America's Fiscal Constitution (37 page)

Secretary of Defense James Forrestal worried about the gap between America’s new global commitments and its military capabilities. A humorless and hardworking federal executive who had served as secretary of the navy after a brilliant career on Wall Street, Forrestal respected Truman’s commitment to a balanced budget. He also believed that the Soviets could only be restrained by the credible threat of American intervention. The Pentagon’s senior military brass pushed the secretary to obtain more funding.

Truman gave Forrestal a March 1, 1948, deadline to prepare the first budget request for the new Department of Defense, which had been created to facilitate more efficient and coordinated spending by the armed forces. In the meantime, the president presented Congress with a budget
for fiscal year 1949 that limited spending to $39.7 billion, including $11 billion for the military and $4 billion for an economic aid package to rebuild Europe—the Marshall Plan. That budget proposed a 13 percent reduction in troops and a projected surplus of $4 billion.
⁴⁰

Meanwhile, Stalin continued to incorporate Eastern Europe satellite nations into the orbit of the Soviet police state. His troops brutally suppressed opposition in Czechoslovakia in February 1948, prompting the commander of American forces in Europe, General Lucius Clay, to warn that further Soviet military aggression could come “with dramatic suddenness.”
⁴¹
Truman reluctantly authorized $3.1 billion in additional military spending, less than the $8.8 billion—principally for greater air power—requested by Forrestal.
⁴²

Because Congress refused to raise taxes, a balanced budget depended in large part on confining military spending within available tax revenues. The president met with Forrestal in the Oval Office in May 1948 and instructed him to develop a multiyear plan for defense outlays of no more than $15 billion annually, including $600 million per year in stockpiled supplies.
⁴³
The president knew that some military leaders would second-guess his decision, and he presented Forrestal with a memorandum, prepared in advance, that recorded their conclusions. Truman wrote in his diary that he worked to obtain a “balanced sensible request for which the country can pay.”
⁴⁴

The Joint Chiefs of Staff, the nation’s ranking military officers, could not agree on how to allocate spending among the branches of the armed services. All acknowledged the need for greater investment in the air force, but neither the army nor the navy agreed to take a corresponding cut in its funding. The Joint Chiefs insisted that they needed at least $4 billion more. Forrestal pressed them to specify how the additional spending would affect the outcome of a potential conflict. In October 1948 he reported their conclusions to the president: if the Soviets moved into Western Europe, a $15 billion budget could support a bombing campaign based in Great Britain, while an additional $4 billion would strengthen control of the Mediterranean.
⁴⁵
Since Truman believed that Congress would not raise taxes to cover that cost, he declined to authorize the supplementary funds.

Neither Forrestal nor congressional leaders in either party expected Truman to be reelected in 1948. The Democratic Party had splintered. Some liberals supported the third-party candidacy of former vice president
Henry Wallace, while many Southern Democrats backed a third-party bid by Governor Strom Thurmond of South Carolina. Republicans presented a more unified front. Their platform promised lower taxes and a balanced budget while maintaining a strong defense, commitments to veterans, and popular domestic programs.

Truman thought the budget could not be balanced with the enactment of the program endorsed by the Republican platform. To emphasize that fact, he called Congress back into session and challenged Republicans to enact their platform’s tax and spending policies. To the surprise of many observers, the president was reelected. Democratic congressional candidates fared well, and their party regained control of Congress.

Political histories of the 1948 election tend to focus on the contrasting campaign styles of Truman and his Republican opponent, New York governor Thomas Dewey. The American Fiscal Tradition, however, framed the trade-off between spending and taxes. In the farm belt Truman reversed the partisan results of the election two years earlier. Federal support for agricultural prices was one of the few New Deal spending programs that remained in effect. Lower tax rates would require lower outlays for defense and farm programs. Taft and other Republican budget leaders knew that, so they were slow to deny the intent to cut agricultural spending.

After the election Forrestal flew to West Berlin, where Soviet forces had blockaded land access to sectors of the city under Allied administration. He asked General Lucius Clay whether “he would be willing to accept deficits in the federal budget over the next several years” to build up American military strength. Clay said no, because “an unbalanced budget in the United States would have a serious impact in Europe, where it would be taken as a signal that even the United States was unable to cope with its fiscal problems.”
⁴⁶

Squeezed between pressure for budget discipline and the demands of the professional military, Forrestal became severely depressed. He jumped to his death from a hospital window shortly after the president requested his resignation. Retired general Eisenhower had tried to help Forrestal mediate the dispute between the military services and develop operational plans tied back to budget numbers. That effort physically exhausted Eisenhower, whose doctor insisted that he take time off. The United States balanced its budget after World War II, but it had yet to bridge the gap between international commitments and capabilities that had vexed Forrestal and Eisenhower.

T
HE
R
EPUBLICAN
B
UDGET
D
ILEMMA

Republicans in Congress never resolved the tension between Taft’s emphasis on reduced taxes and Vandenberg’s support for the Truman administration’s level of military spending. America’s unwritten fiscal constitution precluded the illusion of “free” debt-financed spending or tax cuts. Corporate managers and small business owners, a core GOP constituency, firmly backed “pay as you go” budgets.

Republicans hoped to find some fiscal room to maneuver when Congress appointed former president Herbert Hoover, an expert on management and a harsh New Deal critic, to identify waste and inefficiency. Truman also loathed inefficiency and welcomed Hoover’s help. Congress passed the Hoover Commission’s most ambitious recommendations. That experience yielded a result similar to future drives for efficiency: the effort was worthwhile, but the savings were small when compared to the size of the federal budget and the level of tax cuts desired by many conservatives.

