Even after all the fiddling with it that every Administration does in order to approve its appearance, the federal budget is still the best guide around to what the government is doing. It is also the most realistic document available. Opposition candidates can issue position papers and talk about what they might do, but the budget says how limited the options are. The budget may not be the greatest reading since Gone With the Wind, but it does tell us a good bit about what’s going on. A look at what has happened to the allocation of federal expenditures in the past few years, and some attention to political realities behind the rhetoric, suggest just how hard it has been, and will be, to effect significant change.
A great deal of the federal government’s money is committed automatically to such things as paying the interest on the national debt, social security, and welfare, Medicare, and Medicaid. And the costs of all of these keep rising. The expense of the medical programs are fairly out of sight compared with original expectations. The reason is instructive. Medicare, whatever the public may have thought when it was enacted in 1965, does not ensure medical treatment; it ensures the payment of medical bills. The real beneficiaries of this program—doctors, hospitals, and other medical facilities—are taking on the characteristics of those other private purveyors of federal responsibilities, the defense contractors. With the federal government obliged to pick up the tab, there is precious little incentive to hold down costs.
Another major portion of the budget goes for continuation of the mass of new domestic programs that were begun in the 1960s. Even those which the Democrats say are being starved cost money. With every new federal program there came a vociferous clientele: a federal bureaucracy and congressional subcommittees devoted to its perpetuation. And for all the outrage that has been vented against some subsidy programs, it is not realistic to expect the elimination of enough of them to amass any sizable savings. On balance, there is little on the domestic side of the budget ledger that could be changed.
Four years ago, when the Vietnam War began to be wound down, the common expectation was that this would free money for domestic purposes. Charles Schultze, a Director of the Budget during the Johnson Administration, warned that there would be no “peace dividend” (August, 1968, Atlantic). He has turned out to be right. Schultze was saying not that this was the inevitable outcome but rather, given the realities of political pressures and behavior, the likely one. As Schultze predicted, the military has consumed most of the savings from Vietnam. The Nixon Administration refrains from giving out figures on the cost of the war, but approximate calculations can be obtained. In its peak year, the Vietnam War cost about $23 billion. In the coming budget year, it will cost about $4 to $6 billion. Therefore, there has been a theoretical “saving” of at least some $17 billion through winding down the war in Vietnam. But the Pentagon’s request for next year is higher than it was at the height of the war.
Actually the amount of money that the Pentagon is requesting in the new budget—$83.4 billion—is a good bit higher than the amount it is planning to spend ($76.5 billion). The difference is due in part to some fiscal legerdemain: in order to hold down the election-year budget deficit, a total of about $2 billion of this year’s defense spending was pushed into last year’s and next year’s budgets. The difference between what the Pentagon is asking for and what it will actually spend is also attributable to the part the military budget will play in presidential politics.
The Nixon Administration has reduced Pentagon spending—when the effect of inflation is subtracted from its budget totals. But not by the theoretical $ 17-billion “savings.” For one thing, although the level of forces has been reduced, the cuts in what has been referred to as the “support structure”—bases, officers, supply staffs, and so on—have been not at all proportionate. For another, the costs of weapons keep rising, so much so that even the usually complaisant military committees in Congress are getting restive. Senate Armed Services Chairman John Stennis, Democrat of Mississippi, usually a trusty friend of the military in the tradition of the late Representative L. Mendel Rivers of South Carolina and Senator Richard Russell of Georgia, opposes an increase in defense spending and has raised his voice against “stratospheric price levels” of weapons systems and “rocketing” manpower costs.
Furthermore, as Schultze predicted, once spending for Vietnam decreased, the military services increased the pressure for new weapons which they had been denied during the war. The Administration’s recent decision to have an American presence in the Indian Ocean—“from time to time,” Defense Secretary Melvin Laird says—fulfills an old naval dream. It also undercuts the pressure to reduce the number of expensive (about $1-billion) aircraft carriers the Navy maintains.
The Administration claims as an achievement that defense spending has declined as a percentage of the gross national product. That assumes that as the gross national product goes, so should defense spending, a connection that is not established. Also, it seems that the Administration wants to win points for its projected increases in defense spending.
The rise in defense spending that is to come is, so to speak, a two-edged political sword. On one side, it establishes that the Administration has not let the nation’s defenses slip; on the other, it cuts unemployment. In arguing that it has kept the nation sufficiently prepared, the Administration will at once be on the defense against the right, and the offense against the left. The argument that there is a “defense gap,” used by the Democrats against the Republican Administration in 1960, has now become the property of the Republican right. This Administration pays a good bit of attention to the right, pacifying it as best it can. On the other hand, the Pentagon is accustomed to citing the Soviet “threat” in order to justify its requests for funds. This has led to a somewhat schizoid rhetoric on the part of Defense officials. Two stories appeared in the Washington Post within a brief period, one with the headline: “U.S. Cites Russian Buildup; A-Force Push ‘Tremendous,’Laird Warns”; the other headlined: “U.S. Military Second to None, Laird Aide Says.” The projected jump in defense spending of $6.3 billion is meant to muffle the right on the defense issue.
