What it means
President Johnson set out the Great Society idea in 1964, and Congress passed a wave of laws over the next few years. The measures included the Civil Rights Act, the Voting Rights Act, the Economic Opportunity Act, which launched the War on Poverty, and the Elementary and Secondary Education Act.
Medicare, health insurance for older people, and Medicaid, health coverage for low-income people, were created in 1965. The finance angle is the shift from one-off spending to ongoing entitlements.
Medicare and Medicaid pay for healthcare for anyone who qualifies, so their cost depends on how many people qualify and how much treatment costs, not on a fixed annual budget. Over decades, this has made health programmes one of the largest and fastest-growing parts of federal spending.
The timing also mattered. In the same years, the US was spending heavily on the war in Vietnam, and economists often point to the combination of rising domestic and military spending as a contributor to higher inflation and larger deficits in the late 1960s.
This is why the period is often discussed with the phrase guns and butter, meaning military and social spending together. Assessments of the Great Society remain debated.
Supporters point to lower poverty among older people, wider access to health care and better access to schooling. Critics argue that some programmes were expensive, created dependency or grew faster than the economy could comfortably support.
For a business reader, the Great Society is useful background to modern topics such as healthcare costs, the size of entitlement spending and the government's long-term debt. It also shows how a policy launched in a single political moment can shape budgets and markets for generations.
Financing the programmes also raised questions about who pays. Medicare is funded partly through payroll taxes and partly through other revenue, so the working population effectively supports current beneficiaries.
As the number of older Americans grows relative to workers, the balance between contributions and payouts becomes a central issue in public finance.
In practice
Real-world examples.
Example
A healthcare company models its future revenue and finds that a large share of its patients are covered by Medicare or Medicaid. The finance director builds her forecast around government reimbursement rates, which trace back to programmes created in 1965. She also runs a downside case in which rates are cut, so the board can see the effect on profit.
Example
A university finance office budgets for student support. It receives federal aid that stems from Great Society education laws, and it plans staffing around how much of that funding it can expect each year. When the aid formula changes, the office re-runs its budget before the new term begins.
Example
A bond analyst reading a report on the long-term outlook for the national debt notes that rising healthcare entitlements are a main driver. She traces the origin of these commitments to the Great Society, and weighs them in her forecasts for government borrowing. Her client, a pension fund, uses the forecasts to decide how much long-dated debt to hold.
Case study
Seen in the real world.
Easton Regional Health is an illustrative, fictional hospital group that serves a mid-sized city. Its chief financial officer wanted to understand why more than half of its patient income came from two government programmes.
She learned that Medicare and Medicaid, both created as part of the Great Society, set the prices the hospital could charge for much of its work. Government programmes paid the group $200,000,000 a year, so her team built a model showing that a 2% cut in the reimbursement rate would reduce annual income by 0.02 x 200,000,000 = $4,000,000.
The hospital group then trimmed costs in departments with low government margins and negotiated better terms with private insurers. In this illustrative story the lesson is that a policy decision made decades ago can still set the limits of a business's financial strategy today.
Watch out
Common mistakes.
- Thinking the Great Society was a single law, when it was a series of laws and programmes passed over several years.
- Confusing Medicare and Medicaid, when Medicare mainly covers people aged 65 and over and Medicaid covers people with low incomes.
- Blaming the programmes alone for 1960s inflation, when military spending and wider economic conditions also played a part.
Questions
People also ask.
Who introduced the Great Society?
President Lyndon B. Johnson announced it in 1964, and it was built on the programmes already planned under the Kennedy administration.
Did the Great Society reduce poverty?
Many researchers believe it reduced poverty, especially among older people, though economists continue to debate how large the effect was and which programmes worked best.
Why does it matter for finance?
Its entitlement programmes became some of the largest items in the federal budget, which affects government borrowing, taxes and interest rates.
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