Guns or Butter

by Bernstein, Irving;

  After a brief stop in Honolulu, Heller recalled, Freeman, Udall, Hodges, Wirtz, and he had “a long, long caucus about Lyndon Johnson.” No one doubted his intelligence. There was evidence that he could be either a conservative from “rich Texas” or a liberal out of the populist tradition of the Southwest. There was concern about how demanding he could be of the people who worked for him. As one put it, “He’ll just suck the guts out of you.” Heller was not bothered because he was already on an eighty-hour week. And there was the difference in style between “the sophisticated and polished Mr. Kennedy against the rather corny Mr. Johnson.” Heller was apprehensive because he did not know whether Johnson was receiving advice from other economists. Altogether there were, Heller wrote, “a great many unknowns and a great deal of uncertainty.”

  When the plane landed about midnight Heller went straight to the Executive Office Building. Both other council members, Ackley and John Lewis, as well as the staff, were waiting for him, ready to go to work. They wrote two memoranda for Johnson, one describing the functions of CEA in serving the President and the other reviewing the current economy and pending issues. The latter was quite cheerful and homed in on the tax cut. The nation was enjoying its eleventh consecutive quarter of expansion since the first three months of 1961. The gross national product was rising at a good clip; the balance of payments had improved; wage increases were moderate and labor costs were quite stable; prices were moving upward only moderately. The prospect for continued expansion in the first half of 1964 was good. But unemployment was still a nagging 5.5 percent and the rate of expansion was “just keeping pace with our growing labor force and growing productivity. … If the tax cut failed to pass or were delayed too long, we would face a slowdown or even a downturn, in the second half of 1964.” The tax bill passed by the House, if enacted, would lift the GNP by $12 billion in 1964 and by $30 billion a year when in full effect. There was no need to worry about the fiscal 1965 budget, now estimated at $101 to $102 billion. The fiscal 1964 budget deficit was about $9.2 billion and Kennedy had promised a lower deficit in fiscal 1965. That was easily achieved with the tax cut.

  Heller had a long session with the new President that evening, Saturday, November 23. Johnson began by saying, Heller wrote, that “he needed my help and wanted me to stay.” The economist did not disagree. While they discussed a number of important subjects, the one relevant here is what Heller called the “Troika exercise.” This informal arrangement had been set up under Kennedy to coordinate revenue, budget, and economic policies by bringing the top people in the Treasury, the Budget Bureau, and the Council into a meeting with the President every month or two. The tax bill would be the topic for discussion. As Heller was about to leave, the President pushed the door shut, drew him back into the room, and said,

  Now, I want to say something about all this talk that I’m a conservative who is likely to go back to the Eisenhower ways or give in to the economy bloc in Congress. It’s not so, and I want you to tell your friends—Arthur Schlesinger, Galbraith and other liberals—that it is not so. I’m no budget slasher. I understand that expenditures have to keep on rising to keep pace with the population and help the economy. If you looked at my record, you would know that I am a Roosevelt New Dealer. As a matter of fact, … John F. Kennedy was a little too conservative to suit my taste.

  Dillon and Under Secretary Henry H. Fowler for the Treasury, Gordon and Staats for Budget, and Heller and Ackley for the Council met with the President at 9:15 p.m. on Monday, November 25. Both Dillon and Heller presented memoranda. The secretary argued for a deal with Senator Byrd. According to Ackley’s notes, “a [budget] figure above $100 billion but not close enough to round up to $101 would do it—say, $100.6 or $100.7.” This could be achieved easily with the savings McNamara was now getting at Defense from improved efficiency and with Gordon’s gimmicks (he had become something of a budgetary wizard). McNamara had told Dillon that he could produce $500 million and Gordon thought he might push him to $700 million. Fowler, however, insisted on getting the budget under $100 billion.

  Heller urged a budget of $101 to $102 billion. In real terms, he pointed out, this was a rise for 1965 of only 1.5 percent over 1964. This was less than the Eisenhower and Kennedy budget increases, smaller than the rises in state and local government expenditures, and would provide a drop in the ratio of the national debt to GNP, “the best measure of the burden of the debt.”

