Vietnam and the U.S. Economy

...Its unrationalized defense-space projections do, however, underline its excessive concern with not upsetting the "traditional balance between federal actions and other public and private actions...

...The tax cuts made in 1964, worth $19 billion to individuals and corporations, were and remain exemplary of the use of the dividend: the cuts were meant not only to stimulate the business sector but to enlarge its share of economic activity as against the government sector...

...Thus one nickel out of every dollar of the economic growth dividend of the past six years will have flowed into such programs—a relationship that may or may not change in the years ahead, but that cannot be altogether ignored when appraising the prospects of even so modest a proposal as the Freedom Budget...

...The authors of the Freedom Budget eschew, however, all suggestions of either...

...Over the same period, the increment in the total national product will have amounted to about $250 billion...

...Nor do they propose any shift in financial resources within the Federal Budget to provide funds for larger social programs...

...Hence, no institutional reforms are proposed by the Budget...

...Thus the disposal of the "fiscal dividend" has come to be seen as the key to the elimination of social ills...

...The left-of-center position, welcoming the greater role of government, generally remains silent, at least in its programmatic statements, about the frequently observed effects of some kinds of large-scale government expenditures in aggravating the evils which social programs are expected to remedy...

...Its objectives are readily reconcilable with a Democratic party platform...

...If we look only at the increment in tax revenue and in the deficit—$47 billion between 1962 and 1968—the relative share of domestic programs is 28 per cent or $13 billion...

...Its assumptions about these programs involve a gain of $23 billion between fiscal 1967 and fiscal 1975 when the war in Vietnam is likely to have ended...

...The Freedom Budget, thoughtful in estimating required funds for a wide variety of social improvements which would account for somewhat more than two-fifths of projected 1975 federal outlays, abdicates responsibility ("makes no attempt at independent judgment") in regard to the other three-fifths that are to be devoted to defense, space, and international programs...

...Both camps proceed from a common assumption, i.e., that growth of the American economy can be taken for granted (this I shall not argue), and that gains in federal revenue generated by growth can more or less freely be allocated among armaments, social purposes, and private consumption via tax cuts...

...According to Chairman Mills, the threatening disequilibrium must be restored not only by tax increases—on the contrary...

...it remains dependent, as a matter of indisputable fact, on heavy defense expenditures, and it possesses at present neither the "flexibility" nor the institutional means to abandon any significant portion of its military-industrial apparatus...

...My sympathies are close to Melman, but his "policy systems" are a technocratic construct lacking a social content on which political pressures could operate...

...Over the long term, this tendency deprives the forces of social reconstruction of needed moral and physical resources...

...President Johnson spoke in a similar vein when he signed the 1964 tax reduction into law, and Fowler has cited numerous examples of Johnson's continued fiscal conservatism— a conservatism that is not merely opportune but real enough to anyone who compares Johnson's talk of Great Society programs with recent cutbacks in social welfare programs—programs which had been skimpy to begin with...

...Its economic importance as an autonomous source of economic "growth" is now such as to make even partial reconversion, were that contemplated, quite difficult...

...by mid1967 the ratio had risen to more than 10 per cent...

...President Johnson's timidity in requesting even a puny surtax which would have reduced personal income by 1 per cent, and the stubborn refusal by Congress to enact the request when it was finally made, dispose of the first assumption as being simply apolitical...

...Only about 5 per cent of all jobs in private industry (or close to 3 million) are currently directly generated by defense, but in industries where value added and capital investment are highest, the relevant proportions are considerably greater...

...Institutional change appears no longer to be a prerequisite for that...

...Hence, we cannot count on its automatic availability...

...Mills, after all, represents a society in which "balancing the books" is inherently virtuous, and a government deficit defines a social disequilibrium, signaling a possible shift in the relationships of power in favor of the state...

...That was at the time the clear mandate of Chairman Mills of the House Ways and Means Committee, endorsed by Presidents Kennedy and Johnson...

...They would rather draw (presumably by way of taxation whose rate structure would remain unchanged) on the annual increment in the national product, "the economic growth dividend," which is expected to amount, cumulatively, to $2.3-$2.4 trillion over the 1965-75 decade...

