3 Answers | Add Yours
There were two related aspects to Reaganomics that led to it being called "voodoo economics."
First, Reagan believed in this thing called the Laffer Curve. It says that when you lower the tax rates (in other words, take 10% of people's money rather than 15%, for example) the government will actually get more money in taxes. Sounds weird, right? That's why Bush called it "voodoo."
Second, Reagan believed in supply side economics. The orthodox economics of the time said that if there is a recession, the government should give more money to the regular people (by cutting taxes or giving out unemployment benefits or hiring people to build roads and such). The people will go spend it and that will help the economy.
Supply side economics said that you don't do this. Instead, you lower taxes on businesses and the rich people. They will take the extra money and invest it in things like new businesses and that way more people will have jobs.
This seemed less convincing to many people. Most people who lose a job would think that they would be helped more if the government gave them money. Reagan wanted to help the poor and the unemployed by giving money to the rich and the business owners. That seems weird to many people and that is why Bush called that voodoo economics.
At the time, Regan's opponents had to discredit his philosophy of supply side economics. Most notably, then Presidential Candidate George H.W. Bush, argued that Reagan's economic philosophy was "voodoo economics." The term itself was more flair than anything else, as it was unclear why "voodoo" was invoked. He used it to suggest that there was little analysis or guaranteeing mechanisms to indicate that Regan's approach would actually work. Reganonomics argued that by reducing the tax burden on companies and people, more wealth can be generated and this would be able to reinvested in the nation, causing levels of economic productivity to rise. It was seen as hopeful and promising and to that, the label of "voodoo" was tossed.
Here's an answer from Jude Wanniski, the writer and advocate who coined the term supply-side economics:
Mundell, the 1999 Nobel Laureate in economics . . . provide[d] the intellectual underpinnings for the Reagan personal income tax cuts of 1981. The tax cut need only produce sufficient economic growth so added revenues would be able to pay the interest on the bonds floated to finance the tax cut. In the 1980 campaign, George Bush called this “voodoo economics,” but it is the same rationale used in private enterprise. If a business can issue debt to finance an expansion of a product line, it need only sell enough at a profit to service the debt. Anything else is gravy, but the equity markets will not punish it as long as it does well enough to cover interest.
Opponents of the Reagan policies to this day blame the ensuing budget deficits on his tax cuts, but one need only observe that the deficits were accompanied by declining interest rates on government bonds to see the wisdom of Mundell’s hypothesis. The investment made in lower tax rates in the Reagan years — and the bipartisan tax cuts of 1997 — produced the economic growth responsible for the “profits,” or budget surpluses, that have emerged today.
To solve the longer-term problem of actuarial deficits in Social Security and Medicare, at least a portion of the projected near-term surpluses should be devoted to lowering those tax rates on capital and labor that are higher than they need to be. Only if the amount of capital available to labor is increased by 50% over the next 20 years will it be possible for two workers instead of three to provide for a pensioner. Merely paying down the debt will not accomplish that goal.
We’ve answered 318,915 questions. We can answer yours, too.Ask a question