America's Fiscal Constitution (40 page)

The Federal Reserve can create money by purchasing federal debt. The Accord obligates the Federal Reserve to credit interest it receives back to the Treasury. An amount of debt likely to be held permanently is effectively monetized by the Federal Reserve. For this reason, an accurate measure of the burden of Treasury debt—as shown in
Appendix A
—is gross debt minus amounts held by the Federal Reserve.

E
ISENHOWER
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S
C
OMMITMENT TO
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ALANCED
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UDGETS

Herb Brownell, who managed Thomas Dewey’s successful races for the Republican presidential nomination in 1944 and 1948, knew how to line up votes for the Republican National Convention. Before committing to help Eisenhower in the 1952 election, Brownell probed the general’s views—largely unknown to the public or anyone else—on domestic policy. For most of his life Eisenhower had not even voted. Eisenhower relayed to Brownell his central political philosophy: the budget should be balanced.

Eisenhower had emerged from World War II as a national military hero. He secured the nomination with a come-from-behind convention victory over Senator Taft, and then soundly defeated the Democratic nominee, Illinois Governor Adlai Stevenson, in the November election. Differences over the federal budget did not play a significant role in the contest because Stevenson shared Eisenhower’s loathing of federal deficits. Eisenhower’s coattails swept Republicans to majorities in the House and Senate.

When Eisenhower took office in January 1953, the United States serviced an unmonetized debt of almost $240 billion, an amount just shy of the record level reached in fiscal year 1946.
²⁹
The expense of the Cold War and large interest payments on that debt had prevented sharp cuts to the tax rates of World War II. Revenues from personal income taxes rose from $18.4 billion a year at the end of World War II to $27.9 billion in the fiscal year when Eisenhower was elected. During that period corporate income tax revenues grew from $16.4 billion to $21.2 billion.
³⁰

Eisenhower’s 1956 State of the Union address reminded Americans of “our enormous national debt and of the obligation we have toward future Americans to reduce that debt whenever we can appropriately do so.
Under conditions of high peacetime prosperity, such as now exist, we can never justify going further into debt to give ourselves a tax cut at the expense of our children.”
³¹

The four traditional pillars of fiscal discipline remained intact throughout the Eisenhower presidency. First, budgets presented by the White House and adopted by Congress were clear and understandable. The administration rejected advice from economists to consider trust fund surpluses in deciding whether the budget balanced. Second, “pay as you go” planning confined proposed spending to a level within projected revenue in the annual budget proposed to Congress. Third, trust funds linked taxes and spending on specific programs, most notably for expanded Social Security pensions and federal highway construction. Fourth, when borrowing occurred to offset revenue shortfalls during downturns in 1954 and 1958, federal officials worked within a debt ceiling no greater than the one set at the peak of World War II.

As the Korean War wound down early in Eisenhower’s presidency, Eisenhower faced pressure from Republicans in Congress to cut tax rates quickly. The president understood that high tax rates could distort economic decisions. He had personally attained financial security by publishing a best-selling memoir under a contract deliberately structured to avoid the application of the top tax rate. When Eisenhower asked Congress to delay scheduled tax reductions in order to balance the budget, Senator Taft exploded in anger. The Republican chairman of the Ways and Means Committee refused to allow a vote on the delay. The US Chamber of Commerce and the National Association of Manufacturers heeded the president’s call for fiscal discipline and reluctantly agreed with the administration. President Eisenhower ultimately prevailed with Congress to postpone tax cuts.