...Furthermore, says Fowler, "the first item on the President's post-Vietnam agenda" is the possibility and priority of tax reduction—not any step-up in antipoverty programs...

...The authors declare that "even those who are already affluent or wealthy would not be penalized in any way in order to accomplish [the] great priority purposes" of the Freedom Budget, and while there are occasional references to inequality in the distribution of income, no proposals to eliminate it are made...

...We must remember that we are speaking only of the end of the Vietnam conflict, which would present diffiiculties, although not insuperable ones...

...Comparisons with the aftermath of World War II would be sorely misleading...

...Not only have price rises prevented real incomes from advancing (at the end of 1967, real weekly take-home pay of a worker with a family was all of 50¢ higher than the year before...

...For such a shift would, at the least, require heavy increases in taxation, which would weaken private investment and consumption and strengthen the public nondefense sector...

...Numbering 1.9 million in 1967, the semiskilled and skilled represented 16 per cent of all workers in their occupations, or 44 per cent of total defense employment (but only 32 per cent of total H. BRAND industry employment...

...or the highway and urban renewal programs, which in many instances have tended to worsen the condition of the urban poor...

...The American economy would not, however, be able to cope with disarmament on any larger scale...

...In manufacturing, nearly 11 per cent of employment is defense-generated, while in services, the proportion is less than 3 per cent...

...they also raise the costs of public services, thus further straining the fiscal capacity of sub-federal jurisdictions and intensifying the inadequacy of such services...

...In mid-1965, 9 per cent of total payroll employment was directly attributable to defense spending...

...The second assumption is weakened by the record-low jobless rate among adult males (the chief repository of knowledge and skills), large numbers of whom have been absorbed either by the military or in defense and closely-linked capital-goods industries—and who are thus unavailable for tasks of social reconstruction...

...Whether or not such projections are more "realistic" than those of the Freedom Budget, on the surface they strengthen the Freedom Budget's case that resources for the elimination of poverty and other ills are ample...

...To liberals and leftists, deficits may seem a painless way of helping to finance desirable social programs and of obtaining full employment...

...N THE ABSENCE of a shift in the relation ship of political forces, the dominant interests of the American body politic have first call on the fiscal dividend (which is what the Freedom Budget's "economic growth dividend" is all about)—and in fact they do and did, with the explicit support of the Johnson and predecessor Administrations...

...These deficits have, on the one hand, failed to reduce unemployment significantly below 4 per cent—an outcome predicted by many economists who have viewed much of present unemployment as stemming from the changing skill structure of the economy, rather than from inadequate final demand...

...By insisting that major social ills can be eliminated without disturbing the traditional balance between private and public sector, the Freedom Budget avoids the question of whether that "balance" does not itself engender or perpetuate those ills...

...but its strategic objective must be to change the institutional alignments which lie at the root of social evils—including that greatest of evils, war...

...According to Secretary of the Treasury Fowler, President Kennedy "rebutted any notion that rising federal revenue in the years ahead mean that federal outlays should rise in proportion to such revenue increase...

...Between fiscal 1962—the first in nine years when a Democratic Administration had full control of the purse strings —and fiscal 1968 (which began last July 1), federal tax revenues will have totaled, cumulatively, an estimated $700 billion, and deficits (which are additions to the public debt) about $44 billion...

...Since the assumptions are only implicit, they cannot be debated, but it should be noted that few qualified observers share them...

...It has had to finance the war by enormous deficits...

...Relatively decent working conditions in the factories came about because trade union struggles changed the "balance" between labor and industry and helped incorporate the changed balance in law...

...Social advance remains a painful struggle in the realm of politics...

...Defense activities employ relatively large numbers of skilled and semiskilled workers, and relatively small numbers of unskilled and service workers...

...T T HE POLITICAL IMPLICATIONS of a large, powerful defense-space complex cannot be discussed here...

...Maybe it is true that poverty can be eliminated without interfering with the existing private-public balance, but the Freedom Budget cites no historical example which demonstrates that it has been done...

...THOSE WHO BELIEVE that the American economy can provide the means both to fight the war in Vietnam and wage massive attack on poverty at home must also believe that economic resources can be shifted from private to public purposes, without affecting privileged positions and vested interests and possibly without jeopardizing the very sources which under American capitalism generate growth...

