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Reaganomics and voodoo economics are names for or derivatives of supply-side economics, a flawed, politically motivated economic doctrine embraced by Ronald Reagan. This doctrine is fundamentally flawed, its application particularly during the presidency of Ronald Reagan created large federal deficits, which, along with other problems caused by Reaganomics, have caused harm to the economy of the United States, even up to the present day. Supply-side economics was created by no great minds, it involved no Adam Smith or John Maynard Keynes, instead it is composed of the half-baked ideas of reactionary politicians, journalists, and rejected economists. Among academics, it is rejected. Renowned economic mind Paul Krugman declared "Or, to put it another way, the supply-siders are cranks", "they are wrong", "So the group that Bartley assembled and promoted was something stranger and wilder than a mere collection of conservative economists; more like a cult or a sect than a simple school of thought." Author and economics professor Robert Lekachaman declared that supply-side economics was "a quite deliberate redirection of income and wealth from the poor to the rich" and declared "That program is as implausible in its economic assumptions as it is inequitable in its impact." Former supply-sider Michael K. Evans stated plainly that "the underlying dynamics ... doomed the Reagan program to failure." Hobart Rowen, a columnist for The Washington Post also showed his distaste for Reaganomics, "Of the many self-inflicted wounds suffered by America in the last thirty years, none was as deep, corrosive, and enduring as the series of huge, chronic federal budget deficits created by the policies of Ronald Reagan in his eight years in office." What then were the policies of Reagan? Why were they used despite their lack of support in the intellectual community? What problems did they cause? And why on earth was Reagan not burned at the stake? All these questions demand, and will have answers.

Economic Thought During and before Regan's Presidency

To begin to discuss Reaganomics, one must first have a clear idea of mainstream economic thought prior to the presidency of Mr. Reagan.

Keynesianism

Its comprehension begins with a single man, John Maynard Keynes. Keynes, a British economic theorist, lived between 1883 and 1946 during which time he devised theories that would revolutionize world economic thought and policy. His career in the public eye began during the first world war, when he worked for the British treasury arranging foreign loans and acquiring foreign currencies, the area in which he made his reputation. In 1919, Keynes, then a very high ranking treasury official, was sent to Versailles as Britain's financial representative due to his "unique combination of the guts of a burglar and the intellect of a first-class economist" However, he was quickly discouraged by the process and resigned from his position in the treasury and published an attack on the settlement entitled Economic Consequences of Peace. The book was, in large part poorly received because of its attacks on prominent political figures, however, its true purpose was to show that the reparations imposed on Germany were "utterly unrealistic" because of the weak German economy and the low likelihood of high Germany being able to export large amounts of goods and that they would harm the global economy. Next, in 1926, Keynes published The End of Laissez-Faire questioning the economic situation in the 1920s, and, in large part, large corporations.

Then, in 1936, came The General Theory of Employment, Interest, and Money, it was " a difficult, technical treatise". but can be simplified into a few simple concepts, that the world at the time(during the depression) did not have a problem with the labor supply, or potential supply, neither did it lack for demand for products. Simply put "Producers were eager to produce, consumers were eager to consume." Therefore, Keynes proposed that the problem was a general lack of money. To restart the economy, he proposed government intervention, low interest rates and government spending to employ workers in public works projects. This, however entailed deficit spending, an activity despised by economic minds of the time.

Keynes continued to work in economics until his death. In the end, Keynesian economics, the combination of all of Keynes' economic thought, is simple. When individuals and businesses try to hold onto more cash, due to economic uncertainty and loss of confidence as well as other factors, they do so by minimizing spending. However, if multiple groups decide to spend less at the same time, everyone's income falls. So, no one actually accumulates any more money, and due to fallen income, confidence declines and the whole process starts anew. This cycle will, of course, create a recession. However, identifying the cause of recessions is less than half the battle, so, Keynes proposed a solution. In the words of Paul Krugman, "So the usual and basic Keynesian answer to recessions is a monetary expansion." However, Keynes stated that sometimes monetary expansion would prove ineffective, in which case he proposed that the government spend on public works projects to restart the economy(as discussed in the previous paragraph).

