The Great Deformation (41 page)

War deficits, of course, are what they actually got. Yet this was a good thing, according to the Keynesian professors, because such deficits inject demand into the economy, thereby lifting output closer to its full-employment potential. The supply-side apostles of Art Laffer's tax-cutting scheme agreed. The incremental GDP growth from incentives to save, invest, and take risk would pay for all the war spending the nation might ever need.

In fact, war deficits are the worst fiscal policy imaginable. They add to civilian demand but generate no marketable output of consumer products or capital goods. Accordingly, war deficits tip the economy toward excess demand, inflationary bottlenecks, rising interest rates, and financial instability. They destroy wealth and lower living standards.

Since time immemorial, therefore, politicians have attempted to alleviate these pressures by financing war bonds with printing-press money. Lyndon Johnson did it and broke the resolve of Chairman Martin and the anti-inflation policy of the Fed.

Likewise, after global money went on the T-bill standard, Reagan and Bush did it, too, by exporting their war bonds to the central banks of Japan and China, and thereby postponing but not eliminating the day of reckoning. Eisenhower's achievement in throttling the warfare state was thus of singular significance, even if it proved to be transient.

IKE'S DISPATCH OF THE BLOATED TRUMAN DEFENSE BUDGET

Eisenhower's campaign for fiscal discipline started with the bloated war budget he inherited from Truman. In a notable episode of hitting the ground running, Ike traveled to Korea immediately after the election in November 1952 and set in motion a negotiations process that made an armistice on the Korean peninsula a foregone conclusion.

Given the expected cutback of war expense, the White House team led by treasury secretary and deficit hawk George Humphrey was shocked by Truman's defense budget for the upcoming fiscal year. It was still 6 percent higher than the current year's. With Eisenhower's blessing, therefore, the inherited Truman budget request was slashed by nearly 30 percent, with more cuts targeted for future years.

Although defense spending never did shrink all the way to Ike's target, the wind-down of Truman's war budget was swift and drastic. When measured in constant 2005 dollars of purchasing power, the defense budget was reduced from a peak of $515 billion in fiscal 1953 to $370 billion by fiscal 1956. It remained at that level through the end of Eisenhower's second term.

Moreover, even though Democrats charged that Eisenhower and Humphrey were “allowing their Neanderthal fiscal views to endanger the national security,” the actual record proves the administration's drastic rollback of Pentagon spending was not based merely on penny-pinching. Instead, it flowed from a reasoned retrenchment of the nation's national security strategy called the “New Look.”

The new policy doctrine of the Eisenhower administration called for a sharp reduction in land and naval forces, coupled with a significantly increased reliance for nuclear deterrence on the air force bomber fleet and the rapid development of intercontinental ballistic missiles. In addition, the European allies were called upon to play an expanded role in containing Soviet conventional forces on their own borders.

The New Look contrasted sharply with the inherited doctrine known as NSC-68. Written by Truman's coterie of confirmed cold warriors, such as Dean Acheson and Paul Nitze, it stressed maintenance of extensive conventional forces and a US capacity to fight multiple land wars simultaneously.

At the end of the day, the general who had led the greatest land invasion ever undertaken could not be convinced that those scholastic theories of limited war were plausible in the nuclear age. But he did acutely fear that the massive permanent military budgets required by the limited war doctrines of NSC-68 would erode the economic foundation on which true national security finally depended.

The nearly one-third reduction in real defense spending during the Eisenhower period was thus achieved by sharp changes in priorities and force structure. These included shrinking the army by nearly 40 percent, large cuts in naval forces, and an overall reduction in military personnel from about 3.5 million in early 1953 to 2.5 million by December 1960.

Equally important, the military logrolling under which each armed service had been given exactly one-third of the defense budget was decisively abandoned. Instead, under the New Look doctrine of “massive retaliation,” the air force was allocated 47 percent of the DOD budget while the army got only 22 percent for its sharply circumscribed missions.