...They also must read into available unemployment statistics the view that the utilization of manpower is running below optimum levels, and must infer that enough "slack" exists to permit, given the "will," a more energetic attack on domestic problems...

...With steady economic growth, high levels of employment, and an annual fiscal dividend being evidently assured, that preoccupation seems to have become outmoded...

...There has never been much doubt on the part of the Left about the productive power of capitalism—leftists were the first to note and analyze it...

...A third point of view has been espoused by Seymour Melman, who attacks military priorities as part of a "policy system" which he altogether rejects...

...Moreover, the large federal deficits, financed as they have been in capital markets already heavily drawn on by business and state and local units, have been a major cause of increases in interest rates...

...Analogously, major extensions of the "welfare state" in the U.S...

...tax increases unaccompanied by "real and significant expenditure reductions and firmer controls would have a serious long-range impact upon the direction of our economy...

...It must indeed concern itself with broadening the base of the welfare state...

...Those, on the other hand, who insist that it is the war in Vietnam which prevents effective dealing with problems at home are guilty of either or both of two errors: one, they imply that the end of the Vietnam War will free the resources necessary to wage peace at home, which may be the case but does not follow with compelling logic: the end of the Korean War was succeeded by recession in the economy and virtual stagnation (even the threat of regression) in social legislation...

...That part of the increment in federal revenue which has not been, or is not to be, absorbed by tax cuts has been and is predominantly applied to past, present, and future wars...

...Yet, the validity of this position seems hardly more questionable than that of those left-ofcenter liberals who view the fiscal dividend as a politically neutral instrument which obviates institutional change as the means of rooting out social ills...

...And in a society that of necessity must seek to expand job and investment opportunities in services, the men and women made unemployed by the end of the Vietnam War will offer experience in goods-production work or in war-oriented research and design...

...Indeed, the structure of the economy and society which generates the dividend H. BRAND can be, perhaps must be, left untouched— it is the goose that lays the golden eggs...

...Finally, defense programs, far in excess of demonstrably rational requirements, typify the tendency of modern capitalism to apply its rich pool of technology and talent to unproductive and outright destructive purposes...

...He proposes an alternative policy system, structured so as to emphasize social priorities on a worldwide scale...

...It is of more immediate political importance here, however, that the Johnson Administration has brought disrepute to the H. BRAND New Economics, which teaches that government expenditures should exceed tax revenues by an amount roughly in proportion to the magnitude of those resources which the private sector fails to absorb...

...No doubt, I have oversimplified the grouping of existing points of view on current economic possibilities of dealing with social problems...

...A major preoccupation of the Left, however, has traditionally been the distribution of wealth and income, and its relationship to politics...

...This is shown by an examination of the direct effects of defense spending on employment...

...I fear it would mean bigger and bigger government with a smaller and smaller range of freedom of activity for the private sector...

...The Federal Reserve, frequently the scapegoat of easy-money advocates, has gingerly avoided attracting criticism...

...But it turns out that employment remains contingent in good measure upon continued spending on armaments and on a rising level of private consumption, and that the conservative forces which base themselves on such an economy thus become major claimants to the fiscal dividend...

...Such workers have experienced the sharpest job gains due to Vietnam...

...Considering the indirect effects of expanding defense employment, there can be no question that the boom of the past two years had its source in that build-up...

...On the other hand, the deficits have added to the strong upward pressure on prices which stepped-up war production has engendered...

...To Chairman Mills and his like, however, deficits do not merely serve as a pretext to compel cutbacks in domestic programs...

...ECONOMY ports, which have contributed to capital intensity on farms, and thus to the exodus of the rural poor to urban slums...

...It has done what it could and under its charter must do to facilitate government finance...

...according to calculations by Daniel Suits of the University of Michigan, the unemployment rate would exceed 7 per cent but for Vietnam...

...Sponsored as it was by persons of divergent views, the Freedom Budget necessarily represents a consensus...

...The conservative stance chooses to ignore the sustaining force of government spending and of fiscal policy in the economy...

