The Great Deformation (42 page)

Accordingly, during the eight Bush years, constant-dollar welfare state spending grew at 7 percent per annum and there was but one consolation: real domestic spending grew even more rapidly—at 8.5 percent annually—during the Nixon-Ford era. The so-called conservative economic team of that era—George Schulz, Casper Weinberger, and Herb Stein—never managed to encounter, it appears, a significant expansion of the welfare state that they could not rationalize.

Nevertheless, the constant dollar spending growth of $1 trillion (2005$) during the George W. Bush “guns and butter” spree has no peer at all in the record books. It can be fairly said that when it came to defining “Big Government” the Bush era left nothing to the imagination.

And so it came to pass that exactly one-half century after Eisenhower had led the Republican Party back to the promised land of the old-time fiscal religion, his political heirs and assigns had made a mockery of their heritage. This untoward outcome proved that the 1950s twilight of financial discipline rested on the resolve of an aging statesman who had not embraced any of the multiple Keynesian heresies that took charge of policy soon thereafter.

PILLARS OF IKE'S FISCAL SUCCESS

It goes without saying that when Eisenhower left the White House in January 1961, the prospect of today's inexorable fiscal bankruptcy was not even a remote possibility. This benign state of affairs was owing to four additional considerations beyond the thirty-fourth president's seeming pacification of the warfare state.

The first of these was the fact that the nation still had a central bank dedicated to sound money and reluctant to monetize the Federal debt. Secondly, there remained intact a bipartisan consensus in favor of meeting our
gold redemption obligations under Bretton Woods. Thirdly, the Republican Party had not yet embraced the specious Keynesian construct of the full-employment budget. Most important of all, the conservative party still viewed taxes as an integral element of budgetary management, not as an all-purpose tool of perpetual macroeconomic stimulation.

President Eisenhower was an exemplar of financial orthodoxy with respect to each of these propositions, but it was on the matter of achieving meaningful spending cutbacks before turning to the popular business of cutting taxes that he left a lasting mark.

THE EISENHOWER-HUMPHREY PREDICATE:

TAX CUTS MUST BE EARNED WITH SPENDING CONTROL

Eisenhower inherited Truman's high war taxes and appointed as his chief economic spokesman and treasury secretary George M. Humphrey, who was a dyed-in-the-wool anti-tax industrialist. According to one leading chronicler of Eisenhower's economic policy, Humphrey “saw high taxes as a greater menace to the US than communism.”

Yet notwithstanding his archly anti-tax philosophy, Humphrey was no incipient supply-sider. In fact, he shared Eisenhower's view that tax cuts had to be earned by means of putting spending reductions in place first. Thus, Humphrey minced no words when advising a congressional committee on where he stood: “I will contest a tax cut out of deficits as long as I am able …”

Unlike modern GOP treasury secretaries who have eschewed the gore of intra-cabinet spending battles in favor of the glory of running the tax-cutting department, Humphrey served as Ike's leading helpmate in wielding the budget knife. In an early cabinet meeting, for example, Humphrey hectored defense secretary and former GM chief executive, Charles Wilson, on the grounds that his proposed budget trims were woefully inadequate. Thundering in the language of the auto business, Humphrey instructed the defense secretary to throw out his proposed budget and start all over: “Get the best damn streamlined model you ever did in your life…. [W]e can't just patch-up the old jalopy.”

Still, it was Eisenhower who ultimately resolved the tension between tax cutting and budget balancing in favor of the latter. In the context of 1953, there was a strong policy case for dismantling the wartime régime of high taxes which had been in place for more than a decade.

The latter were most certainly stifling capital formation and economic growth. On top of this, political pressure for tax cuts among Republican business constituencies was overwhelming. After two decades of Democratic
rule, Republican businessmen from both Main Street and Big Business were adamant in their demands for relief from the scourge of “tax and spend.”