WHY THE LAND-WAR GENERALS QUIT

Needless to say, Ike's drastic change in national security doctrine and downsizing of the conventional force structure sharply curtailed the
nation's ability to wage land wars of intervention and occupation. And it also caused an explosion of outrage in the army.

In fact, its two representatives on the joint chiefs of staff, Generals Matthew Ridgeway and Maxwell Taylor, resigned in protest against General Eisenhower's new strategy, the implication being that the army would not be getting another Korea-type assignment anytime soon.

The irony is that Ridgeway and Taylor were later rehabilitated by Robert McNamara, the whiz-kid Ford Motor executive who became defense secretary knowing as little about military and defense matters as Ike did about selling swept-wing sedans. Nevertheless, soon after his appointment by President Kennedy, McNamara rehabilitated NSC-68, along with the extensive conventional forces needed “to prevent the steady erosion of the Free World through limited wars.”

Not surprisingly, with Ridgeway and Taylor back in charge “limited war” is exactly what the nation got: to wit, still another misguided land war in Asia which turned out to be even more strategically senseless and fiscally corrosive than the one in Korea.

It also got proof positive that imperial wars too unpopular to be financed with higher taxation were destined to end in bloody failure. On the latter score, the constant-dollar defense budget by fiscal 1968 had rebounded from Ike's $370 billion peacetime minimum all the way back to the $515 billion war budget that Truman left on Eisenhower's doorstep in 1953.

Likewise, the armed forces were expanded by 40 percent from Ike's 1960 level. By the Vietnam peak they had reached the very same 3.5 million that had been attained during the Korean War.

In a few short years, therefore, the national security academics which came to the Kennedy-Johnson administration from the Ivy Leagues took policy on a complete round trip. In essence, they reestablished the dangerous and costly capacity for imperial adventures that the proven warrior from West Point had insisted should not stand.

IKE'S SINGULAR ACHIEVEMENT: CONTAINMENT OF THE WARFARE STATE WHERE HIS SUCCESSORS FAILED

Johnson was not alone in coddling the warfare state. None of Eisenhower's successors replicated his passion for fiscal discipline at the Pentagon. Nor did they share his fear of the enormous logrolling coalitions nurtured on Capitol Hill by the military-industrial complex, and the propensity of its congressional champions to trade guns for butter in an unending rebuke to fiscal discipline.

Indeed, in a few short years after Ike left office, the profound danger of a symbiotic nexus among the warfare state and welfare state became starkly
apparent. Reflecting the imprint of the Hubert Humphrey “guns and butter” liberals, both sides of the budget hit simultaneous peaks in fiscal 1968. With constant-dollar defense spending back to the $515 billion Korean War peak, domestic outlays followed suit, reaching an all-time peak of $455 billion (2005$). The latter was 75 percent higher than Ike's outgoing 1961 budget, meaning that there was no room to finance it within the existing tax envelope. The Federal deficit thus ballooned to nearly 3 percent of GDP, another modern peacetime record.

The next phase was even worse. The post-Vietnam demobilization of the fighting forces and the dismantlement of their massive logistics base resulted in no restoration of the Eisenhower era fiscal discipline at all—notwithstanding eight years of Republican rule. Indeed, the Washington logrolling coalition wasted no time recycling every penny of the $200 billion “peace dividend” (2005$) back into domestic spending.

Since the federal budget actually gained 20 percent, or $200 billion, in constant dollars between fiscal 1968 and 1977, domestic spending thus rose by a stunning $400 billion. The Republican (Nixon-Ford) White House during this period was presumably equipped with a veto pen, but it rarely came out of the drawer. In fact, the approximate 80 percent gain in inflation-adjusted domestic outlays during these eight Republican years exceeded even the Kennedy-Johnson record spree.

Owing to further modest expansion during the Carter interregnum, the domestic welfare state stood at $1 trillion (2005$) when Reagan took office, double its 1968 level. This left no available fiscal space for the second post-Eisenhower surge in warfare state spending, causing the massive Reagan build-up to be financed with treasury bonds. As described in
chapter 5
, the Reagan defense spending spree also infused the military-industrial complex with unstoppable momentum, fostering a virulent crony capitalism that eventually drove DOD spending to levels which Eisenhower could never have imagined.

