Guns or Butter

by Bernstein, Irving;

  When he announced the proposal for a 6 percent surcharge on January 10, 1967, the President said, “I will very soon forward all of my recommendations to the Congress.” Very soon became a very long time. He did not send up a tax bill. Without his vigorous leadership, the Democrats remained silent and the Republicans called for reductions in Great Society programs. In late February even liberal Democrat William Proxmire of Wisconsin, the chairman of the Joint Economic Committee, was inclined to “take a solid position against a tax increase” until Ackley persuaded him to soften his language. The Business Council’s committee on the CEA unanimously voted down the surcharge in its Hot Springs meeting in May. Constituent mail to Congress, according to Congressional Quarterly, was “extraordinarily heavy” against the levy. During the spring, as the CEA put it, the economy was “schizophrenic—a case for psychiatric rather than fiscal or monetary help.” Higher interest rates had slowed the sale of houses and big-ticket items. “We have taken a slowdown without stalling.” Califano informed Johnson in June that Fowler, Ackley, Schultze, Trowbridge (Commerce), Wirtz, McNamara, and he agreed that “your tax proposal should not go to the Congress until after the recess.”

  By late July the doldrums were history and the boom was again in command. Martin of the Fed came out publicly for a 10 percent surtax. On July 22 the cabinet committee urged the President to ask for the same amount on corporations effective July 1 and on individuals effective September 1. Reuther told Ackley that he agreed, though he preferred a January 1, 1968, starting date. Without higher taxes, he argued, “domestic social programs would be under very heavy pressure.”

  By mid-1967 Lyndon Johnson’s scheme to finance the war painlessly had been torpedoed. He could no longer hide the high cost or the devastating impact upon the federal budget. The Defense Department estimates of expenditures to support U.S. obligations in Southeast Asia by fiscal year were as follows: 1965, $103 million; 1966, $5,812 million; 1967, $20,133 million; 1968, $26,547 million; and 1969, $28,805 million. By mid-1967, the start of fiscal 1968, the number of troops in Vietnam peaked at 525,000; the cost topped out at $28.8 billion in 1969. Thereafter both counts went into decline.

  On August 3, 1967, Johnson sent a special message to Congress, called the State of the Budget and the Economy, and held a painful press conference. At the start of the year his estimated budget came to $135 billion with revenues of $127 billion, including income from a 6 percent surtax. Thus, he had estimated the deficit at $8 billion.

  LBJ now pointed out with alarm, “Since then much has happened to change these prospects.” These were the “hard and inescapable” facts: Expenditures might go $8.5 billion higher to $143.5 billion, while revenues, even with the tax increase, would be $7 billion lower. “Without a tax increase and tight expenditure control, the deficit could exceed $28 billion.”

  “A deficit of that size,” he said, “poses a clear and present danger to America’s security and economic health.” It would bring with it “a spiral of ruinous inflation, … brutally higher interest rates, … an unequal and unjust distribution of the costs of supporting our men in Vietnam, and … a deterioration in our balance-of-payments. … “ This crisis demanded both a reduction in civilian expenditures and a tax increase, not of 6 percent, but of 10 percent, effective for corporations on July 1 and for individuals on October 1, 1967.

  The broad implications of this analysis were clear: the hope for both guns and butter had vanished and the Great Society programs would be seriously underfunded. Johnson, Califano wrote, had told him that, if he asked for higher taxes, “ ‘All hell will break loose on our domestic program.’ He was more right than he feared.” Johnson wrote later, “My willingness to compromise had sharpened the appetites of those who saw in this struggle a long-awaited chance to slash the Great Society programs.”

  At the press conference a reporter asked whether Wilbur Mills supported the surcharge. The President said he had talked to Mills and his committee several times, but he did not know “what Mr. Mills will do, or what the Ways and Means Committee will do, or what Congress will do.” He had good reason to be concerned about Mills. The tax increase had no appeal to him; never one to proceed unless his majorities were safe, Mills was convinced that both Ways and Means and the House would vote it down; and his relations with Lyndon Johnson were cool, if not strained. (Schultze said they did not speak to each other during 1967.)