The Administration also has words for those on its left who have been arguing that defense spending should be cut. “A demagogue,” says the President’s budget message, naming no one in particular, “may find it easy enough to advocate that we simply allocate necessary defense dollars to social programs, but a responsible Congress and a responsible President cannot afford such easy answers.”
This use of the defense budget as an offensive weapon is not, however, the result of any recently designed plan. As long ago as the summer of 1969, when Democratic senators, aided by some scientists and former defense officials, were mounting their noisiest assault on defense spending, one of the President’s aides noted the controversy with some satisfaction. “The President,” he said, “will be able to go to the people in 1972 and point out that while he was trying to negotiate with the Communists, the doves were beating their wings against him, trying to undermine his position and the country’s strength.” Current events show either that this man was very prescient or, more likely, that the White House has been maneuvering the Democrats into such a position all along, and the Democrats have obliged. At least one Democratic strategist here, a man as anxious to spend more for social purposes as the next fellow, is discomfited by the position his party is in on the defense issue, and wishes the whole matter would go away.
The increases in the defense budget are also designed to reduce unemployment-white-collar, technological unemployment—in such important electoral states as Texas, California, and Florida. In addition, the project to build a space shuttle, recently resuscitated by the Administration, will provide an estimated 50,000 jobs. The shuttle project, which is in the budget for the National Aeronautics and Space Administration, was originally estimated by NASA to cost about $6 billion, and is now estimated to cost anywhere from $10 to $14 billion — and it hasn’t been begun. It bids fair to be the subject of a rather strong liberal attack this year, a symbol, like the SST last year, of the struggle over “priorities.” Senator Walter Mondale, Democrat of Minnesota, a leader of the fight against the shuttle, realizes that in opposing it he is in the position of being against jobs. To underline the point, Vice President Agnew recently gave a speech (not by coincidence) in Florida calling those who attacked the space shuttle “career leftists.” “We heard the old familiar refrain,” the Vice President said, “about not attending to the need to reorder our national priorities.”
The Democrats and outside groups have put forward a number of alternative defense budgets, with cuts ranging from $10 billion to about $30 billion. (The latter figure is George McGovern’s). But there is a good deal of difference between what could have been cut and what would have been cut. Candid tacticians of the Democrats’ assaults on the Nixon defense budgets now say that if the Democrats had been in charge, facing their own political and military exigencies, the defense budget might be no more than about $5 billion lower than President Nixon’s thus far. The new defense budget, however, makes substantial commitments for future spending; if these increases are approved by the Congress, there will be still less prospect for spending for other things.
Aside from the demands of ongoing domestic programs, and the failure to make more substantial reductions in military spending, there is a third factor that has led to the current bind: the tax cuts of the past few years. For these, too, the credit, or the blame, can be handed around on a bipartisan basis. Taxes were cut in 1964 and 1965 in order to stimulate the economy. It was argued then by some, in vain, that the revenues should be given over to social purposes instead of to the private sector, and that this too would have a stimulative effect. In 1968, a surcharge was finally enacted to help pay for the war. But the surcharge was lifted in 1969, before—long before—the war was over. The 1969 legislation began as tax reform, but by the time the Congress finished with it, it also included a substantial amount of tax relief, a turn of events which the Administration did not resist until it was too late. Democracy has its good points, to be sure, but history shows that the Congress cannot be left to its own devices on the subject of taxes. The temptation to cut them is simply too overpowering, a seduction congressmen cannot resist. It is estimated that the tax cuts of 1969 and 1971 will amount to a permanent loss of $15 billion in revenues.
Giving it away
When Schultze predicted four years ago that the end of the war in Vietnam would not be accompanied by the release of funds for other purposes because of military spending, tax cuts, and the increasing costs of government programs, he argued that the country would reach a point where it would have to decide whether it wanted to tax itself to meet domestic needs. That is where we are now. And we are there not so much because of what has happened to the military as because of what has happened to civilian spending. The fix we are in now is something new in American history. Until now, spending for the civilian sector—a phenomenon of far more recent vintage than is usually realized—was not of sufficient proportions to make any substantial claims on the economy. There was virtually no spending for domestic purposes until the 1930s, and even then there was not much. Only in the last decade did domestic spending make heavy claims on the budget.
