America's Fiscal Constitution (41 page)

Two problems with the routine use of public debt bothered Buchanan. Public debt could both divert savings from private investment and suppress information about the true cost of public spending. Thomas Jefferson and James Madison, though not many modern economists, had recognized the benefits of allowing the public to weigh the cost of federal spending against the felt burden of current taxation.
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Economists, however, had shown how markets allowed consumers to measure the benefit they associated with a particular service against its cost. While some voters
might reasonably expect to shift the ultimate cost of debt to other taxpayers, an entire nation could not transfer its debt to others. Buchanan’s “theory of public choice” later earned him a Nobel Prize in economics. He also noted that the United States had long avoided the slippery financial slope of excessive debt because of what he called its “fiscal constitution.”

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Eisenhower struggled to define the level and nature of spending for global security that could be sustained without borrowing. He believed that limits on debt preserved the nation’s credit for use during future military emergencies. The president decried the inefficiency of the nation’s long history of starving defense budgets during peacetime and then giving military professionals whatever they asked for, at high cost, after the shooting began. He also appreciated the fact that modern warfare required steady annual spending designed to preserve a technological superiority. Eisenhower’s approach to Pentagon budgeting would endure and preserve a unique role for the United States in international affairs.

Eisenhower’s first budget, for fiscal year 1954, included spending of slightly more than $63 billion—an almost 10 percent cut from Truman’s draft budget for that year.
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Most of the savings came from proposed Pentagon spending. Eisenhower reminded citizens of the opportunity costs of an arms race by remarking that the price of a modern bomber was equal to the expense of a “modern brick school in more than 30 cities.”
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In October 1953 the president signed NSC-162, which prescribed a steady level of defense spending within a balanced budget and noted that a “strong, healthy and expanding national economy is essential to the security and stability of the free world.”
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Eisenhower’s “New Look” Pentagon budgets reduced the number of American soldiers, increased investment in research and the procurement of new weapons, and shifted spending from the army to the navy and air force. The president replaced some military commanders who continued to insist on larger budgets. Army Chief of Staff Maxwell Taylor, once a stellar field commander, continued to push for more conventional forces suitable to a “flexible response” in regional wars.
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Taylor’s ideas impressed Senator John F. Kennedy and many others in Congress, but not Eisenhower, who thought American forces should be designed to fight the Soviets or Chinese rather than their proxies.

The Presidium of the Supreme Soviet briefly sought to relieve tensions with the United States after Stalin’s death in 1953. This approach ended abruptly after party leader Nikita Khrushchev executed the political rival who led the initiative. Khrushchev consolidated his power and then publicly exaggerated the Soviet Union’s technological strength and ability to withstand millions of casualties. He asserted that the Soviet Union produced intercontinental missiles like “sausages from an automatic machine,” when in reality it possessed only a handful.
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Chinese strongman Mao Zedong responded to Khrushchev’s bluster by mentioning his own willingness to sustain three hundred million wartime casualties, a negotiating tactic that was not available to democratically elected leaders like Eisenhower.

Members of the Congress, however, could reply to such threats by spending unparalleled amounts of money on defense and related research. Senators Lyndon Johnson and John F. Kennedy criticized the state of American military preparedness after the Soviet Union successfully launched
Sputnik
in 1957. Eisenhower complained that he was “tired” of reminding critics that defense should not be cited as “an excuse for wasting dollars.”
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The United States already had more than nine thousand nuclear devices that could be delivered by aircraft, missiles, and field artillery. In 1960 Congress added $700 million to the president’s defense spending request, including money for the development of two new types of missiles and a B-70 bomber program that Eisenhower had previously cut.
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Eisenhower’s last defense budget, exclusive of costs for veterans and some intelligence activities, was equivalent to $388 billion in 2012 dollars adjusted for inflation. This level of military spending would eventually serve as a floor for the level of real—inflation-adjusted—military spending. By 2012, the inflation-adjusted base military budget—apart from direct spending for war—exceeded Eisenhower’s final one by $180 billion.
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Eisenhower personally edited almost thirty drafts of a farewell speech that he delivered to a large national television audience. In the intervening years, many have quoted his observation that “an immense military establishment and a large arms industry” was then something “new in the American experience.” As always, he placed this warning in a fiscal context: “We cannot mortgage the material assets of our grandchildren without asking the loss also of their political and spiritual heritage.”
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Senator John F. Kennedy supported the goal of balancing budgets throughout his 1960 presidential campaign. Three weeks before the
election he pledged to balance the budget across the economic cycle, a fiscal policy he described at the time as “conservative.” He concluded the presidential race by making a commitment “to maintain a balanced budget except in times of national emergency or severe recession.”
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Soviet actions made it difficult for President Kennedy to keep his budget pledge. Khrushchev threatened to use military force to establish East Germany’s control over sectors in Berlin entrusted to the United States, Great Britain, and France. When Khrushchev boosted Soviet military spending in the spring of 1961, Kennedy asked Congress for a corresponding increase. The president and his brother, Attorney General Robert Kennedy, considered imposing a one-year tax surcharge for the explicit purpose of demonstrating public support for sustained military spending. In Kennedy’s mind, the Berlin crisis exposed a flaw in military capabilities based so heavily on nuclear arms, since he was the first of many presidents who believed that the United States would not credibly be able to threaten first use of nuclear weapons.

