America's Fiscal Constitution (3 page)

While addressing a joint session of Congress in January 1950, President Harry Truman complained that “the ill-considered tax reduction” three years earlier had resulted in a shortfall in revenue needed to pay for “necessary expenditures.” Loud moans from Republican members of Congress caused Truman to stumble over his next line, which he then repeated: “To meet this situation, I am proposing that Federal expenditures be held to the lowest levels consistent with our international requirements and the essential needs of economic growth, and the wellbeing of our people.”
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Neither the Democratic president nor any congressional leader in either party at that time proposed using debt to fund routine spending.

Truman spoke to Congress in an era of fierce partisan rivalry. In February 1950 many Republicans applauded when a senator claimed to have evidence that communist traitors had infiltrated the Truman administration. Truman’s campaign speeches in 1948 had been the most partisan ever delivered by a sitting president. Many of those campaign speeches attacked Senator Robert Taft of Ohio, who set the Washington agenda
of the Republican Party. Taft and Truman had fought over the size and scope of a normal federal budget since the end of World War II.

Truman and Taft were a study in contrasts. Truman never attended college; Taft graduated at the top of his class at Yale and Harvard Law School. Truman grew up in a modest home in a small Missouri town; young Taft lived in the White House during his father’s presidency. Truman was not considered a serious candidate for the presidency until well after he became president following the death of President Franklin Roosevelt in 1945; Taft was a leading presidential candidate within months of his first election to the Senate in 1938.

Both, however, were decisive, plainspoken, and ready to fight over matters of principle. Senator Taft had no quarrel with the president’s belief that “pay as you go” was the “soundest principle of financing I know.” Both Truman and Taft made hard choices in defense of that principle while they reduced federal debt from its World War II peak.

Taft demanded aggressive cuts in spending in order to lower federal income tax rates. Though Republican activists loathed communism, Taft opposed efforts to fund the deployment of troops in Europe to counter Soviet forces. While attempting to cut the Marshall Plan, which assisted allies resisting internal communist threats, Taft candidly explained: “Why not? I want to save us a tax increase.”
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Truman and a bipartisan coalition in Congress blocked Taft’s attempts to cut military spending, close bases abroad, and prevent America’s participation in the North Atlantic Treaty Organization. The president also fought Pentagon demands to spend more than anticipated federal revenues. The stress between “pay as you go” budgets and military leaders who demanded higher spending took its toll on Truman’s subordinates. In 1949 it drove the nation’s first secretary of defense, James Forrestal, to depression and eventual suicide and forced another proponent of spending restraint, General Dwight Eisenhower, to take an extended medical leave.

In the summer of 1950, despite intense partisanship, Truman, Taft, and almost every single member of Congress agreed on two major federal commitments and the taxes to pay for them. Those decisions—on federally administered pensions for older Americans and a global security umbrella—would shape all future federal budgets.

The chairman of the House Ways and Means Committee, Robert Lee Doughton—“Muley Bob” or just “Muley” to his rural constituents in North Carolina—kept out of the headlines. He had worked across party
lines to create a tax system for financing World War II and servicing debt afterward. That new tax system, embodied in the Revenue Act of 1942, served as the principal source of federal revenues for at least the next seventy years. After the war, Doughton labored to build a consensus on the future of an old-age pension program, which many people referred to using the title of a bill he had sponsored in 1935—the Social Security Act. The Social Security pension system had since atrophied. Most older Americans lived in poverty after losing much of their savings as a result of the Great Depression and wartime inflation. The minimum pension benefit of $35 a month, supported by a 2 percent tax on payrolls, had never increased and was not enough to live on after World War II. As a result, Congress—with virtually no dissent—annually approved higher funding to states for public assistance, or “welfare,” for more than a fifth of Americans over sixty-five without other means of support.

Federal leaders in each party worried about the rising cost of those grants, but no one wanted to revert to the earlier practice of cramming destitute older Americans into local poorhouses. Workers in a far more mobile society had often moved away from aging relatives who were living longer; women—who had been the traditional caretakers—poured into the paid workforce in record numbers. Without additional revenues, the budgetary problem of funding public assistance with general revenues would only get worse. Personal and corporate income tax rates were already at extraordinarily high levels, needed to pay for interest on wartime debt, the armed forces, and benefits promised to over ten million veterans.

Doughton found widespread support for an expanded old-age pension system funded entirely with higher taxes dedicated for that purpose. Groups that once opposed the original Social Security Act—including insurance companies and many employers and labor unions—had since changed their views. A portable minimum federal pension could play a useful role in corporate pension planning. Civic leaders in rural areas, who had once insisted on the exemption of nonindustrial employees from the pension system, now wanted some means of defraying the rising cost of welfare payments for older Americans.

Doughton’s amendments to the Social Security Act extended pension coverage to most American workers, raised minimum benefits by 70 percent (just above subsistence), and increased the payroll tax supporting the Old Age and Survivors Trust Fund. Congressman Wilbur Mills assured
his colleagues that a viable pension system financed with contributions from workers would relieve the growing expense of “welfare” and was better than doling out “something . . . for nothing.”
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The bill passed the House in 1949 with a 333–14 vote.