The problem until recently, if anyone can still believe it, was usually how to get rid of the federal revenues that kept rolling in. Taxes were raised only during wars; after the wars, taxes were reduced. After the Mexican War, there was so much excess money in the Treasury that there was a sort of revenue-sharing program which gave the money to the states to spend as they chose. After three installments were handed out, the 1837 depression took place, and the program was canceled. The Director of the Budget in 1927 was in the enviable position of complaining that “despite persistent efforts” to cut revenues, “we seem helpless in the face of the country’s continuing prosperity.” The economists came along later with their terminology kits and called this phenomenon the “fiscal dividend” which accrues through the natural growth in the economy. They said that the problem was to spend this money to avoid “fiscal drag,” and that gave rise to the Heller-Pechman plan of the early sixties, which became the revenue-sharing plan. Revenue sharing, in other words, began as a way of shoveling out surplus moneys in the Treasury. The idea of revenue sharing is still with us, but the surplus money is not. If revenue sharing is enacted by the Congress, it will largely supplant other spending. There is still an annual growth in government revenues of over $20 billion, but most of that is now absorbed by financing existing programs.
The simple fact is that no one—not Richard Nixon or the Democrat who might replace him—will be able to do very much to meet domestic needs unless taxes are raised. The subject is in the air now. Even President Nixon talks about it, on the last page of his budget message—perhaps on the fairly safe assumption that not very many people read budget messages. After bowing to the “desire for less pervasive government,” and the “private enterprise system with its competitive spirit and its work ethic,” he slips in a reference to his “hope that the inevitable need for new taxes could be delayed as long as possible.” (Italics added.) “I am not averse to a day of reckoning,” he said, “but when it comes, I want it to be said that this administration foresaw the danger . . . .” (Earlier in the budget message, the President takes credit for the tax cuts that have taken place since he took office, and calls this “the return of power to the people.” “In 1973,” he points out, “individuals will pay $22 billion less in Federal income taxes than they would if the tax rates and structure were the same as those in existence when I took office.”)
Beyond fine print
It is a pretty good bet that in the early 1970s, “reordering priorities” will go the way of “reciprocal trade” and the “war on poverty,” and that the next great issue on the agenda will be taxes. Not just taxes but whose taxes, which is first cousin to the issue of “redistribution of wealth.” The tax system may seem arcane, and the tax lawyers have done their expensive best to make it so, but it is at the heart of the matter of who pays for what in this country. While most citizens may be unclear as to what the fine print in the tax laws and the budget say, the ever increasing number of lawyers here, and representatives of groups with a line to the federal till, are not. And there is little point in talking about what ought to be done to deal with national problems without taking into account how hard, under current circumstances, it might be to do it. Any politician promising the moon, to use a perhaps outmoded metaphor, might well be asked with what he plans to pay for it. If he says he would “reorder priorities,” he should be pressed for details.
There are a number of routes for raising revenues. The value-added tax, or national sales tax, which the Administration is talking about would not raise funds, for its stated purpose is to supplant property taxes. A second approach is to reform the tax system. It is now beginning to be better understood just how far we have moved from a progressive income tax and what sort of politics of class has been played.
While taxes have been cut, there has been a significant shift in the distribution of the tax burden. The social security payroll tax has provided a steadily larger percentage of tax revenues, and it is regressive: it takes no account of total income; it contains no exemptions or deductions for size of family, size of medical bills, or what have you. The extent to which the payroll tax is regressive is partly masked by the mythology that social security is a sort of insurance system instead of what it is—a tax on those who work now, to support retired people now.
Joseph Pechman of the Brookings Institution has done a study of the tax system that is getting a lot of attention here, for it provides the kind of information that helps raise public consciousness about an issue. He found that although the progressive income tax is supposed to tax incomes at rates ranging from 14 percent to 70 percent, on the average, people pay at far lower rates. He found, for example, that those with incomes of $50,000 to $100,000 pay slightly less than 25 percent, and those with annual incomes of $1 million or more pay only about 32 percent. The tax system, in other words, is the prime procedure for redistributing income—in either direction. The more progressive it is, the more it redistributes from the wealthy to the poor; the more regressive, the more it helps the rich.
There is also the standard shopping list for reforming the tax system through closing “loopholes,” taxing stock options and capital gains at regular rates, raising inheritance taxes, and so on. But several veterans of tax-reform battles here say that even with a great deal of effort, only about $5 to $6 billion in new revenue could be gained through tax reform. That leaves a general tax increase as the one source of revenues sufficient to change significantly the way in which the federal government spends its money. The question remains whether, even if more money is raised, there has been fresh thinking about ways to spend it well. But that is another subject.