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What is Voodoo Economics (Reaganomics)?

2017-01-27T08:29:08+00:00

The term 'Voodoo Economics (Reaganomics)' is included in the Corporate Finance edition of the Financial Dictionary. It's available on mazon in Kindle or Paperback version. See more details here.

Voodoo Economics is also known as Reaganomics. The term was originally used by President George H.W. Bush (Bush the Elder) to refer disparagingly to the economic policies of his predecessor President Ronald Regan. Ironically President Bush served for eight years as the vice president under Ronald Regan after he made those remarks.

Before eventual President George H.W. Bush served as the VP of President Reagan, he considered his one-day running mate’s economic policies the Voodoo Economics as unorthodox and ineffectual. This was because Ronald Reagan loved supply-side economics, wanted to cut back taxes on corporate and personal income, and planned to restrict taxes on capital gains.

The more popular term for the so-called Voodoo Economics changed into Reaganomics over time as these economic policies became wildly successful. The policies of the United States’ fortieth president who served from 1981 to 1989 were considered experimental at the time. President Reagan suggested that the economy (which was under a terrible recession since the time of President Jimmy Carter) could be massively stimulated by unconventional methods. These would eventually include massive and across the board tax cuts, significantly lowered social spending, greatly increased spending on the military, and the financial deregulation of American markets. President Reagan introduced these measures to combat the lengthy era of economic and financial stagflation which had started back under President Gerald Ford in the year 1976.

While pre-Vice President George Bush the Elder intended for the term Voodoo Economics to be negative and harmful, the later adopted phrase Reaganomics served both critics and proponents of the policies of President Reagan. This set of policies came from the ideas of trickle down economics theory. Such an idea believed that by decreasing taxes, particularly those on companies, the government could stimulate the economy and increase economic growth. The concept held that as corporations found their expenses were reduced by federal policies, these savings would eventually find their way on down into the remainder of the national economy. This would then cause a boost in the growth rate.

As part of his plan, President Reagan unleashed a four part strategy to lower inflation and to increase the job and economic growth. He started by cutting back the federal government’s spending on programs which were domestically based. Next he cut taxes for especially businesses, but also on individual investments and personal tax rates. Third, he decreased the burdensome regulations that handcuffed corporations and companies. Finally, he fostered a lower growth rate of money within the U.S. economy.

While President Reagan did manage to lower the domestic program spending, he over compensated for it with his boost to military spending. This caused a financial net deficit and grew the U.S. debt burden during both of his four year terms. He did effectively slash the highest individual income tax rate down from an eye watering 70 percent to 28 percent. Corporate tax top rates declined from 48 percent down to 34 percent.

Reagan moved on by cutting through all of the restrictive economic regulations which President Jimmy Carter had enacted. He also finally put an end to the dreaded and stifling price controls which still remained on natural gas and oil, cable television, and long distance phone service. During his second term, President Reagan encouraged a Federal monetary policy which helped to finally stabilize the American dollar versus major foreign currencies.

Towards the close of the second term of President Reagan, he had increased the Federal government’s tax revenue base from $517 billion of his incoming year 1980 to $909 billion by his final year of 1988, effectively almost doubling it. He had cut inflation back to four percent, and he had pushed down the unemployment rate to under six percent. Economists and politicians may continue to spar regarding the ultimate impacts of the Reaganomics/ Voodoo Economics, yet no one argues that it did bring on what has become among the strongest and longest lasting eras of continuous prosperity in the history of the United States. From the years 1982 to 2000, the DJIA Down Jones Industrial Average increased in level by almost 14 times. The economy increased the job base by 40 million new ones during those heady years.

The term 'Voodoo Economics (Reaganomics)' is included in the Corporate Finance edition of the Financial Dictionary. You can get your copy on mazon in Kindle or Paperback version. See more details here.