Introducing his budget earlier this month, President Bush invoked the specter of Franklin Roosevelt and compared our times with Pearl Harbor, World War II and its shift from domestic to military spending. The prologue to his budget repudiates the Vietnam War spending catastrophe -- guns with butter -- that brought the nation two decades of inflation and four recessions. It praises Roosevelt's cuts in nonmilitary spending to finance World War II and claims that these budget shifts prepared the way for almost a quarter-century of robust economic growth in the United States and throughout the world. This is both a gross misreading of American economic history and the wrong analogy for the Bush budget.
To devote 40 percent of GNP to the war effort, President Roosevelt did cut domestic spending by about 20 percent at the beginning of World War II. But when the Japanese attacked Pearl Harbor, our military was tiny and woefully unequipped. Whereas Roosevelt's bold plan built 10,000 new airplanes, the Bush budget would add only a few dozen. The size of these conflicts is not comparable, nor is the scale of resources consumed.
More important, the shift from civilian to defense spending had nothing to do with the long period of prosperity that ensued. Indeed, at the end of World War II, American economists universally feared the return of the Depression. Why didn't this happen? Four reasons: the release of wartime pent-up savings; domestic programs from low-interest home mortgages to Social Security and the GI Bill; aid to Europe and Japan that came back to American firms as orders for machinery and equipment, and domestic infrastructure investments like the interstate highway program.
War rations forced workers to save their ample paychecks. In Detroit, auto plants made Liberator bombers; construction firms built defense plants and military bases. Instead of cars and homes, workers bought savings bonds. After the war, they spent these savings on cars, houses and appliances, jump-starting the durable manufacturing and housing sectors.
Social spending on programs pioneered by the New Deal also fueled the postwar boom. Social Security put money in the pockets of retirees who were apt to spend it quickly. Federal mortgage programs enabled millions of veterans and young families to buy housing. The GI Bill absorbed unemployed soldiers gently into the workforce by giving them incomes to go back to college.
The capital goods business did well, too. Orders from ravaged Japan and Germany for industrial equipment reinvigorated American factories. New spending on highways increased the mobility of our society and facilitated interstate commerce and new urban development. Of course, Cold War spending on missiles and space contributed too, but total defense spending plummeted to a very modest level compared with World War II.
The Bush budget is far more comparable to the Carter-Reagan budgets of 1978-86, which pumped up defense spending an unprecedented 50 percent in real terms. President Ronald Reagan also initiated deep tax cuts. The combination created huge new deficits even as the president was castigating big government. By the late 1980s, the yawning deficit became the dominant policy issue. Paying down that debt in the 1990s meant that President Bill Clinton could not follow through on campaign pledges to extend health care coverage to all Americans and to invest in America's educational and physical infrastructure.
The prosperity of the 1990s was due in part to the reining in of the deficit and to significant defense spending cuts that countered the excesses of the previous decade. Americans should note that these cuts did not damage our ability to respond to the recent crisis.
The Bush budget's shift from domestic to military spending will not induce another robust quarter-century of growth, especially given the poorly targeted tax cut. Private sector business investment will not be stimulated by the purchase of more F-22s and Comanche helicopters, nor will these boost long-term productivity. And in the short term, increased defense spending and tax cuts are poor ways of stimulating the economy. New orders for military equipment take a long time to work their way through the economy. And tax cuts for the wealthy, when saved as expected, will not matter if businesses do not care to invest.
Rather, the Bush formula will create a potentially huge long-term drag on growth. The proposed budget will undermine productivity growth, consumer income and spending, business investment and public commitments to infrastructure and human capital. Congress should not buy the faulty Roosevelt-at-war analogy and should fund, instead, only those military programs that are truly necessary.
Ann Markusen is senior fellow at the Council on Foreign Relations in New York and professor of public affairs at the University of Minnesota's Humphrey Institute.