  When Johnson asked Dillon, “What about your tax bill?,” he immediately answered his own question. He had been taking a head count of the Finance Committee and said, “We won’t have the votes to get it to the floor unless we tell them the budget will be about $100 billion.” Heller demurred, urging $101.5. Johnson said acidly, “I can defend $101.5—you take on Senator Byrd.” He had talked about the budget with Eisenhower, Anderson, and members of Congress. “Unless you get that budget down around $100 billion, you won’t pee one drop.” He held up Heller’s memo and said, “This represents my philosophy. You’re writing about what’s desirable; he [Dillon] is writing about what’s possible.” Heller insisted, “I’m writing about what’s defensible.” Johnson insisted, “You have to give something to buy off Byrd.” Once you get the bill passed, Dillon pointed out, “you can do what you want.” The President said, “Like Ike did … talked economy and then spent.” Heller capitulated.

  Gordon warned that “just the number” would not satisfy Byrd. He would demand the details and “the Committee knows how to spot the gimmicks.”

  Following this meeting there were, according to Gordon, “extensive direct discussions between the President and Senator Byrd.” The latter “dominated the committee” and was “implacably opposed to the tax cut.” The senator would never vote for it, but his “opposition to reporting out the tax cut would diminish substantially if the President was able to submit a budget which Harry Byrd thought sufficiently austere; and the magic figure … was … under a hundred billion dollars.” Johnson got the message and met with the Virginian on December 5. Byrd announced that the President “assured me that the budget… would be presented to the Congress before the tax bill was finally enacted. … He would cut the cost of government in every way. … Before submitting the budget he would discuss it with the Finance Committee and Ways and Means Committee. … ”

  Since Johnson was meeting with Gordon daily, he pressed the Budget Director to trim. For several weeks the goal was merely to get under $100 billion and that, Gordon said, “wasn’t very difficult” with the cuts in defense and his own gimmicks. “I relaxed a bit,” Gordon noted. “I thought perhaps by the middle of December that we pretty much had it wound up—the budget then was significantly under a hundred billion.” But the President now changed his mind; he wanted to go much lower. “He would send me back to look at this, to look at that, look at opportunities for trimming there, or for contraction there, for elimination there, and this went on into early January.” Now the reductions hurt. The Department of Defense would shut down 33 military installations and would reduce the number of civilian employees by 17,000. The proposal of the Midwestern Universities Research Association (a consortium of about a dozen universities) to build a high-energy accelerator at Stoughton, Wisconsin, was killed. The space program was cut. Production of enriched uranium was reduced at both Hanford, Washington, and the Savannah River plants. When Johnson was criticized for this, he said, “I am not going to produce atomic bombs as a WPA project.”

  The most incredible event in this Johnsonian pseudo-drama occurred in early January, 1964. The President called Heller into the Oval Office and said, “Walter, I need a billion dollars more revenue. … ” Heller gulped and asked, “Where am I supposed to find it?” “I don’t care where you find it, just find it and report back in an hour.”

  Heller returned to his office. “Suddenly I remembered that Charlie Schultze [of the Budget Bureau, who was very good with numbers] had told me that moving the 15 percent withholding rate to 14 percent would shift the revenues enough
to produce $800 million more … in the fiscal 1965 budget.” The House bill provided for 15 percent in the remaining months of fiscal 1964 and 14 percent starting on July 1, 1965. If Congress shifted to 14 percent in fiscal 1964, the result would be overcollection in the final payoff on April 15, 1965. Voilà, $800 million in fiscal 1965! Heller called Gordon and said, “I need $200 million more.” “Isn’t that funny,” Gordon said, “I was just looking at miscellaneous receipts and had … been on the verge of deciding that the estimates were $200 million too low!” Heller called Johnson, “Mr. President, I’ve got your billion dollars.” Treasury approved the change in the withholding rate. Johnson wrote Byrd urging the lower rate in fiscal 1964, and it was written into the Senate bill.