Two years later, Eisenhower opposed a proposal from some congressional Democrats to reduce taxes by $20 per taxpayer. “Every political party likes to cut taxes; there is no question about that,” Eisenhower assured the press. “So we will do it as soon as we can.”
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The president also condemned any use of debt to raise the standard deduction, which he also feared might “excuse millions of taxpayers from paying income tax at all.”
³³

Secretary of the Treasury George Humphrey spoke for the administration on fiscal policy. Before joining the Eisenhower administration, Humphrey had headed the nation’s second largest steelmaker, M. A. Hanna Company, which was named after the famed organizer of the Republican
Party at the turn of the twentieth century. Humphrey expressed himself with a candor that seems quaint in comparison with the twenty-first-century practice of contrived political “messaging.” Humphrey outright dismissed the idea of borrowing for a tax cut in order to stimulate growth: “I will contest a tax cut out of deficits as long as I am able. . . . I don’t believe in this idea that you can cut taxes out of deficits, and then build up from that.”
³⁴

When conservatives questioned the level of spending in the president’s proposed budget in 1957, Secretary Humphrey invited them to find places to cut. Senator Harry Byrd of Virginia, chairman of the Senate Finance Committee, accepted that invitation. He cut $4 billion, about 5 percent, from the administration’s budget request, mostly by paring down the economic and military assistance to Cold War allies, a White House priority.
³⁵
The White House could, however, count on Byrd and about a dozen other conservative Democrats who would vote with the administration in defeating debt-financed tax cuts. In opposing the effort to give every American a $20 income tax cut, Byrd pointedly remarked: “We are not engaged in war. If we cannot balance the budget now, I ask when can we balance it?”
³⁶

Senator Barry Goldwater became a hero to many conservative Republicans in the late 1950s. The former city councilman from Phoenix and heir to a retail fortune had ridden Eisenhower’s coattails to the Senate in 1952. Like Byrd, Goldwater believed that “spending cuts should come before tax cuts.”
³⁷
He suggested that reducing taxes without making careful choices about government expenditures was tantamount to courting “deficit spending.”

As the economy slowed in late 1957, Eisenhower explained to former economic advisor Arthur Burns that he was “against vast and unwise public works programs . . . as well as the slash-bang kinds of tax-cutting from which the proponents want nothing so much as immediate political advantage.”
³⁸
Yet as employment continued to fall in early 1958, the ambitious vice president, Richard Nixon, publicly mentioned the possibility of a tax cut. Wilbur Mills, who by then had become chairman of the House Ways and Means Committee, warned House Speaker Rayburn that falling tax revenues during the recession would inevitably lead to a deficit even without a tax cut.

Rayburn, Mills, and Senate Majority Leader Lyndon Johnson worked to avoid either being blamed for the deficit or allowing Republicans to
take credit for any tax cut initiative. Days after Nixon’s off-the-cuff public statement, Treasury Secretary Robert Anderson met with senior Democratic congressional leaders and agreed that neither Congress nor the administration would move unilaterally to cut taxes. Within days Johnson mustered a bipartisan majority to defeat—by a 71–14 vote—a tax cut offered by Senate liberals.

In the wake of the recession, Democrats enlarged their congressional majority during the 1958 midterm election. Eisenhower worried that Congress would try to stimulate the economy using debt-financed spending. In 1959, for the first time, the president presented his budget on national television. He aggressively vetoed spending bills, though Congress overrode the veto of an appropriation for water projects.

Secretary Anderson commanded the unqualified respect of the president and the two most powerful Democrats in Congress, Speaker Rayburn and Majority Leader Johnson. Anderson had served in various federal positions after selling his Texas radio station to Lady Bird Johnson, Congressman Johnson’s wife, in early 1943. Eisenhower considered Anderson to be his most qualified potential successor. Anderson believed in the values underlying the American Fiscal Tradition and helped cast one of its traditional pillars—“pay as you go” budget planning—in modern terms. He identified the true burden of debt as “the impact of the taxes that must be levied to service it.” Anderson thought that federal leaders should nurture “sustainable growth” with budgets that usually contained a modest surplus for use in retiring debt incurred during recessions. He urged that “variations in tax rates or spending programs for cyclical purposes [should] be kept to a minimum,” since federal outlays could not be timed to coincide beneficially with the rise and fall in economic activity. Furthermore, he recognized that it would be politically easier to “achieve a deficit in a recession than a surplus in a boom.”
³⁹