As indicated, constant-dollar spending in Reagan's fiscal 1989 budget was 30 percent, more than Eisenhower's last budget, but even the subsequent official end of the Cold War resulted in only a modest rollback. Clinton's final budget was a tad smaller in inflation-adjusted dollars than Eisenhower's, even though by the year 2000 the United States had no industrial state enemy left on the planet.

Then followed George W. Bush's senseless misadventures in the barren expanse of the Hindu Kush and on the bloody plains of the Tigris-Euphrates. These campaigns generated the third great post-Eisenhower surge in constant-dollar defense spending.

By the time of Bush's final budget, constant-dollar warfare state spending
had risen to an all-time high of nearly $600 billion. This was 60 percent more than the $370 billion Eisenhower Minimum, even though by 2008 any semblance of the military threats which existed in Ike's time was long gone.

Finally, on exactly the fiftieth budget anniversary of Eisenhower's farewell warning, evidence of the insuperable power of the military-industrial complex was stunningly evident in Obama's fiscal 2011 budget. The 2008 election, of course, had been even more unequivocally a “peace” election than 1968 had been, because this time the “peace” candidate actually won. Yet election mandate or no, the third great surge in the post-Eisenhower warfare state gave no ground whatsoever.

In fact, inflation-adjusted defense spending in fiscal 2011 of $670 billion was a new record, eclipsing even George W. Bush's final war budget. It was thus abundantly evident that even an out-and-out “peace” president is no match for the modern warfare state and the crony capitalist lobbies which safeguard its budgetary requisites.

Indeed, Barack Obama pushed the frontiers of the warfare state further than ever before. Beating his mandate for plowshares into an even mightier sword, the peace president pushed defense spending to a level 80 percent greater in real terms than General Eisenhower concluded was necessary.

So when all is said and done, the source of Eisenhower's singular success among postwar presidents in actually shrinking the inflation-adjusted federal budget is quite clear: it was due first and foremost to his taming of the warfare state at a time when America still had industrial enemies and the fear of nuclear attacks was palpable throughout a land dotted with radar installations and air-raid shelters. In light of subsequent history, the Eisenhower Minimum was a signal fiscal policy accomplishment, even as it proved to be unsustainable and unrepeatable.

Moreover, in achieving the Eisenhower Minimum, Ike also was able—crucially—to avoid the fiscal logrolling process whereby a temporary peace dividend becomes an excuse to break out the domestic butter. Indeed, it was Eisenhower's resolute fiscal orthodoxy—on both taxes and balanced budgets—that shielded his “peace dividend” from being consumed by the kind of domestic spending sprees that were promoted by politicians of both parties during later cycles of defense retrenchment.

EISENHOWER'S UNMATCHED FISCAL TRIUMPH: SHRINKAGE OF THE STATE

In the final analysis, Eisenhower's fiscal record is one of a kind. Between fiscal 1953 and 1961, total federal spending declined from 20.4 percent of GDP to 18.4 percent. The constant-dollar federal budget was reduced from about $680 billion to $650 billion.

Never again did the nation's inflation-adjusted budget numbers shrink during a presidential term. Not by 4 percent or even by any amount at all.

In contrast to the decline in constant-dollar federal spending during Eisenhower's tenure, real outlays during the three subsequent surges of warfare state spending rose steeply. The Kennedy-Johnson period recorded an increase of 50 percent, while the eight Reagan years saw inflation-adjusted growth in total federal spending of 22 percent.

The all-time record was achieved during the George W. Bush presidency, of course, when constant-dollar federal spending expanded by an even greater 53 percent. During that outbreak of budgetary madness, in fact, it was strikingly evident that domestic spending tends to actually accelerate, owing to fiscal logrolling, when the warfare state is experiencing robust expansion.