Challenges to Keynesianism

Keynesian economics played a major role in policy until the Presidency of Reagan, however, it faced critics from the beginning from the far left, but primarily from conservatives because of John M. Keynes's personal life (he was homosexual) and because of his theories advocating government intervention in the economy. Therefore, conservatives sought to destroy and replace Keynesianism.

Who then would become the leader of a conservative economic movement? Milton Friedman, who created the economic doctrine of monetarism. Friedman's argument was that active monetary policy did more harm than good. He substantiated this claim by showing that the time frame for the effect of monetary policy changes is extremely variable. Instead of an active monetary policy, Friedman advocated a steady rate of monetary expansion of three or four percent each year. After the attacks of Friedman and others, Keynesianism had been essentially destroyed by 1980.

In the resulting confused intellectual economic environment, supply-siders had the potential to rise to power, but they still needed one thing, an economic crisis to give them an opportunity to present their theories to the public. That came too, in the 1970s. In 1973 and 1974 the country entered a recession, the economy recovered, but productivity ceased to rise as rapidly as before. According to Paul Krugman, US productivity between 1945 and 1973 grew 2.8% each year, however between 1973 and 1994 productivity grew at a rate of less than 1% a year.

Although few would have the gall to suggest that the US faced no economic problems after 1970, economists differ widely on why. A strict monetarist would blame inflation caused by excessive monetary expansion on the part of the Federal Reserve. Robert Lekachaman blames Lyndon Johnson for not raising taxes in January 1966 thus creating inflation, OPEC for raising oil prices increasing that inflation, environmental damage caused by decades of lacking regulation, and unsafe working environments. Paul Krugman blames lack of technological innovation, and the entry of the baby boomers into the workforce. However, the important fact is that growth slowed, and that unlike Krugman and Lekachaman, the general public blamed something else: taxes and business regulation.

Birth of Supply-Side Economics

Now, with the circumstances that gave rise to the growth of the supply-siders in mind, in it is time to see who they were, where they came from, and what they thought. First of all, it is important to know that the supply-side movement was not an academic movement. Second, supply-side economics is not a strengthened form of monetarism. Third, supply-siders were and are" a small group that has never found respectability even within mainstream conservatism".

Journalist Supply Siders

The supply-siders were, instead of academics, journalists, congressional staffers, and employees of think tanks or consulting firms. The group who were probably the most influential were, the journalists, particularly Robert Bartley and Jude Wanniski at the Wall Street Journal. Bartley, who assumed control of the Journal's editorial pages in 1972, used them as a way to spread the ideas of supply-side economics all over the world with the aid of Wanniski. Another important supply-sider was Irving Kristol of The Public Interest. Certainly, these three men alone could not have created an economic theory, even a flawed one, that seized control of a nation, and yes there were others, including two with academic backgrounds, Arthur Laffer and Robert Mundell.

Arthur Laffer

Arthur Laffer earned a Ph.D. from the University of Chicago, the home of Friedman and other monetarists, and became a professor at the University of Southern California, however according to Paul Krugman, he "has always had a penchant for playing to the crowds" and he "has never tried to break into the world of conventional academic research ". Laffer has made many equations, curves, etc. but all of them are oversimplified and meaningless. He was brought into the public eye when he developed an equation that he claimed could predict the output of the nation. He became acquainted with Bartley from his writings about currency devaluation between 1971 and 1973. Then he famously created his "silly Laffer curve" or perhaps more accurately laffable curve(see figure 1). To make a long story short, Laffer published mainly articles in newspapers instead of professional journals, and spent his time devising overly simplistic, flawed economic devices.

Robert Mundell

Robert Mundell, however, would appear different, an economist with a reputation based on his work dealing with the relationship between the Canadian and the US dollar. Mundell also served as a professor at the University of Chicago, and Columbia, however, after 1970 "Mundell veered off from conventionality". It was, of course, after 1970 that Mundell became associated with supply-side economics and became the theory's "intellectual mascot", but he did not play a role in molding the ideas of supply-side economics.

Other Supply-Siders

There were, also a few other supply-siders, Jack Kemp, who played quarterback for the Buffalo Bills for thirteen years then was elected to Congress, and his aide, Paul Craig Roberts. In addition, George Gilder was a supply-sider. Gilder, an author and journalist, wrote a book, Wealth and Poverty, in which he argued that women were made by God to stay at home, and men were intended to work, from this, he drew the conclusion that one of the major causes of poverty was women who worked, the other was that Welfare encouraged black men not to work.

