President Reagan's Economic Forecast Accurate

President Reagan's sixth state of the union message Tuesday proclaimed the usual rosy picture of new jobs, low inflation, increasing productivity and low interest rates.  All true.

Yet, to the uninitiated, the economic indicators look scary:

• Trillion-dollar budget.
• Two-trillion dollar national debt.
• Falling dollar on international markets.
• Trade deficit of 174 Million dollars.
• Raging bull market in stock wild fluctuations.

Congress - under pressure from over-produced farmers, auto workers and steel makers -- is gearing up for a major "protection" campaign against our world trading partners.  Tariff taxes will double next week on luxury goods from France, Germany and Great Britain.  Japanese products are the next target.

The big economic numbers, and the growing trade war, seem like big trouble to those of us with long memories.  The Great Depression of the 30s started just this way.

The roots of the Great Depression lay in an unwitting interference with classical supply-side economics, according to Jude Wanniski, president of Polyconomics, Inc., a New Jersey economic research organization.

Wanniski contends in his book, "The Way The World Works," that the production of one commodity instantly constitutes the means of purchasing another.  This is more popularly expressed as, "supply creates its own demand."

If the exchange of goods breaks down in the market place, only an artificial barrier to commerce is the cause.  Most generally this is a government tax or regulation.

A reduction of taxes by President Calvin Coolidge in 1924 sparked unprecedented expansion.  Unfortunately prosperity did not flow to marginal U.S. farmers who had geared up to produce food at any price for the World War I effort.

As European farmers resumed full production, American agriculture found itself with huge surpluses and resulting low prices.  The Republican Congress, traditionally sympathetic to farmers, set about to "protect" them from imports which aggravated our own surplus.

Taxes on foreign imports were increased to create an artificial shortage of food and fiber.  Prices rose and farmers benefited.  The ploy seemed to work so well that industrialists also began clamoring for tariff protection.

Thus began the shift from supply-side, free-market economics to government manipulation of demand.

Hoover Election

Into this atmosphere Herbert Hoover was elected.  He took office March 4, 1929.  Three weeks later the New York Times on Sunday carried an interview with Senator Jack Watson, the majority leader.  He predicted it would be difficult to limit tariff increases solely to agricultural products.  On Monday the stock market broke heavily.

On Tuesday a large delegation of elected officials from New York and New England visited the new president, urging higher tariffs on textile materials.  Stocks crashed again on record volume.

No one understood what the stock market was telling them.

The stock market consists of some four million investors.  These individuals constantly evaluate information regarding the value of goods and the capability of producers.  Investors buy and sell stocks in accordance with their judgment of future performance.

Because there are so many persons involved, the collective effect of their decisions is remarkably perceptive.  Stock sales are merely a barometer which predicts good and bad weather.  They do not make weather.

The sharp decline in the stock market during Hoover's first month in office was a reaction to already existing government policies that investors realized would hurt the economy.

Market crash

The climax came in October 1929 when the pro-tariff forces under Senator Reed Smoot and the anti-tariff forces under Senator William Borah squared off for a final debate - over carbide.

Borah conceded defeat on the morning of Oct. 28.  Before the day was over the market fell 38 points, a record.

A statement the next day by Smoot that the tariff bill would help business only sent the stock market "crashing' another 30 points.  In less than 24 hours stocks had lost half their value! Thousands of small investors "playing the market" on borrowed "margin" money were wiped out.  One loser jumped out a skyscraper window, so the papers called it "Black Tuesday."

Investors had anticipated the Smoot-Hawley tariff bill which ultimately imposed taxes on 20,000 commodities!  World trade ground to a halt.  Investors withdrew from the market as fast as they could.  Factories closed.  Unemployment hit 25 percent.

Congress attempted to shore up the economy by raising taxes to provide "relief" to the needy.  This further penalized productivity and drained away job-producing investment capital.  The Dow-Jones Average of industrial stocks fell from its September 1929 high of 381 to 41 in less than a year.

Breaking Republicans

President Hoover was an able administrator who had put Europe back on its feet with a post-war reconstruction plan.  The success of that plan was largely responsible for his election.  He now attempted to do the same with the failing U.S. economy.

He recommended a Reconstruction Finance Corporation to loan money to failing banks, businesses, farms and home owners.  Congressional Democrats dragged their feet, sensing an opportunity to break the Republican hold on government.

After Hoover had been defeated by a landslide for Franklin D. Roosevelt, the Democrats agreed to support the RFC measure.  The lame-duck president signed it into law on Jan. 23, 1933.  Ironically it was the principal tool used by Roosevelt to rebuild the economy.

Roosevelt correctly identified the taxes on foreign goods as main cause of the depression.  He succeeded in getting Congress to cut the tariffs.

However, FDR increased taxes on domestic production to finance his New Deal welfare programs.  Even so, he had to borrow gobs of money to finance public works, welfare and retirement pensions.  His announced policy was "tax and tax, spend and spend."

War solution

The poor and unemployed started to eat better.  Yet, the welfare rolls and number of unemployed were greater after 13 years of Roosevelt administration than when he took office!  It took World War II to bring full employment and finally solve the Great Depression.

The Hoover-Roosevelt theories of increasing taxes to manage a demand-side economy are still with us.  President Reagan inherited a Hoover-like situation and has tried mightily to avoid the economic mistakes of his predecessors.  But pressure on him from demand-side liberals is enormous.

We can only hope the lessons of the Great Depression will be carefully studied by those Congressmen who sat on their hands during the President's state of the union speech.

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