America's Fiscal Constitution (45 page)

Led by Long, Congress increased pensions by 15 percent in 1969 and then by another 10 percent in 1970.
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Long added the latter increase to a bill that raised the legislated ceiling on federal debt, making it difficult to veto without shutting down the federal government. The veteran actuary of Social Security, Robert Myers, quit in disgust. Long and Nixon pushed for legislation creating a formula that automatically adjusted pension benefits to account for changes in the cost of living.

Mills blocked that effort, which he feared would put excessive pressure on payroll tax rates and diminish congressional control of the program. When the automatic inflation adjustment passed both the House and the Senate in 1971, Mills used his extraordinary power to kill the bill by refusing to schedule a conference committee meeting. This action reinforced the chairman’s credibility as a fiscal conservative, a credibility he soon exploited to the detriment of long-term budget discipline.

In early 1972 Mills announced his candidacy for president and introduced House Bill 1, the Social Security Amendments of 1972. The ultimate congressional insider had caught a severe case of presidential fever. He proposed the most ambitious expansion of federal services since the Social Security Amendments of 1965, which created Medicare and Medicaid. Mills sought to raise pension benefits and link them to future rates of inflation, expand Medicare coverage to disabled Americans, limit the premiums paid by beneficiaries for Medicare Part B, remove copayments for certain types of home health care, raise the payroll tax and wage ceiling, and convert many state-based public assistance grants into a new program of direct payments, called Supplemental Security Income.

The legislation increased the number of Medicare beneficiaries by 10 percent by making disabled Americans eligible for the program.
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The related cost, however, would rise even more because people with disabilities incurred higher than average medical costs.
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The bill was amended to require Medicare reimbursement for the high costs of dialysis used in the treatment of kidney failure. In addition, Congress passed a 20 percent hike in the level of monthly Social Security pensions, an increase that—on top of prior pension increases—doubled the level of pension benefits compared to those in 1967.
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In 1972 Mills abandoned his long-standing opposition to the use of projections of future wage growth in setting pension benefits. Because
wages and employment had consistently grown faster than inflation up to that time, many economists had criticized the flat wage assumption. Unfortunately, within two years of the passage of House Bill 1, inflation and inflation-adjusted pension benefits began to rise faster than both employment and productivity. The prudence of the old flat wage assumption was vindicated too late. To remain self-sustaining, trust funds for pensions and Medicare hospitalization required sharply higher payroll tax rates, which would climb to 15.3 percent of payroll in 1990.
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The Social Security Commission had good reason to call the Social Security Act Amendments of 1972 “a new social security program.”
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The number of older Americans living in poverty would be cut in half. The next generation of conservative federal leaders would begin to decry the emergence of a “welfare state,” often pejoratively associated with Johnson’s War on Poverty and Great Society programs. In fact, the largest expansion of the social safety net occurred with the passage of the Social Security Act Amendments of 1972. The final bill emerging from the conference committee sailed through the House with a vote of 305–1 and the Senate unanimously.

Mills received little political benefit from that new social safety net. His quixotic presidential campaign floundered, and Nixon attempted to take credit for the new program. The first checks with higher monthly pension payments were mailed in October, right before the election. The White House tried to mail those payments along with a presidential message and Nixon’s picture, but this plan was dropped after Social Security officials threatened to resign in protest.

N
IXON
F
IGHTS
C
ONGRESS ON THE
B
UDGET

Nixon won reelection in 1972 with a record Electoral College margin for a Republican president. In the final weeks before the election he campaigned as a traditional fiscal conservative. He told voters that his opponent’s spending programs meant higher taxes down the road. After his election he lectured Congress: “Some people have forgotten the crucial point that the full-employment principle requires that deficits be reduced as the economy approaches full employment.”
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Like many of his predecessors, Nixon wanted to leave office with a balanced budget. He used traditional language when submitting his next budget to Congress along with a reminder that “the only way to restrain taxes” was “to restrain spending.”
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Even though deficits remained modest in relation to national income, the president announced plans to impound, or refuse to spend, amounts appropriated. Congress bridled at being blamed for deficits and responded by passing the Congressional Budget and Impoundment Control Act of 1974, which created new budget committees and the Congressional Budget Office. The legislation required Congress to adopt resolutions each spring that set ceilings on estimated spending. The new budget process was intended to reduce congressional dependence on the presidential budget.

By 1974 the Nixon White House was severely weakened by the investigation of the president’s role in the Watergate burglary. In July, after an economic downturn reduced expected revenues, Nixon proposed cuts in spending. Eleven days later, following Nixon’s resignation, Vice President Gerald Ford took the oath of office.

By the time Nixon resigned, the claim in his first inaugural address that federal leaders had learned how to manage the economy was as discredited as the president himself. A simultaneous rise in unemployment and inflation baffled many economists. Gasoline was rationed and oil prices soared after many large oil exporters embargoed shipments to the United States. By the end of 1974 the Dow Jones Industrial Average had fallen to half its level two years earlier.

Rising inflation, Nixon’s disgrace, and dashed hopes of victory in the War on Poverty and in Vietnam had battered the public’s confidence in federal leadership, but not public support for balanced budgets.