  Mills did hold hearings in August and September. Aside from its own witnesses, the administration received support from the Federal Reserve, the banking and insurance industries, many economists, and the AFL-CIO. But there was strong opposition from industry. The economists split in an interesting way. Joseph Pechman of Brookings submitted a petition signed by 320 academic economists who supported the surtax. The opposition consisted mainly of those who opposed the war and considered it immoral to support it financially. Even some business economists took this position.

  On October 3, 1967, Ways and Means, confirming Mills’s hunch, voted 20 to 5 to lay the tax bill aside until “the President and Congress reach an understanding on a means of implementing more effective expenditure reductions and controls.” Mills defended this action and other recent cuts in appropriations. “These actions are not irresponsible, bullheaded, or spiteful, nor are they maneuvers for partisan advantage.” Rather, they represented an “uneasiness” among citizens about the rise in federal expenditures. The bill, Mills said, was “dead” unless the President mended his ways.

  Immediately afterward Fowler and Schultze met with Mills and Chairman George H. Mahon of the House Appropriations Committee. Mills insisted on a firm commitment that there would be no new domestic programs in fiscal 1969, a commitment the President refused to make. On October 7 an administration group worked up a lesser set of concessions: (1) a $2 billion cut in defense, (2) Mahon’s “line item” listing of 700 specific reductions, and (3) a program evaluation commission to propose cuts in federal programs after the 1968 elections. Califano pointed out that this package was “fragile.” Fowler seemed willing to take the losses; McNamara was concerned about preserving the Great Society; Schultze did not like the commission; and Barefoot Sanders, who now worked the Hill for the White House, as well as Larry O’Brien, were pretty much convinced that the tax bill was dead. “Both O’Brien and Barefoot,” Califano wrote, “are concerned about the hundred or so Democrats in the House that stand ready to join with the two Kennedys and others in the Senate and jump the Administration for any association it has with spending cuts.”

  Johnson was enraged and vented his anger against Mills and minority leader Gerald Ford at a press conference on November 17. “I think one of the great mistakes that the Congress will make is that Mr. Ford and Mr. Mills have taken this position that they cannot have any tax bill now. They will live to rue the day when they made that decision.” This made headlines across the nation. Mills and the Republicans were furious and there were congressional predictions that LBJ would “rue the day” he made the statement because it had killed his chance to get a tax bill.

  The situation seemed out of control. McNamara, Fowler, Schultze, Ackley, and O’Brien urged a resumption of pressure for the tax hike. Democratic bankers from Wall Street lectured Democratic senators: if the economy disintegrated, there would be disasters in the stock and bond markets. Business economists strongly urged a tax increase. CEA’s top advisory team was unanimous in its support.

  On November 18, 1967, the British government devalued the pound from $2.80 to $2.40 and raised the discount rate from 6.5 to 8 percent. This threatened more inflation in the U.S. Thus, Fowler argued, the tax increase was “more important than ever.” The Fed raised the U.S. discount rate on November 19.

  Mills, disturbed by British devaluation, resumed hearings on November 29 and 30. Fowler presented a two-headed proposal: the 10 percent surcharge and a specific statutory expenditure reduction plan to reduce the deficit by $11.4 billion. To the reasons for the program he now added defense of the dollar. But Mi
lls was not impressed. He said the administration exaggerated the danger of inflation and should concentrate on reducing expenditures on domestic programs. He told reporters that it was too late in the session to consider the tax increase. Thus, the surtax died in the Ways and Means Committee. Wilbur Mills had pinned Lyndon Johnson’s shoulders to the mat.6

  When the new Congress opened in January 1968 Johnson sent up a package: a surcharge of 10 percent effective on corporations on January 1 and on individuals on April 1, the extension of excise taxes on automobiles and telephone services due to expire on April 1 to the end of 1969, and an acceleration in the collection of corporate income tax payments. They became H.R. 15414.

  “Next to peace in Southeast Asia,” Johnson later wrote, “I believed the tax surcharge was the most urgent issue facing the country.” But he had very little power to influence the Congress. During the first six months of 1968, when the tax bill was under consideration, his presidency, already undermined by years of hemorrhaging, collapsed.