Eisenhower took pride in the large surplus obtained in the fiscal year of 1960. In his final State of the Union address, Eisenhower asked the nation to forgo tax cuts until it had paid down some debt with several years of surpluses, an action he termed a “reduction on our children’s inherited mortgage.” He added that “once we have established such payments as a normal practice, we can profitably make improvements in our tax structure and thereby truly reduce the heavy burdens of taxation.”
⁴⁰
Federal funds spending in fiscal year 1960 included large amounts for defense ($48.13
billion); interest on the debt ($7.51 billion); veterans’ benefits ($5.44 billion); and agriculture ($2.62 billion).
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“P
AY AS
Y
OU
G
O
” H
IGHWAY
F
UNDING

In the five years following the end of World War II, the number of registered vehicles rose from thirty-one million to forty-nine million. Each day more Americans experienced the aggravation of being stuck in traffic.
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President Eisenhower viewed enhanced mobility as a key to both economic growth and “greater standards of living.”
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As a young officer in 1919, he had participated in an army convoy that tested how long it took to transport materials by truck across the country: sixty-three days from the East to the West Coast. As president, he proposed a $50 billion highway program to link the nation’s major urban centers.
⁴⁴
The Eisenhower administration insisted that any highway plan had to pay for itself through tolls or new, dedicated taxes on fuel, automobiles, and tires.

Eisenhower lobbied Congress for his highway program with atypical fervor. Retired general Lucius Clay, a friend of Eisenhower’s, helped develop the details of the plan. Clay, a national hero honored with a ticker-tape parade in New York for leading the airlift that broke the blockade of Berlin, encountered some stiff political resistance. Members of Congress from rural states feared changes in the existing program that financed farm-to-market roads. Trucking companies that supported better highways had historically opposed financing them with user taxes. The traditional link between new spending and taxes forced the trucking industry to change its position and accept transportation-related taxes so long as the revenues were dedicated solely to the proposed Highway Trust Fund.

A shrewd Democratic populist, Senator Al Gore Sr. of Tennessee, tested the link between spending and new taxes by convincing a Senate majority to back his plan to accelerate highway construction using some general revenues to supplement the resources of the proposed Highway Trust Fund. Byrd believed that there were no spare revenues and blocked Gore’s efforts.

Byrd also killed General Clay’s attempt to expedite construction through the sale of bonds serviced by future trust fund revenues. Byrd favored federal support for highways but opposed the use of debt to build them. In his twenties he had headed a nonprofit organization that built
a road through the Shenandoah Valley and then led a successful push to defeat a proposal by Virginia’s state government to use bonds to accelerate road construction. A few years later, as the state’s governor, he relied on tax revenues not debt to build hundreds of miles of roads. Byrd was personally polite with Senate colleagues, but no one could bend his iron-willed adherence to “pay as you go.”

The Federal Aid Highway Act of 1956 imposed new taxes on motor fuels, tires, and vehicle sales to finance the world’s most ambitious public works program. The “pay as you go” budget practice had forced federal officials to weigh the benefits of highway construction against the tolerable cost of new taxes. The tough debate on financing had produced a consensus on the scope of highway funding. The act passed the Senate with one dissenting vote and the House on a voice vote. By the early 1960s, the Highway Trust Fund accounted for more than 3 percent of federal spending. Like the other trust funds—for old-age and disability pensions, bank deposit insurance, unemployment insurance, federal civilian and military employee retirement, and airport construction—the Highway Trust Fund fell outside the administrative or federal funds budget.

Byrd’s opposition to borrowing for highways planted the seed of a debate among academic economists concerning limits on public debt. The corporate-funded Council on Economic Development commissioned a talented young economist, James Buchanan, to study the merits of Byrd’s contention that highways and all other federal functions should be paid for on a “pay as you go” basis. Most economists, including Buchanan initially, viewed the “pay as you go” tradition as dogma unjustified by economic analysis. Many economists after the Great Depression focused on the effect of debt-financed public spending during severe downturns rather than debt’s resulting mortgage on future tax revenues. Buchanan expressed the logic of Byrd’s stand against borrowing for highways in the language of modern economics.