Bungling National Priorities

The Sixteen-Trillion-Dollar Mistake: How the U. S. Bungled Its National Priorities from the New Deal to the Present. By Bruce S. Jansson. Columbia. $27.50.

There is no other book quite like this, a detailed analysis of the debates over national budget priorities all the way from 1932 to 2002. It could hardly appear at a better time, as President Bush launches the most controversial budget in memory. This subject may sound dreary, but it is not. The book is acceptable to non-specialists and its discussion necessarily involves value judgements not narrowly circumscribed by economics. So this is also national history, of the past seven decades, often rather dense with detail. The history is essential because you can’t debate national priorities out of context with the socio-economic political setting, the world.

Jansson’s book will engender intense controversy, much disagreement. Yet it holds up very well. I can reveal at the outset that though Jansson strives scrupulously to avoid partisan party polemics what becomes relentlessly evident is that, on balance, Republicans come off worse in Jansson’s conscientious account. He himself is careful never to state such a general conclusion. He does allow himself to indulge the terms “liberals” and “conservatives,” however. And his factual history certainly is filled with disclosures of the Democrats’ mistakes, too, as obviously Jansson struggles to be evenhanded. He might well have quoted Alexis de Tocqueville’s lines from Democracy in America: “This book is not decisively in anyone’s camp; in writing it I did not mean either to serve or to contest any party; I undertook to see, not differently, but further than the parties; and while they are occupied with the next day, I wanted to ponder the future.”

No reader can escape noting the pervasiveness of waste and obvious missed opportunities in each and every successive administration. Indeed, Jansson sums up (in 1992 dollars) the dollars totaling the mistakes of each president. Few should be surprised that President Ronald Reagan takes the prize here. Jansson writes:

In 1981 Reagan managed to frame the policy agenda for the next seven years as well as for the presidencies of George Bush and Bill Clinton. His huge deficits trapped Congress in endless debates about how to diminish them that dominated the entire session in such years as 1985, 1990, 1993, and 1995. These huge deficits in turn placed advocates of domestic reform on the defensive for the next sixteen years until a budget surplus finally surfaced in the late 1990s. No other president has so decisively influenced the course of budgetary and political events for such an extended period. And no other president has wasted more than three trillion.

Jansson writes lucidly and at times with some panache, nor does he eschew comparing the presidents. Thus, for example, in moving from the Reagan administration chapter to successive president George Bush, his opening subhead is “A Dinghy in Reagan’s Wake?” He asserts, “I contend here that the Bush administration and Congress made fiscal and tax errors in excess of $642 billion lamentably huge but modest compared to Reagan’s gaffes, $3.4 trillion total.” As in each chapter for each president, he then spells out how this occurred.

The book opens with two absorbing chapters on FDR that set high standards for the rest of the book. The first is entitled “Roosevelt as Magician,” the second, “Roosevelt’s Dilemma.” “That man in the White House,” as elderly reactionaries dubbed him, is shown to be profoundly aware of the grimness of the times as he takes over in the depth of the Great Depression and how ever so bold and clever (and sometimes lucky) he is in creating the New Deal. Jansson reminds us FDR had more than an inkling of the dire threats to the population from his experience as governor of New York, where state and local finances dependent on property and sales taxes had just been devastated. He had seen a third of New York State’s private agencies go bankrupt after 1929 into the 30’s, when as yet there were relatively no federal programs to foot the costs of unemployment, welfare, food stamps, etc. Actual mass starvation could be a genuine threat, FDR realized, and as Jansson repeats. Yes, the fear of actual starvation was in the air.

What Jansson shows is that while government spending nowadays is usually equal to roughly 20 percent of the gross domestic product, in the 1930’s it was only about 10 percent, and about one-third of that was devoted to military spending and veterans’ benefits. In 1933 federal outlays totaled only $4.2 billion, or 8 percent of the GDP (versus 19.7 percent, for example, in 1998).