  This was one of the most dreadful periods any American President ever faced. In early January HEW Secretary Gardner submitted his resignation. In words that many other officials of the administration could have spoken, Gardner said he did so because Johnson could not unite the country and do what was needed. On January 23 the North Koreans seized the spy ship Pueblo and captured its crew. The North Vietnamese and the Vietcong on January 30 launched the massive surprise Tet offensive against virtually all the major cities and towns in South Vietnam, making a mockery of a potential American victory. On March 12 the peace candidate, Senator Eugene McCarthy, polled a stunning 42.4 percent of the vote in the New Hampshire Democratic primary. Four days later Robert F. Kennedy announced his candidacy for President. In a dramatic address on March 31 Johnson withdrew from the presidential race. On April 4 Martin Luther King, Jr., was murdered in Memphis. This was followed immediately by massive rioting in a number of cities, most dramatically, Washington. At this time Califano wrote, “This has been one of the most momentous and shattering weeks in American history.” But it was not the end. On June 5 Robert Kennedy was assassinated in Los Angeles.

  It was against this backdrop of disintegration that the House considered Johnson’s request for the surcharge. The Ways and Means Committee held hearings on January 22 and 23, 1968. Fowler, Schultze, Martin, and Ackley testified strongly, but Mills was not moved. The higher tax would reduce demand and he insisted that the present inflation was cost-push rather than demand-pull. He was annoyed because he found little evidence of an administration effort to reduce expenditures. The senior Republican, John W. Byrnes of Wisconsin, agreed. The Ways and Means Committee summarily stripped the tax increase from H.R. 15414 and passed the bill on February 23 with only the excises and the accelerated collection features. The House approved the truncated measure by voice vote on February 29.

  The Senate phase was critical on two counts—the politics and the leadership. Neither the Finance Committee nor the Senate itself was any more willing to enact a tax increase than the House had been. By now a southern Democratic-Republican coalition dominated both chambers. Only liberal Democrats would support such a bill and they were a minority. A tax hike, therefore, must be packaged with a reduction in expenditures on domestic programs, that is, a gutting of the Great Society by opting for guns over butter. The key question then became: how much to gut? For the President, of course, this was an extremely painful choice of evils. Under heavy pressure from Fowler, he reluctantly came around to $4 billion. The southern Democrats, led by Mills in the House and George Smathers of Florida in the Senate, insisted on $6 billion. The Republicans, led by John J. Williams of Delaware, demanded $8 billion.

  There was a subtle but unmistakable shift of power in this struggle from the President to Smathers in the Senate and, more important, to Fowler as the spokesman for the administration. Smathers had been in Europe in the fall of 1967 and returned, as he wrote Johnson, convinced that the U.S. “must demonstrate that we have sufficient self-discipline to cut our appropriations and raise our taxes in order to meet the enormous problems of Vietnam, rebellion in the cities, and inflation.”

  For Fowler the battle was a holy mission. He was convinced that a $25 billion deficit was “perfectly intolerable” because it threatened runaway inflation and the U.S. balance of payments. His job, he said later, was “a backbreaking bonebreaking job which demanded and received every conceivable energy and tactic that I could think of … to get the job done.” The President called him “one of the most tenacious men he’s ever seen,” and Fowler did not deny that characterization. He led the testimony, spent endless hours in conference and in lobbying with members of Congress, mediated between the prima donnas, Johnson and Mills, and mobilized an enormous and powerful banking and business lobby to push the bill through.

  Senator Russell Long, the chairman of the Finance Committee, held hearings on March 12 and 14, 1968. Only administration witnesses led by Fowler testified. Senator Clinton Anderson of New Mexico announced that he would propose the surtax as an amendment to H.R. 15414 and Smathers supported the move. Asked the administration’s reaction, Fowler said, “I would applaud any move. I’m for prompt action.”

  But the committee rejected the surtax twice. Smathers proposed it alone and it went down to defeat 12 to 5. Williams coupled it with a mandatory $8 billion spending cut, which lost 9 to 8. The Senate committee then started the process of stringing amendments on H.R. 15414 like ornaments on a Christmas tree. They covered industrial development bonds, Aid to Families with Dependent Children, and medicaid. The amended bill was reported out on March 15.

