Connecticut Fiscal Crisis Calls For Creative Solution

World War I raged from August of 1914 to November of 1918, but the United States got involved actively only in the last 19 months of it, declaring war on April 6, 1917; nevertheless, the financial burden that the Great War placed on the government was historically unprecedented—by far. The country ended up spending more than $22 billion for the war, a paltry sum by current standards, but in the context of the time an absolutely enormous amount of money. Consider the following:

 • The cost was 20x the pre-war national debt; theentire federal budget in 1913 was $970 million.

• The American cost of WWI would have been equal to the cost of carrying on the Revolutionary War for over 1,000 years!

• Money spent on the war was almost enough to pay for the entire cost of the U.S. government from 1789-1914!

• The war cost more than $1,000,000 per hour.

How to pay for this stupendous amount of debt? Raise taxes? No. The answer was the sale of war bonds (See photo).

Let’s fast forward 22 years to 1940. The same dilemma arose again on the advent of World War II—a war far more costly than WWI. What to do? Deficit spend? Here’s the sobering analysis in 1940 of FDR’s Secretary of the Treasury, Henry Morgenthau, concerning the New Deal’s deficit spending practices of the previous 8 years — practices devised by his own President’s administration—and the centerpiece of contemporaneous Keynesian economic theory:

 "We have tried spending money. We are spending more than we have ever spent before, and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot.*"

As any economist from any political persuasion will now tell you, it was World War II that eventually pulled us out of the Great Depression, not the New Deal. The money that ultimately stimulated the economy did, in fact, come from private sources but not through raising taxes. It came from bond sales that Morgenthau modeled after the Liberty Loan drives of World War I.

Many members of Roosevelt’s cabinet did want to raise taxes to pay for the war. The sagacious Morgenthau resisted. Instead, FDR’s Secretary of the Treasury started a “Defense Bond” program in the fall of 1940. Series E bonds could be bought in various denominations. (For example, $18.75 would buy you a $25 bond that would mature fully in 10 years.) Morgenthau himself sold the first “E” Defense Bond to FDR on May 1, 1941. After Pearl Harbor on December 7, 1941, and our formal entry into World War II, “Defense Bonds” morphed into “War Bonds,” and sales took off.

The American cost for World War II exceeded that of the Great War by more than 13x—a sum exceeding $285 billion! Yet only 45% of the war was paid for by existing taxes; the rest came from the sale of bonds. Here are the results of the 4 major bond drives:

• 1st War Bond Drive from November 30, 1942 to December 23, 1942 —    just over 3 weeks. Goal was $9 billion; over $13 billion raised!

• 2nd War Bond Drive from April 12, 1943 to May 1, 1943 — not quite 3 weeks. Goal was $13 billion; over $18.5 billion was raised!
• 3rd War Bond Drive from September 9, 1943 to October 1, 1943—exactly 3 weeks. Goal was $15 billion; over $19 billion raised!
• 4th War Bond Drive from January 18, 1944 to February 15, 1944—almost 4 weeks. Goal was $14 billion; over $16.7 billion raised!

Keep in mind this point too: While patriotism undoubtedly played a role in these sales, only $1.6 billion of the $13 billion raised in the 1st War Bond Drive was purchased by private individuals; corporations and commercial banks bought $11.4 billion!

The economic growth fueled by the successful financing and conclusion of World War II led to a postwar economic boom that has no parallel in history. A graph of this postwar growth looks like a ski slope in its upward trajectory, and guess what? It was financed largely by the voluntary investment of individuals and corporations in their own future through the purchase of bonds, not through increased taxation.

Now consider Connecticut’s dilemma. It has a projected budget deficit of over $3.2 billion. Governor Malloy feels the need to raise taxes to close the gap; in fact, the state legislature will shortly consider a new smorgasbord of taxes: increases in the sales and income tax rate; tax on your haircuts; more tax on gasoline—the list seems endless and has most people shaking their heads in disbelief. If the state had shown more fiscal discipline in the last 20 or so years, maybe the public would be more receptive to the taxes, but the state hasn’t. Consider these facts about the last 20 years in Connecticut:

• 20 years ago, Governor Weicker signed the income tax bill, thus creating a significant new revenue stream for the state; billions more have flowed in.
• In the past 20 or so years, the deal with the two large casinos has brought  over $5.2 billion into state coffers.
• In the past 20 years sales from state lottery games have also yielded millions more for state coffers.
• In the past 20 years the state has unabashedly raided the state pension funds for more money to spend—millions more. Pension experts tell us that a pension fund should be funded minimally at 80% of its projected future claims; Connecticut’s level of funding is a pathetic 44%.

One could argue that the pattern here is clear: The more money they get, the more they will spend, and they seem to have no qualms whatsoever about dishonorably raiding pension funds to help fuel their undisciplined spending habits.

There are many potential problems with a new round of taxation, not the least of which is that few believe that it will only be temporary to fix the existing fiscal deficit. It will open up new revenue streams that ought to give everyone pause, based on the recent history of state spending habits. Would you ever run your own household finances in such an undisciplined way? Hardly.

There are those who advocate putting up toll booths at our borders to raise more money for state coffers. How many are enamored with that idea? Do you find that you already waste enough time and gas in traffic on Connecticut’s highways? Want to waste more, especially now that gas is projected to tickle $4 per gallon by this summer?  Do you like air pollution from auto emissions? Want more? Others point out that the cost and the additional waiting will surely deter potential travellers away from Connecticut. In summary, tolls are not only bad for the environment but are also bad for business.

How about looking back at the way the country financed the then historically unprecedented debt of the world wars as a way to finance our historically unprecedented state deficit? The years have shown that FDR’s Secretary of Treasury was indeed a wise man. Refusing widespread calls from the President’s cabinet to raise taxes to fund the war, Morgenthau wisely patterned his financing for the war on the Liberty Loans of the Great War. Such a method taps needed private financing in avoluntary way and invited Americans to invest in their own future. The sales were an overwhelming success and fueled a postwar boom of unprecedented growth. With public dissatisfaction toward government at an all-time high, does anyone really think that more taxation policies that tap private financing for government in a mandatory way-with little perceived return on their dollar-will reverse that trend? Huh!

We find anger about government in our world in many places. The Tea Party movement has that as its centerpiece. Wasteful government spending tales abound. Just last week legislation to fund the development of a secondary jet engine for the new F-35 Striker barely was defeated. Billions of dollars in federal funding for a jet engine that—get this—The military doesn’t even want! Crazy stuff. Even the new conservative Speaker of the House, John Boehner, voted for it! Is it any wonder people are suspicious of government spending and taxation policies?

Does the same old formula for additional government spending—more mandatory taxation—resonate still? Or is it time for a new, creative approach to addressing unexpected, large expenditures such as the deficit which Connecticut faces? Can we learn a lesson from the Morgenthau approach and do something positive that people can get a return on for their money?  Would it be better to voluntarily tap the private financing of our fellow citizens and bury the debt with “Deficit Bonds?” Maybe it istime to do something positive and voluntary for Connecticut’s future and tap into the volunteer spirit that is so very American in a time of genuine need. Henry Morgenthau: Where are you?

 Notes and Sources:

1. Julian E. Zelizer; "The Forgotten Legacy of the New Deal: Fiscal Conservatism and the Roosevelt Administration, 1933-1938." Presidential Studies Quarterly. Volume: 30.Issue: 2. 2000. pp 331+.
2. John Morton Blum, Roosevelt and Morgenthau (Houghton Mifflin, 1970) p. 256
3. Source Records of the Great War