Republican Douglas Dillon, Kennedy’s secretary of the treasury, stressed the importance of balanced budgets. Assistant Treasury Secretary for Tax Policy Stanley Surrey, a respected former tax professor, persuaded Dillon that income tax rates could be cut without a loss in revenue as long as Congress also eliminated certain deductions. Meanwhile, Kennedy’s chief economist, Walter Heller, proposed modest debt-financed tax cuts to spur investment and employment. Average unemployment had remained at about 6 percent from 1959 to 1961, compared to an average of little more than 4 percent for the decade before the 1958 recession.
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Tax policy in the era depended less on the Kennedy administration than on the House Ways and Means Committee and its powerful chairman, Wilbur Mills. Senate Finance Committee Chairman Byrd maintained a minimal staff for his committee and waited for the House to originate tax bills.

No one ever doubted Mills’s mastery of legislative detail, but his initial years as chairman of the Ways and Means Committee gave little indication of the qualities that would soon make him the most powerful member of Congress. At times during the 1950s, Mills seemed more interested in policy than politics. His hearings featured testimony from economists and law
professors instead of the standard fare of lobbyists and business executives. The failure of two of his legislative initiatives early in his chairmanship demonstrated the power of the budget practices that had served as pillars of the American Fiscal Tradition.

Mills tried to reform eligibility for unemployment insurance in response to the 1958 recession. Professional policy analysts questioned why benefits for laid-off workers should depend on their employers’ payments to the Unemployment Insurance Trust Fund, a circumstance beyond the control of the employees themselves. Conservatives rebuffed Mills and insisted on retaining the basic contributory trust fund principle that linked taxes and spending. Another bill proposed by Mills sought to ease restrictions imposed by Congress on interest rates on federal bond issues. Treasury Secretary Anderson believed that the Treasury should extend the average life of debt with staggered maturities and sought relief from legislated interest rate limits in order to sell long-term bonds. This bill was also eviscerated on the House floor because Congress was reluctant to relinquish its traditional control over the terms of debt.

By the early 1960s Mills used lessons gleaned from those experiences to solidify his power. He made the Ways and Means Committee’s ranking Republican, John Byrnes of Wisconsin, a virtual partner. Together they filled vacancies on their committee with members of Congress who were willing to work as a team. Throughout the Mills chairmanship, only one freshman congressman—the promising George H. W. Bush—was selected to serve on the committee. By 1972 every single member of the committee had joined it while Mills was chairman. Committee members often demonstrated greater loyalty to Ways and Means than to their party leaders in the House.

Mills abolished subcommittees, so only the full committee—for which he set the agenda—could hold hearings and consider legislation. He reached an agreement with the Rules Committee that prevented the House from amending bills brought to the floor by the Ways and Means Committee. Mills enhanced his power by keeping score on whether members of Congress favored his legislation. He was willing to consider minor changes in the tax code requested by those he could count on.

Mills agreed to pass two modest tax changes requested by the Kennedy administration in 1961. One allowed businesses a tax credit for some types of new investments, while the other required companies to withhold federal income taxes when they paid dividends and interest. Senate Finance
Committee Chairman Byrd blocked the withholding proposal but failed to kill the tax credit despite uncharacteristic support from liberals on the issue. The ultraconservative Byrd pointedly asked American corporate executives why they needed the “help” of government in order to make good investments. In a sharp contrast with the attitudes of post-2000 conservatives, the Virginian considered tax breaks financed with debt as a type of federal subsidy.

Except for these modest tax changes and somewhat higher spending for the space program and military readiness, Kennedy’s budgets differed little from those of the Eisenhower administration. One budget expert noted that federal spending, including trust funds, remained at “an almost constant level of 19.7 percent” of the economy for a decade.
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President Kennedy, in an erudite commencement speech delivered at Yale University on June 11, 1962, called attention to the power of the nation’s fiscal tradition. He characterized fiscal policy as a field in which “myths are legion and the truth hard to find.” As an example, he noted that many believed “debt is growing at a dangerously rapid rate,” even though “debt as a proportion to our national product [had] declined sharply” since World War II. Kennedy challenged young Americans to develop fiscal principles based on “technical answers, not political answers.” Nothing in his speech suggested that the federal government should ever borrow to pay for routine annual spending. In fact, Kennedy ended the speech with an homage to history. He quoted Thomas Jefferson’s call for the marriage of time-honored values to modern circumstances by the application of “old words to new objects.”

Weeks after this speech on fiscal policy, a reporter confronted Kennedy with a Gallup Poll showing that 72 percent of Americans opposed a tax cut financed with debt.
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The president recognized the power of the American Fiscal Tradition and the advantage of peacetime balanced budgets. But he worried that he had not fulfilled his campaign promise to get the economy “moving.”
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Kennedy inherited a budget for fiscal year 1961 with an initial projected surplus that turned into a modest deficit when economic growth slowed and interest rates on World War II debts rose. That deficit gave Kennedy little opportunity to cut tax rates. When economist Paul Samuelson suggested that Kennedy intentionally propose tax cuts that Congress would not enact, the president rejected the idea as “vanity, not politics.”
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In early 1962 Treasury Secretary Dillon publicly warned against
a “massive reduction in tax rates, without any provision for compensating revenue,” since a loss of tax revenue “would leave us no alternative but withdrawal from our world commitments and neglect of our pressing needs at home.”
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Everyone realized that it would be easier to cut tax rates than to raise revenues by eliminating deductions or exclusions. In August Kennedy assured Mills that he would delay the introduction of any tax proposal until after the November 1962 midterm elections. In a White House meeting concerning the economy, Dillon offered an insightful prediction: long-term economic growth would pick up when the Baby Boomers began entering the workforce in 1965.