World War II, Tax Deductibility, and the Fair Deal
Mobilization for war evaporated the depression’s unemployment overnight. First, 12 million civilians became soldiers. Next, the arsenal of democracy produced around the clock. Unemployment fell from well over 10 percent to barely 1 percent. This was paid for with massive borrowing: war mobilization is the ultimate Keynesian stimulus.
Normally, this rapid heating of an economy would bring on inflation, as buyers of anything—consumer goods, raw materials, or labor—bid prices up to secure a share of scarce commodities. But price and wage controls were emplaced to prevent this. Learning lessons from World War I, the authorities allocated shortages by rationing. This policy of choosing not to allocate through price mechanisms shortages caused by exploding demand cast a very long shadow that extended into the 21st century.
Employers with huge government contracts and impossible deadlines suddenly needed to mushroom their workforces. With civilian labor scarce due to the wartime draft, the natural tactic was to offer higher wages, but this was precluded by controls. Firms with unionized workforces already offered fringe benefits—items paid for by the firm that were not direct compensation, but raised their workers’ effective wages, such as vacation time and insurance. Offering health insurance, or expanding that which already was offered, was a natural arena of labor competition. Since these were business expenses, they were deductible from the firms’ income. Therefore, Uncle Sam implicitly paid part of the cost through reduced taxes. Tax deductibility was ratified by regulation in 1951 and in law a few years later. Individual health insurance policies were far less tax advantaged.
Looking to the postwar future, Roosevelt saw health care as one of the “four freedoms” to which he pledged in 1944. He did not live to see it or many of his other cherished dreams, such as the United Nations.
After the war trust in government was at an all-time high. America had beaten back a depression, vanquished totalitarianism, and emerged stronger than ever from a global holocaust. Economic growth was very strong, boosted by high postwar birthrates (the Baby Boom) and high levels of education made possible by the G.I. Bill. Several New deal innovations such as Social Security and unemployment insurance were popular. The collapse of the wartime alliance and resulting Cold War legitimized internationalism and a militant foreign policy. Although the Republicans had retaken Congress in 1946, Roosevelt’s successor Harry S. Truman saw a rising tide of activism as a political advantage. He promoted a slate of domestic proposals called the “Fair Deal” (in homage to the New Deal), of which the centerpiece was national health insurance. In 1948, Truman used this plan as a club to beat the “do nothing Congress” with. It won him an upset election, but did not survive the legislative process.
By the early 1950s, the employer-based system familiar today was well launched.