By financing a pension trust fund using a schedule of gradually rising payroll tax rates to maintain its actuarial balance, the House bill avoided the replay of a heated debate in the 1930s concerning the size of a pension reserve. President Franklin Roosevelt—a former insurance executive—believed that the pension system was consistent with traditional limits on debt so long as trustees maintained benefits and contributions at levels determined by actuaries. That practice, which was standard for private insurers, would require a large reserve as the population aged. Roosevelt asserted that it would be “dishonest to build up an accumulated deficit for the Congress of the United States to meet in 1980.”
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Republicans shared Roosevelt’s unwillingness to impose debt on a future generation, but feared that building a large pension reserve could magnify that very risk. The GOP leader on the issue, Senator Arthur Vandenberg of Michigan, argued that future leaders might be tempted to disguise debt incurred by the normal federal budget—now called the federal funds budget—by combining it with a Social Security system with large reserves. The conservative Vandenberg preferred a “pay as you go” pension system with only modest reserves. He rejected the alternative of investing pension reserves in corporate securities rather than federal debt, an idea he called “socialism.”
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Doughton’s bill incorporated part of Taft’s Republican plan for medical care—a federal program for grants to states for use in paying hospital bills of low-income Americans, the precursor of modern Medicaid. The bill passed the Senate in June 1950 by a vote of 81–2. From that day on, a system of pension benefits, sustained by payroll taxes and without debt, allowed most Americans to retire with a measure of dignity.

Five days after the Senate passed the Social Security Act Amendments of 1950, North Korean soldiers invaded South Korea, and only US soldiers in South Korea could stop them. The United States accepted the burden of global leadership, ending a four-year partisan debate within and between leaders of each party concerning international military commitments. Months before the North Korean invasion, the Truman administration had blocked a Republican-led attempt in the House to cut military
assistance to Korea. At the same time, in order to balance a budget, Truman had declined to approve his National Security Council’s recommendation that the United States raise taxes and triple its military spending. After the North Korean invasion, Truman signed the recommendation and asked Congress to suspend consideration of any new domestic spending. Congress raised taxes three times within eighteen months, to the highest levels in history, and vastly increased military spending even apart from the direct costs of the Korean War. In the first year of the war, during which the United States led U.N. forces against a larger Chinese army, the federal budget ran a surplus.

Federal income tax collections rose from $35.7 billion in 1951 to $51 billion in 1953, the last year of combat in Korea. By then federal funds taxes—those not dedicated to support specific trust funds—consumed 16.6 percent of national income, just shy of the record 18.8 percent in the last year of World War II and far greater than the average level of 10.3 percent during the period 2001–2010.
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In 1950 the American Fiscal Tradition forced the federal government to balance its responsibilities and resources for pensions and international security. The nation had borrowed for war before, but federal leaders in 1950 realized that total federal debt was already too high. The president and Congress made hard choices in order to avoid an additional mortgage on future tax revenues.

The new consensus on global commitments and a balanced trust fund for pensions survived after Republicans gained control of Congress and the White House in 1953. President Dwight Eisenhower argued that balanced budgets preserved the future of the nation’s children, the burgeoning Baby Boom generation. Like Truman, Eisenhower fought to maintain military spending at a level far less than that requested by the armed forces, though more than the amount urged by Taft. Faced with Pentagon protests about budget cuts, he quipped that the National Security Council should study “whether national bankruptcy or national destruction would get us first.”
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Also like Truman, Eisenhower backed a pension system funded fully with dedicated taxes outside the normal federal budget. By a voice vote with no dissent, the Senate passed Eisenhower’s proposal to broaden the Social Security system. Eisenhower remarked to his brother that a system of minimum pensions completely funded by broad-based taxation was opposed only by “Texas oil millionaires and an occasional politician or business man” whose “number is negligible and . . . stupid.”
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2003: T
HE
C
OLLAPSE OF THE
T
RADITION

Newly elected president George W. Bush displayed a portrait of Eisenhower in the Oval Office. In his first State of the Union address Bush echoed a favorite theme of both Eisenhower and Truman. Bush pledged to reduce federal debt by $2 trillion and keep $1 trillion in reserve. He reminded the public that “we owe it to our children and grandchildren to act now.”
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Bush’s goal for debt reduction appeared within reach at that time. Inflation-adjusted average income had tripled since Truman’s 1950 State of the Union address. President Bill Clinton and congressional Republicans had implemented a multiyear plan to balance the budget and then produce a surplus. That plan rested in part on the continuation of annual spending ceilings and procedural rules that his father, President George H. W. Bush, had fought to obtain in 1990. Moreover, George W. Bush was the first Republican president since Eisenhower who could count on a Republican majority in the House and Senate. Six years before Bush’s inauguration in 2001, all but one Republican member of Congress and many Democrats had voted for a constitutional amendment to balance the budget by 2002.

Bush’s goal of a $2 trillion reduction in federal debt would require Congress to maintain large surpluses in the federal funds budget—federal spending and revenues outside of trust funds. Achieving that goal would take discipline, since there had been only a slight federal funds surplus in the fiscal year before Bush took office. Economic growth had already begun to slow. In the months following Bush’s budget address, however, neither the president nor Congress tried to confine spending to available revenues.

Within twenty-four months of Bush’s first State of the Union address, the federal government was borrowing at a rate of half a trillion dollars per year—almost $5000 annually for every American household. Federal funds spending had soared by $200 billion a year while federal funds tax revenues plummeted by more than $300 billion a year.
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Only a very small portion of the rise in spending was related to the military response to the terrorist attacks on September 11, 2001.

President George W. Bush made no mention of his earlier goals for debt reduction during his State of the Union address in 2003. Instead, he asked Congress to reduce tax revenues again—by more than $2 trillion—and
called for the most costly expansion of Medicare since 1972. The White House then submitted to Congress a budget with sharply higher levels of domestic and defense spending.
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The war in Afghanistan accounted for only a small portion of the additional funding.