S
EVERE
R
ECESSION AND
P
RESIDENTIAL
V
ETOES

Hours after Ford took the presidential oath, the White House economic team and Federal Reserve Chairman Burns advised him that the economy showed signs of recovery from the inflation and unemployment experienced earlier in the year. They urged a cut in federal spending to close the anticipated budget gap.
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Ford—who described himself as a fiscal conservative—understood the federal budget well. His years of service on the House Appropriations Committee led Deputy Chief of Staff Dick Cheney to observe that the president grasped details of the budget better than anyone else in the White House.

Two months after taking office, in his first major address to Congress and the nation, Ford proposed to cut spending and raise revenues with a temporary 5 percent surcharge on most income taxes. After the speech the
economy slid into its most severe recession since 1938. In the last three months of 1974, inflation-adjusted income fell by 7.5 percent, and unemployment rose steadily to 7.2 percent at the end of the year.
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A continued rise in consumer prices confounded forecasts generated using economic models.

Debt filled the gap when federal tax revenues plunged. A Republican Party still haunted by the aura of failure associated with the Hoover administration felt compelled to “do something” to curb the economic slide. Democrats, meanwhile, invoked the New Deal. When a fiscally conservative Democrat, Senator Ernest Hollings of South Carolina, offered an amendment to limit spending to estimated tax revenues, the Senate defeated it by a two-to-one margin.

Since Ford had been appointed rather than elected to the vice presidency before Nixon’s resignation, he lacked the political capital conferred by an election victory. He dropped his request for a tax surcharge and in January 1975 proposed a one-time $16 billion tax rebate linked to a ceiling on federal spending.
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As unemployment swelled to almost 9 percent in May 1975, Congress passed a temporary tax cut and a $5.3 billion “jobs” bill funded through Nixon’s 1973 Comprehensive Employment and Training Act (CETA).
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Congress failed to override Ford’s veto of the jobs bill despite pressure from Democratic leadership, who made the vote a test of party loyalty.

Ford vetoed sixty-six bills during his presidency in an attempt to maintain spending discipline. Congress overrode only his vetoes of appropriations for education, health care, and child nutrition.

In October 1975 the president proposed a tax cut conditioned on a spending ceiling of $395 billion, roughly the level of spending during the prior twelve months plus a cost of living increase for Social Security.
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Ford’s proposal was crafted with help from White House staff members who would play crucial roles in fiscal policy in the early twenty-first century: Chief of Staff Donald Rumsfeld, Deputy Budget Director Paul O’Neill, Deputy Chief of Staff Dick Cheney, and Council of Economic Advisers Chairman Alan Greenspan. When a Republican congressional leader warned Ford about the political danger of vetoing a tax cut simply because it did not include a spending ceiling, the president cited the example of Truman, who had vetoed a tax cut to balance the budget in 1947 and was reelected the following year. Congress passed the tax cut without a spending ceiling and failed by a narrow margin to override Ford’s veto on December 17, 1975.

Before Christmas Day, Long convinced Ford to sign a new bill that contained both the tax cut and unenforceable language that pledged spending restraint. Ford’s political advisors were relieved to have a tax cut to counter promises made by the president’s opponent in the primaries, former California governor Ronald Reagan.

The battle between Ford and Reagan for the presidential nomination continued until the 1976 Republican National Convention. Reagan had kicked off his campaign the previous year by announcing an ambitious program to lower federal spending by $90 billion—almost a quarter—in order to balance the budget with lower tax rates.
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His budget plan called for an end to Medicaid as well as most domestic programs except for Social Security, Medicare, and “some aspects of agriculture, transportation and the environment.”
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Ford gained ground in early primaries by pointing out that Reagan’s proposal would shift the burden of financing the established social safety net to the states. Reagan regained momentum after he deemphasized his budget plan and focused his attacks on Ford’s foreign policy. The GOP platform of 1976 expressed traditional conservative doctrine: the nation could not “responsibly cut back taxes” without “spending restraint.”
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Former governor of Georgia Jimmy Carter surprised his party’s leaders with his strong showing in the Democratic primaries. Carter had always identified himself as a fiscal conservative. He pledged to improve efficiency, cut waste, and balance the budget as employment recovered from the deep recession. The onetime peanut farmer quipped that he had “never known an unbalanced budget—in my business, on my farm, as Governor of Georgia.”
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The economy had revived by the November election, even though unemployment remained above the level previously considered normal. Carter defeated Ford by a miniscule margin.

The American Fiscal Tradition appeared to be as strong as ever after an election between two presidential candidates committed to traditional limits on debt. Nonetheless, the budget had not balanced during a decade that had included the final years of the war in Vietnam and a severe recession. A growing public movement sought to amend the nation’s
written
Constitution to include the traditional limits on debt.

PART V

THE EROSION, REVIVAL, AND COLLAPSE OF THE TRADITION: 1977–2013

14

S
TRUCTURAL
D
EFICIT
: P
RESSURES FOR
T
AX
C
UTS AND A
R
EVIVED
C
OLD
W
AR

1977–1981: Years when deficits exceeded debt service = 5 (1977–1981, soaring interest rates and military costs)