But FDR knew in a hostile Congress he was vulnerable to Republicans’ and conservative Southern Democrats’ denunciation and defeat as a “big spender” if he advocated increased spending. Writes Jansson: “He resolved this dilemma by a mixture of illusion and artifice—a combination that not only got him elected but protected him from political attack.” The method (artifice) FDR devised was a device suggested by Treasury Secretary Morgenthau, a canny scheme to segregate “emergency spending” from the “regular” or ordinary budget of the government. Jansson terms this a “political sleight of hand,” a beguiling device that funded the New Deal. Jansson elaborates on this as the key to FDR’s early triumphs, and I summarize it as typifying how Jansson analyzes each administration. Space forbids detailing descriptions of the other 20th-century administrations. FDR determined to finance this “still-undisclosed” “emergency” budget strictly by borrowing. Customary tax revenues meanwhile would fund the ongoing “regular” costs of government agencies and the military. So right off FDR promised to cut government spending by 25 percent in order to balance the federal budget. The “emergency budget” he rationalized by likening it to wartime budgets inevitable with military crises. He requested all so-called “off budget” spending increases to come strictly from the emergency budget. And, to silence Republican critics, he stressed this was the same tactic Hoover had used when Hoover had placed the spending for the pioneering Reconstruction Finance Corp. outside his regular budget. Besides, FDR promised to end such spending as soon as the Depression lifted.

Of course the Depression had not lifted by early 1933. He quickly established some further credentials as a “frugal” president by cutting one billion dollars from the budget he inherited from Hoover. “He wanted to show that he meant to balance the regular budget before he initiated the emergency one, thus diminishing the political risks when Republicans would attack his spending increases,” writes Jansson. FDR claimed the frugality of his program and the necessity of steps to avert possible “mass starvation” and underscoring that the money for his massive new work programs for employment (the Civilian Conservation Corps) came not from general tax revenues but from borrowing. Furthermore, the federal government would assist states with their relief costs, he said, only when “localities, states, and private charities have done everything they could possibly do.” So, by 1934 FDR had initiated a fiscal revolution that quintupled domestic spending. On his request he promptly received $3.75 billion from Congress. He was a “magician” indeed.

Jansson succinctly describes the various expedient New Deal programs. As some of us vividly remember, FDR is seen as heroically successful. But then, in his next chapter, “Roosevelt’s Dilemma,” Jansson spells out the denouement. The dilemma was World War II, Hitler, and the unavoidable diminution of funding for domestic New Deal programs. The merit of Jansson’s account here is his convincing detail of how brilliantly the hard-pressed president built up America’s military strength from a pitiful base to unparalleled power. FDR’s “magic” in his ingenuity and political shrewdness in creating the domestic New Deal is duplicated in his military buildup, as Jansson elaborates. Enough of the cliches about FDR as a “second-rate” mind: his presidential performance throughout, sometimes uneven, was astonishingly adroit and successful.

Jansson breaks new ground in showing how FDR from early in his career was always keenly concerned about the military’s (especially the Navy’s) status, and how even in the prewar New Deal heydays he gave weight to his concern to rearm America. He was horrified by Chamberlain’s conceding Sudetenland to Hitler, and anticipated war. He devised the “Rainbow Plans” to cope with worst-case scenarios of war in both the Atlantic and Pacific spheres. To illustrate the diverse expedients FDR used to shore up the Allied military effort, Jansson writes: “Several millions of dollars of WPA funds were transferred [secretly] to start making machine tools for the manufacture of small arms ammunition. . . . Although the Neutrality Act forbade sales of U.S. military aircraft to foreign nations, Roosevelt secretly shipped planes to the French.” But to stress a “united” front he named two prominent Republicans, Henry Stimson to head the War Department and Frank Knox the Navy.

But Jansson emphasizes that “tiny federal tax revenues crimped military and New Deal spending. On the eve of Pearl Harbor, the nation collected only 7.7 percent of its GDP in taxes, compared to roughly 20 percent since the early 1950s.” This gross inadequacy of federal tax revenues is not only the burden of Jansson’s negative critique of FDR’s administration but indeed of all the post-1930 administrations. Here is an illuminating quote from FDR after Marriner Eccles, the Federal Reserve Chairman, protested cuts of $500 million in work relief in December 1939, when more than eight million people remained unemployed:

You are absolutely right. But with the war in Europe likely to spread, we simply must get an increase in the military budget from last year’s one billion to 1.5 billion [for] the coming year. To do this. . .the budget for relief is the only place from which I can transfer additional funds that are needed for the military . . .but even so, Marriner, despite the immediate decrease in relief appropriations, it is going to be extremely difficult to get Congress to pass the military budget.

