Arms, Revenue, and Entitlements. William Mannen

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      British Library Cataloguing in Publication Information Available

       Library of Congress Cataloging-in-Publication Data

      Names: Mannen, William, 1986– author.

      Title: Arms, revenue, and entitlements : U.S. deficits in the Cold War, 1945–1991 / William Mannen.

      Description: Lanham : Lexington Books, 2020. | Includes bibliographical references and index. | Summary: “Arms, Revenue, and Entitlements: U.S. Deficits in the Cold War, 1945-1991 explores how defense, tax, and entitlement policies caused the U.S. government to become deficit normative during the Cold War era, arguing that only a comprehensive program can rein in deficits in the twenty-first century”— Provided by publisher.

      Identifiers: LCCN 2019056198 (print) | LCCN 2019056199 (ebook) | ISBN 9781793607096 (cloth) | ISBN 9781793607102 (epub)

      Subjects: LCSH: Budget deficits—United States—History—20th century. | Finance, Public—United States—History—1933- | Fiscal policy—United States—History—20th century. | United States—Armed Forces—Appropriations and expenditures. | World politics—1945-1989.

      Classification: LCC HJ2051 .M366 2020 (print) | LCC HJ2051 (ebook) | DDC 336.3/4097309045—dc23

      LC record available at https://lccn.loc.gov/2019056198

      LC ebook record available at https://lccn.loc.gov/2019056199

      Chapter 1

      From the Surplus to the Deficit Normative State

      The long run trends in the ratio of debt to GDP through most of U.S. history show the pattern of rising debt during wartime and economic contractions followed by stabilization in debt levels during peacetime expansions. Yet today the federal debt assumes an unstoppable upward trajectory unprecedented in the annals of American public finance. In its extended baseline projections, the Congressional Budget Office (CBO) predicts that the ratio of debt to GDP will top 144% by 2049.^[1] The federal budget now invariably produces deficits, which drives this debt. The last time the government generated a surplus occurred in FY 2001. The budget thereafter returned to deficit amid war and financial crisis. Yet even the four surpluses achieved in the late 1990s and very early 2000s only offered a reprieve from what had already become deficit normality.

      Rising debt levels over the long run, triggered by near permanent deficits, must be recognized as harmful for both economic and institutional reasons, even if deficits should not be considered harmful per se such as during downturns. A standard justification for balancing the budget in the twentieth century centered on the threat that unrestrained deficits would produce inflation, and indeed the “Great Inflation” of the 1960s and 1970s arose at a time of rising government spending, in fact during a protracted war in Vietnam. This anti-inflationary justification may not be as germane today with the Federal Reserve struggling to hit its 2% inflation target. But the danger of rampant future inflation cannot be automatically discounted. What is more, the danger of rising government debt crowding out private investment and reducing output bears greater relevance in today’s economy now that interest income accrued from Treasurys are increasingly diverted into foreign countries.

      The institutional justifications for reining in deficits are equally powerful. Faced with constantly rising debt levels, the federal government will be forced into allocating more and more of its revenue into net interest payments (adjusted for interest income earned from government trust funds), hampering effective governance. In the past, net interest as a percentage of total outlays spiked whenever government spending grew, but it receded again with a subsequent decline in spending. This future stabilization in net interest will not occur in the event of continually rising debt levels. The CBO projects net interest payments to rise from 9% of total outlays in 2019 to 20% by 2049, by which point servicing net interest will cost more than total discretionary spending.^[2]

      The long run trends in the growth of debt should not obscure the role played by deficits in more immediate terms. Debt accumulates to the extent of deficits generated in a given fiscal year, and multiple factors, including events abroad and political dynamics at home, affect the generation of such deficits at specific points in time. Whatever the factors behind it, debt continues to rise as the government regularly sustains deficits year upon fiscal year, an invariability that is at the heart of the deficit normative state.

      A situational perspective focuses on deficits as they are incurred in each fiscal year and the factors compelling these deficits. The budget and appropriations process inevitably occurs within a specific context shaped both by national security concerns and domestic political imperatives. Under a process first established with the Budget and Accounting Act of 1921, the president must submit a budget request by the first Monday in February for estimated spending levels in the following fiscal year. The fiscal year used to run from July 1 to June 30 until it was changed to an October 1–September 30 time frame starting in 1976. The legislation mandating this change also created the House and Senate Budget Committees, which designate spending levels for the two Appropriations Committees in each chamber. The Appropriations Committees then determine spending levels for the subcommittees. Congress ideally passes a series of twelve appropriations bills for the president to sign, though in recent years it has heavily relied on expedients like continuing resolutions, which keep the same level of spending intact from the previous fiscal year. This process does not occur in a void. Real world factors constantly impinge upon the budget. The transition to the deficit normative state occurred because for various reasons the president and Congress made tax and spending decisions that led to deficits, and these deficits became only more and more routine.

      A surplus normative state existed in the 1800s because the budget registered more surpluses than deficits on an annual basis, and these surpluses tended to coincide with economic expansions. That is not to say the government never sustained a deficit or that national debt did not grow. Deficits were unavoidable in wartime or in periods of financial and economic distress. The Jackson Administration briefly succeeded in paying off the national debt in 1835, an accomplishment facilitated by sales of abundant publicly owned land. When the Administration inserted a specie clause into its contracts for the sale of land, it inadvertently triggered a financial panic and a downturn that sent the budget back into the red. The antebellum deficits paled in comparison to Civil War debt, which soared to 30% of GDP, its highest level since the 1790s, as the federal government organized a whole new scheme of taxation, currency, and banking to sustain the war effort. Many of these policy changes from the war remained in place after it ended, including higher tariff walls, which helped turn the budget quickly back to surplus.

      Indeed