Johnson and the Economy
Johnson had kept many of Kennedy's economic advisors, including some who felt that inflation might not be bad for the country. By passing the Great Society programs and then escalating the war, Johnson increased government spending and the deficits, pumping money into the economy. He was asking the economy to produce both guns and butter, which unfortunately it was not able to do. Consequently, we began to experience what economists refer to as demand pull inflation. Demand pull inflation results when there is a demand for more goods than the economy can produce; too much money is chasing too few goods, and as a result the price of those goods rises. The president's economic advisors, not necessarily seeing this as bad, were slow to suggest fiscal restraint. As a result our economy began to inflate.
Belatedly, Johnson's economic advisors realized that inflation was getting out of hand, threatening to overheat the economy, and so needed to be slowed down. They suggested a tax increase to do this. A tax increase would lower the budget deficits by taking money out of the hands of consumers, which would reduce demand and lessen inflationary pressures. However by the time the tax increase was passed, it was too late to help; inflation continued unabated and even increased. The inflationary spiral which Johnson's advisors had finally realized was a possibility became a reality.
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