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In the 1960s, President Lyndon Johnson's economic/social policy, the Great Society, came up against a counterforce and competing claim few in public policy circles at that time had expected: Lyndon Johnson himself.
Johnson, in a decision that would alter U.S. society and the cultural landscape, chose to escalate U.S. involvement in the Vietnam War, and vastly increased government defense spending. The spending, when combined with spending for the Great Society, posed the question: "Could the U.S. economy tolerate increased government spending for defense and for social programs without an increase in inflation?" This is known in economics circles as the "guns and butter" question.
President Johnson believed that it could. He was wrong, and the failure to trim either program and raise taxes to pay for them was a major factor in the sharp increase in inflation in the late 1960s and 1970s. The war spending also, over time, cut short the Great Society initiatives -- the nation's largest package of social reforms since President Franklin D. Roosevelt's New Deal.
Forty years later ...
LBJ's unwillingness to increase taxes to pay for both guns and butter is recognized as a large economic policy mistake, and it begs the question, has the United States repeated that mistake this decade?
Unless there's a tax increase soon, it apparently has. What's more, former President George W. Bush committed an even larger guns-and-butter error than LBJ: Bush cut taxes by about $1.1 trillion, then massively increased government defense spending for the Afghanistan War, Iraq War and anti-terrorism efforts. He then, incredibly, refused to support a tax increase to pay for the them. Bush not only backed simultaneous guns-and-butter spending, he cut federal revenue while doing it! As a result, almost $1 trillion in debt has been added to the national debt in unpaid for defense spending. It's that added debt that has many economists concerned that inflation will rise in the years ahead, unless a federal tax increase is passed to pay for that borrowing.
The large deficits of the Bush era -- incurred, incredibly, while the U.S. economy was expanding -- also left the Republican Party with very little credibility on the issue of fiscal responsibility -- one factor in the party's election defeats in 2006 and 2008.
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Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.
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