Jansson highlights the stark change from the New Deal era and wartime—from 1933 to 1939 federal domestic work and welfare programs received almost 50 percent of budget resources. “During no other period in contemporary U.S. history has domestic discretionary spending for social programs so dominated the federal budget; indeed later chapters will show that federal spending on education, training, and employment and social service programs never again rose above 4.5 percent of the federal budget during the twentieth century,” writes Jansson.

However, Jansson deems the New Deal was “on the ropes” even before World War II because of dangerously inadequate low tax revenue. He scolds FDR for taxing only 6.37 percent of the GDP in the 1930’s (compared to 16 percent in the late 1940’s). When in 1938 Republicans coined the term “tax-and-spend Democrats,” FDR “should have countered with “no-tax-and-starve-“em-out Republicans’,” writes Jansson. He contends that FDR made virtually no effort to raise tax revenues, and in fact opted, alas, only for regressive taxes, as on beer and liquor levies.

Jansson subjects each of the successive 20th-century presidents to the same detailed review he did for FDR. As noted, limited space precludes similar consideration of each one. The FDR description typifies how Jansson proceeds. In common, all are faulted for insufficient federal taxation; for wasteful defense expenditures; and mistaken national budget priorities. The waste of resources is bipartisan, with both Democratic and Republican presidents as contributors and senior Southern Democratic heads of key legislative committees teaming up with typical conservative Republican legislators. Jansson accuses them of sacrificing, in the 1930’s, $940 billion (in constant 1992 dollars) by limiting the federal income tax to the richest 5 percent of Americans. What’s more, they caused postwar presidents to have to pay $193 billion on excessive interest payments by funding more of World War II from borrowing rather than from tax revenues. He concludes therefore the nation wasted more than one trillion dollars from 1932 to 1945 from inadequate tax revenues. Jansson is somewhat ambivalent about Truman. He notes that Truman and Congress wasted $1.17 trillion by cutting taxes excessively from 1946 through 1952, but credits Truman with vetoing excessive tax cuts on three occasions. He also faults Truman for deciding not merely to repulse the North Koreans’ invasion of South Korea in 1950 but to conquer North Korea itself, nearly tripling the length of the war at a cost of $504 billion. Here I would question Jansson on the grounds that this was primarily General MacArthur’s flawed overriding policy. Eisenhower, Kennedy, and the Congresses are criticized, too, for a waste of $633 billion for manifestly inadequate low federal taxes, at periods when 85 percent of the federal discretionary budget was being absorbed by military spending. LBJ and Congress are guilty again of clearly inadequate taxation to fund both the Vietnam War as well as his “Great Society.” As noted, Reagan takes the cake for accumulating record huge deficits—plaguing the nation with massive interest payments well into the 1990’s. Jansson charges the Nixon, Ford, and Carter administrations for mistakes wasting one trillion dollars, “and that figure does not even count pork barrel spending, corporate welfare, excessive deregulation, or excessive tax concessions for affluent Americans,” Jansson writes.

Clinton gets a very mixed appraisal from Jansson. He concedes that Clinton entered the presidency with little money in the federal till, the continuing shadow of the Reagan era, frustrating new shifts in national priorities. Clinton gets credit for some incremental reforms in domestic initiatives like funding 100,000 police officers and 100,000 teachers. But his central complaint is the common one, that Clinton was “tactically skilled but settled for a quarter loaf” in situations when he might have and should have “obtained half a loaf.” This criticism is exemplified, too, by Clinton’s failure to cut military expenditures sufficiently after the Cold War ended, the USSR quite prostrate.