...If government policy thus aims at the deliberate strengthening of the private sector by means of tax reductions (when these are feasible), and if defense spending continues high or rises further, then the very availability of the fiscal dividend on the scale envisioned by the Freedom Budget is in question...

...Yet, it would not be hard to show, for example, that corporate control over prices and capital investment vitiates wage policies favoring low-income earners, crimps funds for adequate pensions for all, cuts into manpower and material resources required for public services, and virtually precludes rational regional and intraregional planning...

...For many, the end of Vietnam will raise major problems of re-employment, arising in part from the slowdown in the economy, in part from the difficulty of transferring skills...

...Of the 3.2-million rise in total employment over these two years, roughly one-third was due to the Vietnam build-up...

...In consequence, home and apartment vacancy rates have declined close to early postwar lows, and the incipient housing shortage has made the country's ghettos even more airtight than they already were...

...Its authors know, of course, that allocations in the Federal Budget are the result of political pressures...

...I do not intend to be a party to this kind of program" (New York Times, November 21, 1967...

...Two, they read into the "war" on poverty a promise of acceleration which was never made, and they ignore the fact that until sometime early last year, the means devoted to antipoverty programs continued to increase at about the same stingy rate that had obtained prior to the escalation of the Vietnam conflict...

...Government sources estimate that about one-fourth of defense spending returns as tax revenue...

...This is the sum which became available for new or expanded domestic or civilian programs...

...Yet if this "balance" results in ever larger defensespace outlays, it implies a political line-up not dissimilar to the one prevailing at present— one that is hostile to making the resources available on which the realization of the Freedom Budget's objectives depends...

...There is no backlog today of urgent consumer needs or of capital investment requirements...

...He asserted that] as the economy climbs toward full employment, a substantial part of the revenue increases must go toward eliminating the deficit...

...Not monetary policy but a politically cowardly fiscal policy has lifted interest rates to levels where they have throttled the flow of capital into residential construction...

...So would comparisons with other industrial countries, many of which are beginning to face prob lems of structural unemployment and insufficient investment outlets with which the U.S...

...The Federal Budget—"the main instrument of national economic policy"—is the only mechanism which would deal with the "priorities" set forth in the Freedom Budget...

...has had to grapple since the midfifties...

...The expansion of the defense sector has itself contributed to yielding revenue required to sustain domestic programs: between the second quarter of 1965—just prior to escalation—and the third quarter of 1967, military expenditures rose by 49 per cent, and their rise represented one-fifth of the increase in the national product over the 21,4-year period...

...Of the available $744 billion, 80 per cent or $593 billion were spent on defense, space, international affairs, interest on public debt (incurred mainly for war financing), and veterans' benefits...

...Since, however, representatives of labor as well as socialists are prominently associated with the Freedom Budget, it strikes the critical reader by its studied political neutrality: poverty, inadequate health, education and welfare services, and other evils are documented in some detail, but their causes are nowhere identified in terms of the social and economic institutions which breed them...

...This is not ideological phraseology but articulation of a conservative position...

...the Federal Budget reflects these pressures, and is not in itself an agent of institutional change or social planning...

...Examples include agricultural price sup VIETNAM AND THE U.S...

...Many careful projections of defense expenditures show a basic stability for the coming decade," writes Murray Weidenbaum, who is an outstanding expert in the field (in Prospects for Reallocating Public Resources, American Enterprise Institute, page 56...

...Here, my concern will be briefly to contrast the Freedom Budget, which is broadly representative of current left-of-center thinking (and to which I allude in the first paragraph of this article), with the actual tendencies in the disposition of the fiscal dividend...

...The share of all domestic programs comprised 20 per cent or $150 billion— which included many expenditures that cannot be regarded as social welfare measures...

...ECONOMY (whatever the form) than by asking for crumbs off the tables of the affluent and assuring them at the same time that they need not fear for their privileges...

...are much more likely to develop through organized struggle VIETNAM AND THE U.S...

...In any case, the references are not functional elements of the exposition...

...Unwilling to intensify conservative opposition to its domestic programs or to heighten the controversy over an unpopular war, the Johnson Administration only belatedly asked for (and at this writing has still not obtained) a tax boost...