Despite his loss in two presidential elections, Governor Dewey was a talented politician who continued to be reelected, with lopsided margins, as the governor of the nation’s largest state. He believed the GOP would be “buried” if it opposed “farm price supports, unemployment insurance, old-age benefits, slum clearance, and other social programs.”
⁴⁷
In reality, federal spending on domestic programs, other than for veterans, constituted a small portion of the federal funds budget.

Senator Taft faulted Dewey for not defining his differences with the Truman administration more sharply. Some of those differences—notably concerning labor-management relations—had little budget impact. Moreover, Taft himself had championed some new spending programs. Taft, one of the most influential senators in the twentieth century, had the rare gift of being able to articulate a broad political vision and then apply it to the details of varied legislation. His conservative beliefs may surprise many twenty-first-century Republicans. The senator journalists called “Mr. Republican” explained that “under a free system we are bound to have much greater inequality than under a socialistic system, although in the end I believe the socialistic system would level everybody down. . . . I believe, however, that we must accept the inequalities and then do our best to improve the condition of the people at the lower end . . . by economic measures like minimum wage laws, and to an extent by direct assistance to health, education, housing and the like.”
⁴⁸
In short, Taft thought that
a competitive market economy should be accompanied by a social safety net for Americans who were unable to work or make ends meet even when they worked hard.

Taft sponsored legislation to create public housing for working Americans who could not otherwise afford it. He endorsed federal grants to states in support of improved housing, health, and education. Taft felt that states alone could not fund these essential services without losing business to other states that maintained lower taxes by shirking those responsibilities.

While Taft set the Republican tone on domestic policy, Vandenberg prevailed on foreign policy. Vandenberg fought Taft’s efforts to cut the military budget and reduce foreign military deployments and economic assistance—such as the Marshall Plan—to allies. Vandenberg wrote in his diary that he got “so damned sick of the little band of GOP isolationists . . . that [he] could scream.”
⁴⁹
Republicans in Congress shifted toward Vandenberg and away from Taft on international security after the 1948 election. Younger party members such as Richard Nixon and Joseph McCarthy scored points by attacking Democrats for being “soft” on communism. In June 1949 Taft was one of only thirteen senators to vote against the North Atlantic Treaty, the agreement that established NATO and committed US forces to the defense of Western Europe.

International developments in the fall of 1949 made it more difficult to restrain military spending. In October President Truman announced that the Soviets had successfully detonated an atomic bomb. Later that month the Soviet Union recognized the communist People’s Republic of China. Those events evoked memories of Pearl Harbor and Munich, yet Truman held the line on defense spending. He wrote to an old friend that it remained his “ambition to reduce the national debt below Two Hundred Billion Dollars.”
⁵⁰

D
OWNTURNS AND
L
IMITS ON
D
EBT

W. Elliot Brownlee, a leading historian of federal taxation, observed that immediately after World War II, “for the first time since the early nineteenth century, the two political parties agreed on the essential elements of the nation’s fiscal policy.”
⁵¹
Those essential elements included a broad-based, graduated tax on personal income; a flat percentage tax on corporate income; and a flat percentage payroll tax earmarked for social insurance. During fiscal years 1947 to 1950, that tax system—exclusive of
trust funds—produced revenues of $157.4 billion, which more than covered the government’s $153.4 billion in spending.
⁵²
Outlays for defense, international commitments to allies, veterans’ benefits, and interest on the public debt accounted for $120.6 billion, almost 80 percent of the total.
⁵³

Concerns about high unemployment led to a spirited contest in Congress that shed light on the post–World War II concept of the federal budget. The Employment Act of 1946 arose from bills filed, debated, and passed by the House and Senate in 1945. The original bills declared the national goal of full employment. The text of the Full Employment Act was negotiated in the context of a political dialogue in the United States and Western Europe over whether people seeking work had a right to be employed. Americans across the political spectrum respected the dignity and self-sufficiency accompanying gainful employment, but many elected officials—especially conservatives in both parties—rejected the implication that the federal government needed to finance employment as a last resort.

The Senate passed the Employment Act with a lopsided vote, 71 to 10, after it was strongly endorsed by Senator Joseph O’Mahoney of Wyoming, a centrist Democrat considered by his colleagues to be an economic expert. He assured other senators that he staunchly opposed planned deficit spending, although deficits tended to follow a downturn. The Senate unanimously voted for an amendment to the bill, drafted by Taft and Radcliffe, stating that any program designed to boost employment would have to be linked to taxation “calculated to prevent any net increase in the national debt” over a reasonable period.
⁵⁴
The bill that passed by the House and emerged from the conference committee stripped out most language in the Senate version that required federal spending and full employment. It passed by overwhelming margins in the House and Senate.
⁵⁵

The Employment Act of 1946 could be interpreted as no more than a hollow endorsement of the goal of high employment, but it did demonstrate a heightened awareness of the relationship between the federal budget and the economy as a whole. In that spirit, the bill created the White House Council of Economic Advisers. The White House Bureau of the Budget, then managed by Harold Smith, had already added economists to its growing fiscal division. Federal leaders since 1789 had considered the impact of federal spending and taxes on economic growth. In the immediate aftermath of the Great Depression and World War II, elected officials more frequently referred to the budget’s impact on the economy by using a term borrowed from economists: “fiscal policy.”

The Employment Act of 1946 coincided with a debate within the economics profession concerning the appropriate limit of borrowing during downturns. In 1948 two young economists, Milton Friedman and Paul Samuelson, outlined those limits in a manner that influenced debates among budget experts for the balance of the twentieth century. They each recognized that recessions would cause federal income tax revenues to decline and rejected the notion of raising tax rates in order to balance the budget during a downturn.