Scores of factual revelations and perceptions enrich this book, such as noting the prolonged waste of tax money for veterans’ benefits, extending for one inane instance to men who signed up after the Armistice. Jansson stresses corporate tax concessions as the least visible (than direct spending) waste. Jansson observes that in the decade he devoted to researching this book he found no book or study that “chronicles the transformation of the federal tax system from a relatively progressive system in the late 1940’s and 1950’s to the relatively regressive system in the 1990’s.”

Thus total Federal Tax Receipts as percentage of GDP dropped from 6 percent and 5 percent in the late 1940’s and 1950’s to an average of 3.81 percent from 1960—1969, to 2.71 percent from 1970—1979, down to 1.70 percent from 1980—1989, and stayed approximately 2 percent from 1990 on. But the staggering loss came from the cuts in corporate taxes, with the rate dropping from 4.9 percent of GDP in 1956 to 2.6 percent in 1979 and thereafter. Individual taxes remained relatively constant as a percentage of GDP. Jansson calculates that had the Federal Government “kept corporate taxes at the rate that prevailed in 1956 (4.9 percent of GDP) through 2004, for example, it would have had $5.8 trillion in additional resources.”

A “void” of criticism persisted on this point, and Jansson avers as well “no scholarly critique of Cold War spending exists,” though some scholars are now providing “building blocks for a critical analysis of military spending.” Indeed Jansson, in a “Monday morning quarterbacking” role, expresses exasperation over the fact that the tax and fiscal errors he describes were most often identified at the time they occurred. I doubt that this will be disputed.

Jansson’s temperature surely must have risen as he concludes:

Had the $16 trillion in squandered resources been diverted to the domestic agenda, American society would have been dramatically transformed. For roughly $2.15 trillion (in 1992 dollars), for example, the United States could have funded, from 1945 to 1996, free child care for women with the smallest annual incomes, substantially subsidized child care for women in the next two income quintiles, and funded one thousand primary-care health clinics to serve twenty-five million Americans in medically understaffed urban and rural areas. It could have increased funding for entitlements—such as food stamps, Supplemental Security Income, Medicaid, and the earned income tax credit—designed to assist (mostly working) people in the two lowest quintiles of annual income. The United States could have increased funding for social investment programs, here defined as certain education, social service, employment, and training programs, mostly funded by the discretionary budget.(These programs averaged less than 1 percent of the federal budget from 1944 to 1966, 3.7 percent in the 1970s, and 2.7 percent from 1980 to 1994.) It could have lowered taxes of low- and moderate-income people or granted them major tax concessions to help them buy houses, set up businesses, and further their education. Or it could have vastly increased the amounts spent on public transportation, environmental cleanup and protection, and programs to repair the nation’s fraying infrastructure. The squandered resources would have provided $15.78 trillion—more than sixty times the entire domestic discretionary budget of 2000—to more than double the U.S. discretionary budget each year since 1933. Or the United States could have substantially increased some of its entitlements, such as expanding Medicaid to cover everyone or almost everyone without health insurance, from 1965 through 2004.

While Jansson’s book ends prior to the advent of President George W. Bush’s budget, his critique would hold in spades as Bush aims to cut domestic programs by 4.7 percent in real per capita terms, to quote Robert L. Borosage in The Nation (April 30, 2001), a budget that projects a continued decline in domestic discretionary programs to their lowest levels as a percentage of GDP in history.

Jansson’s scholarly credentials are solid: he is the recipient of awards for his work (eight books); has doctoral degrees from Harvard and the University of Chicago; studied at the London School of Economics; etc. Paul Warnke, former director of the U.S. Arms Control and Disarmament Agency, agrees that Jansson makes his case that defense expenditures and miscalculations “can cost incredible sums of money,” and Robert Greenstein, director of the Center on Budget and Policy Priorities, credits Jansson’s “discussion of national budget priorities debates over the past seventy years” with being unique. The U.S.A. has paid dearly for short-term expediency and ideological rigidity on tax policy. It is difficult to argue against Jansson’s sobering conclusion, “Wasted resources diminish attempts to build a just society by taking resources from the people who most need them and placing these assets in the hands of military contractors, the affluent, special interests, and corporations.” Amen.