As a philosophical matter, Eisenhower didn't disagree. He readily conceded that under the fiscal position he had inherited from Truman, the nation was fast “approaching the limits of taxation and spending.”

Nevertheless, Ike had no doubt that his first priority was to restore a balanced budget as soon as possible. The starting point was a severe reduction in the $12 billion deficit in the inherited Truman budget for the upcoming 1954 fiscal year.

This figure amounted to about 3 percent of GDP, and therefore would be considered a trifling matter by present-day standards. Yet Eisenhower elected to defer the GOP's tax reduction agenda until a balanced budget had been delivered in the here and now, not merely projected for the distant future.

Indeed, in a July 1953 note to a friend, Ike left little doubt as to his fiscal priorities: “Beginning in June 1952 … I have always maintained one thing—that the annual Federal deficit must be eliminated before tax reduction can begin…. So I spend my life trying to cut expenditures, balance the budget, and then get at the
popular
[Ike's italics] business of lowering taxes.”

In fact, notwithstanding a thorough and painful round of surgery on the inherited fiscal 1954 budget, the new president was distressed to discover that after netting out the cuts and re-estimates he would still be recommending a $6.6 billion deficit to Congress. Moreover, it should be noted that this remaining, and as Ike saw it, intolerable level of red ink was measured on the old “administrative budget” basis.

After accounting for an approximate $3 billion Social Security trust fund surplus, the “cash deficit” (later called the “unified budget deficit”) was only $3.6 billion, or just 1 percent, of GDP. Yet for Eisenhower the Social Security trust fund was not something to be raided to pay for cotton subsidies and military procurement. Likewise, “close” might count in horseshoes but not in restoring the nation's fiscal discipline.

EISENHOWER'S ESSENTIAL FISCAL STRATEGY: THE ANTI-GINGRICH PARADIGM

Given the absolute priority of achieving budget balance first, Eisenhower declined to seek an early end to Truman's war taxes. Instead, he actually sought the extension of several revenue-raising measures that were scheduled to expire in the upcoming budget year.

As a result of these actions, Eisenhower's place as the anti-Gingrich of modern fiscal history cannot be denied. Unlike the contemporary Republican Party, Ike was willing to be the tax collector for the welfare state (and warfare state, too) once he had exhausted the ability of his administration to cut spending in the budget year at hand.

Nor should the “year at hand” element be overlooked. In those times there was no such thing as a ten-year budget, and Eisenhower wouldn't have put any stock in deferring tough choices into the foggy future, anyway. After all, ten years earlier he had stood on the cusp of the Normandy invasion, not knowing whether civilization itself would survive another decade.

Indeed, Ike's understanding that the budget choices which count are the ones reflected in current-year expenditures and receipts could not have been more jarringly different than what passes for fiscal conservatism today. The much ballyhooed “Ryan Budget” for fiscal 2012 added $7 trillion to the national debt, for instance, before it would achieve a balanced budget twenty-five years later; that is, in 2037. Eisenhower would have thought such a fiscal plan the scribbling of a madman.

Not surprisingly, Eisenhower generated not inconsiderable distress among Republican businessmen when he sought an extension of Truman's excess profits tax in order to further reduce the fiscal 1954 deficit by $1 billion. He also insisted on cancellation of a 5 percent corporate tax reduction scheduled for April 1954 in order to protect the out-year budget.

Moreover, the Eisenhower White House then deployed a full-court press to pry these tax increases out of a reluctant Republican-controlled Ways and Means Committee. In his congressional testimony on the matter, even his anti-tax secretary of the treasury had no trouble making the administration's fiscal priorities crystal clear: “If the Administration has the courage to come in here and ask you gentlemen to extend this tax it is the firmest good-faith showing that we are determined to balance the budget and to accomplish sound [economic recovery].”

Nor did Ike spare rank-and-file Republican voters, either. When Congress passed a bill in mid-1953 to repeal a 20 percent excise tax on motion-picture tickets, Eisenhower vetoed it in order to maintain the revenue level projected for his first-year budget.

