I have always wondered what would have happened to the economy of the United States if Herbert Hoover had been reelected President in 1932. I would particularly like to know now because I suspect that the "supply side" economics formula which President Reagan is getting ready to apply to today's economic problems is primarily a warmed-over version of the "trickle down" economics which Mr. Hoover preached but never had time to practice long enough for a conclusive test.
The Hoover formula was built around the Reconstruction Finance Corporation. This was set up in 1932 to make funds available at low interests rates for stimulating industrial production. Government funds for industrial investment were needed because the stock market crash had largely wiped out the normal sources for investment capital. There just wasn't any private investment capital left.
The RFC was supposed to provide a fresh pool of such capital. One of my early memories as a cub reporter in Washington is sitting in the offices of the RFC on Pennsylvania Avenue listening to Jesse Jones explain how the benefits would "trickle down" through the various layers of the economy stimulating activity and well-being, right down to the bottom where it would provide employment and restore activity and health to the whole economy and all the people in it.
Suppose Mr. Hoover had been re-elected and had continued to rely largely on the RFC for economic recovery. What would have happened?
We shall never know. Franklin Delano Roosevelt won out in November of 1932. He kept the RFC, and it pumped freshets of low-interest capital into the ailing fabric of US industry. But Mr. Roosevelt added a lot of other things to the RFC; things designed primarily to put money back into the pockets of the unemployed at the bottom of the economic scale.
Gradually things did get better, but gradually. Recovery never did really get going until the war boom in the late '30s when vast capital investment in war industries and the call- up of men for the armed services did finally end the Great Depression.
Of course conditions in 1932 were different from conditions today. One similarity is the shortage of investment capital. But one big dissimilarity is ability to buy. The real cause of the great collapse which began in October of 1929 was rising unemployment leading in turn to a shrinkage of consuming power. Industry could turn out more goods than the public could buy. Consuming power had to be rebuilt before there would be much point in stimulating supply.
Today there is no shortage of consuming power. People have money -- almost to burn. With wages rising as the price index goes up (and sometimes faster) there is no shortage of spending money. But there is a shortage of savings. With taxes as high as they are today (and rising automatically with rising wages) the incentive to savings is weakened. Who wants to earn more money if Uncle Sam is merely going to take much of it away in higher taxes?
Tax cutting should, at least in theory, stimulate savings and thus replenish the pools of investment capital. Budget cutting is bound to cause some unemployment, hence some decline in consuming power. If budget cutting actually reaches the social services there would be a further shrinkage in consuming power. The happy moment (for those still employed but not for those who lose a lot of consuming power) would come when fewer dollars chase more goods. At that point, the inflation would be over and we would be back in a buyers' market with prices even beginning to come down a little, instead of forever climbing.
Mr. Reagan's first big problem is to persuade the Congress to permit enough trimming back in the social services to bring about a significant decline in consuming power. There wasn't enough in 1932. There is too much right now, enough too much to keep prices on an upward spiral.
His second big problem will be to gain from Congress the ability to stimulate in ways which will renew the American industrial fabric, rather than just keep obsolete factories working beyond their natural life span.
The first battle of the year is going to be the battle in the Congress over Mr. Reagan's budget-cutting plans. The seccond battle of the year will be over how to spend "supply side funds." IF the stimulus goes to the obsolete industries -- as has happened to a dangerous degree in Britain -- a lot of effort will have been spent in vain. If it goes into the new and promising industries -- Mr. Reagan will be the p olitical success of his generation. May he succeed.