Principles of Supply-Side Economics

What then were the beliefs of the supply-siders? "First, demand-side policies, especially monetary policies, are completely ineffective. Second, the incentives of reduced taxation are very large". From these basics principles emerged most of their beliefs, that supply would create its own demand, and that money didn't really matter. But, there strongest belief was that tax increases inflict terrible harm on the economy, and that tax cuts do enormous good. How then would supply-siders explain historical economic phenomena such as the Great Depression? According to the supply-siders one single tax bill is responsible, the Smoot-Hawley tariff. Apparently this single from which "the effective tax increase was only about 2.5 percent." caused the Great Depression, which was responsible for 25% unemployment, billions of dollars lost, and a tremendous stock market crash. Seems pretty presposterous doesn't it? Well, essentially all economists, including Robert Mundell, agree that the supply-side analysis of the depression is utterly ridiculous.

However, the supply-siders made even more incredible claims, particularly that the application of their theories (namely drastically cutting taxes) would not cause budget deficits, because the resulting economic boom would drive productivity up enough that revenue from taxes would rise. They also claimed that in the event that deficits were created they would have no negative effects.

Reagan's Election

With the election of Ronald Reagan in 1980, the supply-siders finally got an opportunity to put their theories in to practice. During the campaign Reagan said that through supply-side economics, he would be able to increase spending on defense while cutting taxes, but still retain a balanced budget. This was nonsense as Ravi Batra declared, "Anyone with a semblance of common sense knew that it was impossible to do what Reagan promised." Thus George Bush deemed the ideas of Reagan to be "voodoo economics"

However, despite the fact that his ideas on economics were nonsense, Reagan won the 1980 election, according to Robert Lekachaman because of his famous comment "Ask yourself if you are better off than you were four years ago." Then, on January 20, 1981, Reagan was inaugurated, and the worst eight years ever of American economic policy began. However, supply-side policies had been polluting America before that, since 1978 and the attempt to pass the Kemp-Roth bill(a proposed massive tax cut that luckily died in a conference committee).

Unfortunately Kemp-Roth's death did not prevent Reagan from passing his own tax cuts which "mostly benefitted very high income families". Simply put, the Reagan tax cuts were a disaster for America. Paul Krugman puts it very simply, "Reagan cut taxes for the rich and increased military spending... He promised the economy would grow so much the deficit wouldn't increase, but he was wrong." As a result, social spending was cut, harming the poor, the "the victims of brutal social policy" as Robert Lekachaman calls them.

Effects of Reaganomics

How could Reagan possible justify this "undeclared war against blacks and Hispanics, welfare clients, women, children, and blue-collar workers"? Growth.

Savings and Growth

He claimed that low taxes on the wealthy would benefit everyone by encouraging "savings, investment, and economic growth." This claim is a lie, a deceitful, politically motivated lie. First of all saving is not increased by lower taxes on the wealthy. To prove this, consider the following information, in 1980 the top-bracket income tax rate was 70%, and the personal savings rate was 8.2%.In 1985, the income tax rate on that same group was 50%, but saving was less, 6.9%. Furthermore, in 1988 the top-bracket was taxed at a measly 28%, but saving declined again to 5.2%! In addition, lower taxes on the wealthy certainly do not encourage increase investment, as evidenced by figure 2.

Well, what about growth? This is aptly summed up by Paul Krugman "Growth in the 1980s was slower than in the 1970s as a whole .... By no stretch can the growth performance in the 1980s be called exceptional, or even satisfactory." So, low taxes on the rich neither encourage savings, promote investment, or lead to growth.

Justification

Certainly, then, Reaganomics did not help the poor or middle class, but his theories did aid the rich, though at a cost to the other two groups. The presidency of Reagan, resulted in "the rich becoming far richer, the poor a lot poorer, and the middle class going nowhere in particular." The rich did indeed get far richer, however, even within the rich, the richer a person was to begin with, the he or she became. Did this bother conservatives? Not at all, they felt no qualms about substantially cutting taxes on the ultra-wealthy whose income was drastically rising, while the poor suffered. Indeed, I suppose they misguidedly believed that it was God's will. Jerry Falwell, declared, "Material wealth is God's way of blessing people who put Him first." So in the end, I suppose that, society cannot complain, after all conservatives just hold a different value system, so those of who are not blessed by God with a seven figure income should just pray harder.