  The President not only cut the budget, he made economy in government a central theme of his public messages. In his address to the joint session of Congress on November 27, 1963, he said, “I pledge that the expenditures of your Government will be administered with the utmost thrift and frugality.” On November 30 he instructed the heads of departments and agencies to keep their 1965 budget requests to “the barest minimum.” The next day he sent personal letters to 7500 defense contractors demanding “cost reduction.” In his news conference on December 7 he warmly endorsed McNamara’s cost savings. On December 11 he implored the Joint Chiefs of Staff and officials of the Defense Department “to protect your country’s purse.” In his news conference on December 18 he said that his budget for 1965 would come in a little under “Mr. Kennedy’s budget for 1964”: “We are going to cut out every dime of waste.” On December 26 he called for “economies” in the foreign aid program. At the news conference on December 27 he pointed with pride to a reduction in federal employment. He also said that he was conferring with former Presidents Hoover, Eisenhower, and Truman to learn how to improve efficiency. In the State of the Union message on January 8, 1964, he promised an administration which is “efficient, and honest and frugal.”

  What was Lyndon Johnson up to? Here was a man with a deserved reputation as a big spender in both his personal style and in his presidency. Dillon, clearly, was right in saying that Senator Byrd would have been satisfied with a budget of $100 billion. At the outset this seemed to satisfy Johnson. But in mid-December he suddenly changed course and insisted on coming in under $98 billion. Since he left almost no tracks, one must speculate about his reasons for this shift.

  He seems to have been moved by two factors. The first was that, while he remained publicly very respectful of Kennedy, he had begun to compete with him. In his account of his presidency Johnson wrote, “A recent Harris poll had indicated that the most unpopular aspect of the Kennedy administration was what the public considered fiscal irresponsibility. I knew that we had to turn that feeling around.” Thus, he insisted on a budget lower than Kennedy’s. The second and probably more important factor was that Johnson, after an extraordinarily successful transition, was by mid-December positioning himself for the run for the presidency in 1964. His plea for national unity following the assassination had been very effective, in part by winning over Republicans, southern Democrats, and businessmen. He might retain much of that support by ringing the changes on the hoary slogans of economy in government and a balanced budget.

  He went pretty far. In mid-January 1964, Johnson instructed Gordon to deliver a copy of the 1965 budget to Byrd as soon as it was printed and to brief him on it. It was an awkward occasion because the senator, “a crusty individual,” as Gordon put it, “had not long prior to that demanded my dismissal.” He went to Byrd’s apartment at the Sheraton Park early in the morning with the still warm budget in his hand, was admitted by the senator in his bathrobe and slippers, and explained the details for half an hour. Gordon said, “I think the President’s courtesy in sending the budget director to brief Senator Byrd played up to the old man’s vanity and probably helped somewhat to moderate his opposition to the tax legislation that the President was determined to have.”

  Johnson sent the 1965 budget to Congress on January 21, 1964. His estimate of administrative budget expenditures for fiscal 1965 was $97.9 billion. This was $500 million lower than Kennedy’s 1964 estimate of $98.4 billion. In the eyes of the Eisenhowers, Byrds, and most businessmen Johnson had won the race by half a billion dollars.2

  By the fall of 1963 the tax bill had become a high-speed locomotive that could not be stopped. The American people strongly favored its passage. The campaign Heller and Kennedy had waged to educate the American public in elementary Keynesian economics had succeeded. Most well-informed citizens now agreed that the World War II-Korean War tax system was obsolete and was acting as a brake on the economy, that the achievement of economic growth and full employment demanded a reduction in both personal and corporate income taxes much like H.R. 8363, which had passed the House comfortably. Almost everyone else wanted his taxes cut. An immense number of organizations across the political spectrum had endorsed the bill: prominent business leaders in the Business Committee for Tax Reduction, the Chamber of Commerce, the National Association of Manufacturers, the Investment Bankers, the AFL-CIO, the Farmers Union, and Americans for Democratic Action, among many others.