It turned out that military spending fell even more rapidly than the administration had projected. Consequently, the brief and mild recession early in the year did not derail the budget, with the fiscal 1954 deficit coming in at only $1 billion. In fact, in the context of a $400 billion economy, the deficit during Ike's first full budget year was essentially a rounding error (0.3% of GDP) even by his own standards.

THE 1953–1954 RECESSION: HOW EISENHOWER ESCHEWED COUNTERCYCLICAL ACTIVISM

During the course of the mild recession of 1954, Eisenhower refused to be panicked into deviating from his course toward a sustainable balanced budget. While he recognized that the deficit would be temporarily enlarged owing to the so-called automatic stabilizers of higher unemployment insurance outlays and reduced income tax collections, he refused to recommend new discretionary initiatives such as tax cuts or spending stimulus.

As it turned out, Eisenhower's resolve was fully justified, since the downturn amounted to hardly even a faux recession. In fact, the historical evidence shows that the 270-day recession, which the National Bureau of Economic Research (NBER) dated from the third quarter of 1953 under its highly mechanical formulae, was simply an economic soft patch: a cooling off from the red-hot economy that had been stoked by the Korean War.

During the 1951–1952 war economy, for example, real GDP growth had averaged 5.5 percent on an annualized basis. Moreover, this strong growth trend had spurted to a 10 percent average during the final quarter of 1952 and the opening period of 1953.

The momentum of the national economy was so strong, in fact, that the unemployment rate as of October 1953—several months after the recession started—was only 1.8 percent (based on BLS definitions used at the time). It was still just 3 percent by year-end. After the war economy momentum was finally broken and a brief dip ensued in late 1953 and early 1954, the US economy was expanding smartly once again by June. By the second quarter of 1954, in fact, real GDP was nearly 7 percent greater than it had been before the final Korean War burst of output. In short, in late 1953 and early 1954 the US economy had not been headed into a deep recessionary hole at all; it had just rebooted itself after the Korean War exertion.

For all his alleged lack of “sophistication” in economic matters, Ike understood that civilian economies always experience a “cooling off” period after a war. Accordingly, he was not about to allow this one to distract from his appointed fiscal course.

Eisenhower's chief economic advisor, Arthur Burns, nevertheless kept a wary eye on the economy during the spring of 1954. He also squinted sourly at Ike's old-fashioned treasury secretary, who consistently advised Ike to keep his powder dry on economic stimulus measures and to stay the course on fiscal discipline.

But in a premonition of far worse things to come during the Nixon era (1969–1973), Burns couldn't let colleagues forget about his renowned expertise on the business cycle and his unique capacity to prescribe just the right policy medicine to help it along. As a result of Burns' pestering,
therefore, Eisenhower did not fight congressional Republicans when they passed a reduction in excise taxes.

The people were thus encouraged to spend more on jewelry, movies, and telephones, even though this measure set the budget back by several billions. Burns later boasted that the economy had thereby been stimulated: “We felt the cut might not be a bad idea for countercyclical reasons.”

In a similar vein, Ike also permitted Burns to develop a list of “standby” government construction projects which could be speeded up, such as flood control, highways, and merchant marine tankers. At the same time, he made sure that Humphrey kept them on the shelf.

At a press conference in early April 1954, just weeks before the economic upturn began, Eisenhower proved he could tell the difference between an economic soft patch and the onset of another great depression, even if his business cycle expert couldn't. After assurances that the economy was sound, Eisenhower decisively shut down the economic stimulus debate, saying, “Your Government does not intend to go into
any slam-bang emergency program
[my italics] unless it is necessary.”

While Eisenhower didn't think it was necessary, Burns continued to pester. So on May 14 Ike gave the go-ahead on the Burns scheme to have each cabinet member get an early start on these “standby” construction projects. Later economic data would reveal, of course, that these tiny speed-up actions amounted to a feckless gesture, since economic recovery was then already under way.