Deficits

However, cutting taxes on the wealthy did do something to harm everyone, even God's chosen few, it created budget deficits. A deficit is simple, it is the result of the government spending more money than it takes in. Deficits, are the most damaging, and long lasting effect of Ronald Reagan. Of course, Reagan was not the first President to run a deficit, most have, but Reagan's deficits were far larger, in 1982, the first year with a Reagan budget, the deficit increased more than $49,004,000,000, a 62.1% increase from the previous year. Now of course, supply-siders claimed that before too long, the increase in growth generated by their policies would eliminate the deficit, however, in 1989(the last Reagan budget year), the deficit was $161,196,000,000, $82,560,000,000 more than 1981(104.6%). All in all, Reagan deficits amounted to $1,420,728,000,000 more than 47 times as much money as was lost in the Great Depression!

How did supply-siders justify the deficit? They claimed that increased private savings and investment would finance the deficit; however, we have already determined that savings and investment fell during the Reagan years. In other words, the deficit was a BIG problem. Because investment did not rise so, money to finance the deficit was money that otherwise could have been invested in new factories, homes, and equipment, money that would have led to economic growth. Hobart Rowen declared the deficit to be more "deep, corrosive, and enduring" than any other of America's "self-inflicted wounds" from Johnson onward.

However, the $1.4 trillion deficit of Reagan was not the only economic harm he caused, in addition, the government postponed necessary long-range spending estimated by Paul Krugman at $100 billion, as well as various liabilities accumulated because of Social Security and Medicare estimated by Paul Krugman to be about $300 billion. In addition to these, there is the money lost due to the Savings and Loan crisis.

Savings and Loan Crisis

Starting during the 1970s, S&Ls began to have to pay very high interest rates on deposits, without being able to increase interest dramatically on their investments(mortgages). The Reagan administration then deregulated the industry. Savings and Loans then began to pay far higher interest rates than before, many S&Ls then became insolvent, but were not shut down because the Federal Savings and Loan Insurance Corporation did not have sufficient funds to shut them down. At the same time, S&Ls began to use creative accounting practices(similar to the ones made famous by Enron in today's world) to inflate their assets and profits. Then, on October 1, 1981, S&Ls were allowed to sell All-Saver Certificates which generated partially tax-free interest, this policy aided the wealthy, but it also allowed S&Ls to continue on, although it did more harm than good. Other policies, such as NOW accounts allowed the doomed S&L industry to carry on. However, by 1989 the industry collapsed costing the government an extra $100 billion that can reasonably be blamed on Regan and deregulation. In addition, other problems in the financial system caused by Reagan may cost the government, according to Paul Krugman, up to another $100 billion.

Long Range Impact

Reagan, a genius responsible for prosperity, a disciple of a flawed economic theory, or a vindictive man determined to steal from everyone but the fantastically wealthy for the advantage of the privileged few? Certainly not the first. He created enormous federal deficits probably around $2 trillion if you include the S&L crisis, etc. He contributed to a greater disparity in income distribution among the American people. Finally, he set back US economic growth from 3.4% to 2.1%. Perhaps, he thought his policies were for the greater good of America, but they certainly weren't. His election caused no 'morning in America"The flawed theories to which he adhered devastated the American economy. Their general effect was an unconditional war on poverty, but instead of attacking that problem, his policies attacked those people who were in poverty

References

• Batra, Ravi. The Great American Deception. John Wiley & Sons, Inc., 1996
• Evans, Michael K. The Truth About Supply-side Economics. New York: Basic Books, 1983
• Lekachaman ,Robert . Greed is not Enough: Reaganomics. New York: Pantheon Books, 1982
• Lekachaman, Robert. The Age of Keynes. New York: Random House, 1966
• Krugman, Paul R. Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations. New York: W.W. Worton, 1994
• Rowen, Hobart. Self Inflicted Wounds. New York: Random House Inc., 1994
• US Bureau of the Budget. The United States Budget in Brief Fiscal Year 1990. Washington DC: US Government Printing Office, 1990
• "A Laffer Curve." 25 Feb 2004 <http://www.econ.rochester.edu/eco108/ch8/micro08/sld116.htm>