and the president started writing his own chapter in the history of our Great Stagflation. More on that will come next week.