  If anything, the Senate seemed to favor the tax cut even more than the House. This was reflected in the 3 to 1 breakdown among the 17 members of the Finance Committee. The early supporters included nine Democrats—Russell Long of Louisiana, George Smathers of Florida, Clinton Anderson of New Mexico, Eugene McCarthy of Minnesota, Paul Douglas of Illinois, Herman Talmadge of Georgia, Vance Hartke of Indiana, J. W. Fulbright of Arkansas, and Abraham Ribicoff of Connecticut—and three Republicans—Everett Dirksen of Illinois, Thruston Morton of Kentucky, and Frank Carlson of Kansas. There were four opponents—two Democrats, Byrd and Albert Gore of Tennessee, and two Republicans, John Williams of Delaware and Carl Curtis of Nebraska. Republican Wallace Bennett of Utah had not made up his mind.

  If Byrd seriously entertained the notion of holding the tax cut hostage to the civil rights bill, he did not mention it publicly. The only support he could have gotten was from Talmadge. Nor did he stall the committee’s progress either before or after the Kennedy assassination; Johnson’s budget foreclosed such a move in the later stages. Majority leader Mike Mansfield told the President on December 3, 1963, “Byrd has been cooperative. … We have to give Byrd credit. He is against things, but he doesn’t hold them up.” True, the Finance Committee held the bill from early October 1963 to January 28, 1964. But the lack of speed is explained by the flood of witnesses at the hearings, the assassination, a very large number of amendments, Byrd’s insistence that every member should be allowed to speak without limit, and Albert Gore’s propensity to filibuster.

  Joseph Barr, who worked the Hill for the Treasury, considered Gore “hopeless,” and Larry O’Brien urged Long and Smathers to ride herd on him. Gore, a maverick Tennessee populist, came out against the tax cut in 1962 before the bill was written. He wanted the government to spend more rather than tax less; he called the measure “a rich man’s bill”; and he blamed the administration for allowing the House Ways and Means Committee to strip away the important reforms. Barr thought that he had “locked himself into a political posture in Tennessee that he cannot readily abandon.” Since Gore was unable to stop the bill, he did whatever he could to slow it down. His tactics even annoyed Byrd.

  For Johnson the tax bill offered a nostalgic reprise of his glory days as majority leader. At the Troika meeting on November 25, according to Gardner Ackley, he showed “pretty clear knowledge of every vote [in the Finance Committee]. He said that he had been checking up on it (not too directly—that would be beneath the dignity of the President!).” He seems to have been in continual touch with Senator Byrd. At the weekly congressional breakfasts he harangued the Democratic leaders, particularly Mansfield and Smathers—“give it the old college try,” “get some leadership.” He demanded and received a flood of memoranda on the bill’s progress from those who followed it—Larry O’Brien and Mike Manato
s in the White House and Dillon, Fowler, and Barr in the Treasury.

  At the same time the President seized every reasonably appropriate public occasion to urge enactment of the tax cut. In his address to the joint session of Congress on November 27, 1963, he said, “No act of ours could more fittingly continue the work of President Kennedy than the early passage of the tax bill.” At a meeting with the AFL-CIO Executive Council on December 4 he said that the measure should be “alive and working.” At his meeting with the Business Council the same day he said, “I need it now.” At his first news conference on December 7 he called for “early passage of the tax bill.” He discussed it at length in the press conference on December 18. In the important papers in January 1964—the State of the Union, the Economic Report, and the Budget Message—he developed tax policy at length.

  The Finance Committee, meantime, plodded along. In 32 days of hearings between October 15 and December 10, 1963, it listened to 132 witnesses. Most of January went to voting on the bill section by section and on 59 amendments. This was Gore’s opportunity to toss sand into the machinery. He was absent on January 9 and the committee, Barr wrote, “plunged ahead.” He returned the next day and there was “little progress.” In fact, the great majority of the amendments were either minor or technical and a large proportion were acceptable to the Treasury.