  By now the surtax was in desperate trouble. Fowler spent four days on the Hill trying to broker a deal to save the tax, usually with Martin and sometimes also with Charles Zwick, the new Director of the Budget. Fowler and Smathers worked out a strategy for a 10 percent tax increase and a $5 billion expenditure cut. This required Republican support and they worked over Dirksen for votes. “He said he would try … ,” Fowler wrote Johnson, “but gave me no commitment that he could deliver.” Looking forward to the conference, Fowler talked at length to Mills. The chairman had a problem because Ways and Means had no jurisdiction over expenditures, which fell to Chairman Mahon of the Appropriations Committee. He was jealous of the jurisdiction of his subcommittees and did not recognize the importance of the surtax. Nor was Dirksen making much progress with Williams. Fowler thought a 10-5 or 10-6 package ($10 billion tax increase and $5 or $6 billion expenditure cut) might “break this logjam and put us well down the road, but far, far from home.”

  Fowler’s lobbying paid off. Dirksen eventually delivered a phalanx of Republican votes, but the old master exacted his price—$6 billion in spending cuts instead of $5 billion. The Senate debated the bill for a week. Smathers and Williams together proposed the crucial 10-6 amendment, which passed 55 to 35 with strong bipartisan support. The telephone and auto excises were stripped away into a separate bill and were quickly passed and signed by the President on April 12. The Senate then hung about a dozen ornamental amendments on the bill. Johnson, in his dramatic withdrawal speech on March 31, pledged that he would sign a bill with the surcharge and “appropriate reductions in the January Budget.” In the final Senate roll call on April 2, 1968 H.R. 15414 passed 57 to 31.7

  Thus, the conference committee received a House bill without the tax and a Senate bill with it. Reflecting the times, the conference became a donnybrook. The brawl dragged on for six weeks and left almost everyone embittered. It was impossible for the public, many members of Congress, and even some of the participants to understand. This was in part because Mills, with conservative Democratic and Republican support, insisted on raising taxes and cutting expenditures not only currently but also into the future. The conflict was also obfuscated by arcane budgetary concepts like the “rescission of unobligated balances” and shorthand like “10-8-4.”

  At the meeting on April 24, 1968, Mills asserted control over the conference. He declar
ed, Fowler reported, that “the Senate bill was unacceptable and inadequate because it was decisive only on holding back expenditures in fiscal 1969 and did not reduce the upstream authority to obligate … for the fiscal year 1969 and the following.” The House, therefore, would take the initiative through its committees.

  The Appropriations Committee on May 1 rejected ranking Ohio Republican Frank Bow’s motion for a 14-6-6 formula by a vote of 23 to 21, that is, reductions of $14 billion in appropriations and $6 billion each for rescissions and spending. The President said he would accept a $4 billion cut in spending and the Democrats accepted his suggestion.

  On May 2, however, Mills moved 14-6-6, the defeated Bow proposal. Califano was convinced that Mills was trying to “torpedo both the tax bill and the Great Society.” Rumors spread that Johnson would capitulate at a press conference on May 3. Calif ano wrote him the evening before, “If you get stuck either with no tax bill or with the provisions … Mills is now peddling, … the ball game may be over … for the rest of the year.” He urged the President to come out fighting. “I think we should turn loose everything we have to take the Ways and Means Committee away from Mills.” The President heeded this advice and demanded that congressmen “stand up like men.” “I think the time has come for all Members of Congress to be responsible and, even in an election year, to bite the bullet and … do what ought to be done for their country.” He added, “Don’t hold the tax bill until you can blackmail someone.”

  On May 4 the President wrote an open letter to Speaker McCormack, urging him to “do all in your power to secure passage of the necessary tax legislation.” His budget of $186 billion was “lean enough” to justify only a $4 billion cut in expenditures. “To accept reductions any deeper … is unwise.” Barefoot Sanders “stressed to Fowler that under no circumstances should any impression be left with Mills … that the President is willing to accept deeper cuts.”