History Suggests Debt-Ceiling Fights May Be Good for Us: Echoes
"We've got debts no honest man can pay." Source: Bloomberg Data
A sanctimonious president refuses lawmakers the cuts they demand. The federalists in Congress grow cocky. They'd rather force a bond-market crisis than raise the debt ceiling or erode states' rights.
"I'm not worrying," the firebrand Virginian leading the opposition to the president says, and charts his own version of the budget. "I'm sticking to my guns. We've got a prairie fire started among the people in favor of cutting the budget."
The president disapproves. The Virginian seems downright gleeful. The debt-ceiling fight is giving new life to his already lengthy career.
This sounds like the story of the very Democratic President Barack Obama and the very Republican House Majority leader Eric Cantor battling in 2011. But it's actually a description of the very Republican President Dwight D. Eisenhower and the very Democratic Finance Committee chairman, Harry F. Byrd, in 1957.
The details of that quarrel are worth remembering, if only to remind us that the meaning and impact of such contests may be different from what politicians, or the public, assume at the time.
When Eisenhower became president in 1953, he seemed an unlikely champion of spending. The general won the White House as a fiscal conservative. The red ink that continued to flow after his inauguration offended the sense of order and control that had helped him earn five stars.
Eisenhower wanted to concentrate on highways, Stalin and Korea, not debt or bonds. In this he was like most chief executives, especially those who are not elected for their economic background.
But Ike determined that the government must raise the debt limit to $290 billion from $275 billion before he could finish his budgetary cleanup.
"Despite our joint vigorous efforts to reduce expenditures," Eisenhower told lawmakers, "it is inevitable that the public debt will undergo some further increase."
His second-in-command, Treasury Secretary George Humphrey, played the heavy. If the debt-ceiling increase didn't become law, "it would just cause a near panic," Humphrey said.
Daunting words to children of the Depression. The Dow Jones Industrial Average was only then, after a quarter century, returning to its 1929 level. A panic would jeopardize the last stage of that long-awaited stock recovery.
But legislators were more alarmed about debt. War spending was becoming forever spending. U.S. debt as a share of the economy was declining, and was lower than it is today, but was still nowhere near as low as in the 1920s or 1930s. The rebels charged that Eisenhower was trying to turn debt levels higher than the New Deal into a new normal.
"Sometime, somewhere," declared Virginia Representative Howard W. Smith, "this Congress or the administration has got to reach the point where we say: 'This is the end; this is all.'"
Harry Byrd marshaled opposition to Eisenhower's request. The government could scrape by without additional borrowing authority, he insisted. The Treasury had some $9 billion in ready cash. The president had the power to curtail federal expenditures and create even more wiggle room.
For a while, Byrd prevailed. The apocalypse didn't materialize. The government made it through the first half of the next year using a mixture of ready cash, spending reductions and various financial maneuvers.
In August 1954, the Senate finally agreed to raise the limit by $6 billion, but only temporarily. That fall, the Dow finally crossed its 1929 high of 381.
Still, Byrd tangled with Eisenhower all decade. In 1957, Eisenhower proposed a $72 billion budget; Byrd countered with a "Byrd Budget" that would cut federal spending by $6.5 billion. And so on. The debt ceiling stayed below $290 billion, Ike's original goal, until 1959. Meanwhile, the economy gained ground, which eased the debt burden.
Did Byrd check Eisenhower's spending in the 1950s? Somewhat. Did he give Ike pause? Certainly. The president left office again obsessing over the scale of government, and he delivered a farewell warning so lugubrious, and so evocative of the small entrepreneur's challenges in facing the "military-industrial complex," it might have been penned by Ron Paul.
“Today the small inventor, tinkering in his shop, has been overshadowed by task forces, " he said."A government contract becomes virtually a substitute for intellectual property."
Debt crises came and went for the rest of the century, and debt continued to rise, without calamity. A few decades later, a president took the bold step of moving the debt ceiling into the trillions; a senator filibustered for half a day to stop the increase, and failed. This time, the sparring partners were Ronald Reagan and William Proxmire, a Democrat of Wisconsin.
President Bill Clinton blew into office with another prairie fire burning, the recession of the early 1990s. Clinton's supporters sought more spending to douse the fire, not less. The Democratic Congress went along. When Republicans won control of the House in 1994, Speaker Newt Gingrich coerced the administration to agree to changes, including spending limits. Clinton declared the era of big government over.
The takeaways? The first is that anti-spending crusades, while compelling in their commitment and as theater, don't prevent government expansion in the long term. Had the Tea Parties of the past truly succeeded, had Gingrich truly succeeded, we wouldn't be having yet another debt-ceiling crisis now, with the national debt exceeding $14 trillion.
The second is that such crusades do have real value over the medium term by reducing spending, or at least slowing spending increases, and providing reality checks.
Most importantly, perhaps, debt-ceiling fights force presidents who would rather not focus on the glum details of economics to look more closely into the abyss of debt, rather than spending away and passing on the bill yet again.
For that alone, debt-ceiling fights are worth it.
(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg View columnist. Joseph J. Thorndike is the director of the Tax History Project at Tax Analysts. The opinions expressed are their own.)
To contact the writers of this article: Amity Shlaes at amityshlaes@hotmail.com and Joseph J. Thorndike at jthorndike@thorndike.com.
To contact the editor responsible for this article: Timothy Lavin at tlavin1@bloomberg.net.
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