However, businesses do not fare well overall during periods of inflation. They pay back their loans on cheaper, inflated dollars.At the same time, their property values rise. For example, when interest rates on existing mortgages are lower than the rate of inflation, homeowners win. ![]() LBJ shoved America into the world of demand-pull inflation.which began a cycle of inflationary pressures.Īs destructive as inflation can be, there are those who benefit from unexpected rising prices such as people in debt. Americans were already producing at the economys capacity so supply did not increase. ![]() The total effect of the increasing demand went into higher prices. Suddenly demand was given a big shot in the arm and the aggregate demand curve shifted up. The "Great Society" programs of Lyndon Johnson had been launched, as was the Vietnam War. Consumer demand ran at a feverish pitch as did government spending. Comment & Analysis by Richard Gill In the 1960s we had a classic go-go economy. In short, the demand exceeded the economys ability to supply and everything began to cost more. To meet the demands of the marketplace, expensive new factories had to be built and competition for workers bid up wages. At the same time the government kept spending, so businesses operated close to capacity and labor approached full-employment. In the absence of a tax increase or any other effective restraint, consumers and businesses kept spending. The stage was set for the surge of inflation. He wanted to have the domestic programs and he wanted to be able to run the war as well. Because Vietnam was unpopular, he wanted a silent, invisible war and so, therefore, he did not want to raise taxes. ![]() While Johnson avowed to create a Great Society and eliminate poverty in American, the biggest item in the federal budget was not war on poverty…it was the war in Vietnam. While his advisors urged Johnson to increase taxes, he didnt think he could get the votes to support it. Many economists felt a tax increase would take money out of the hands of the consumers and business… Spending would drop… inflationary pressures would retreat. But as the economy heated up, the prices began raising out of control. The massive tax cuts proposed by Kennedy in 1962, and signed into law by Lyndon Baines Johnson after Kennedys death succeeded in stimulating demand, creating growth in the economy… Business was booming, jobs were plentiful.and unemployment was near an all-time low. Case Studies LBJ and the Cause of Inflation
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