Email of the day (3)
Comment of the Day

April 07 2010

Commentary by David Fuller

Email of the day (3)

On Reaganomics, then and today
"I am a pre-subscriber to your excellent email service, but wondered whether I could raise a point/ask a question about strategies for the reduction of sovereign debt. I am told that "Reaganomics", the policy pursued by Ronald Reagan's administration involving sharp cuts in public spending, together with tax CUTS, was an unqualified success - despite being heavily criticised at the time.

"Do you consider that present conditions differ in significant respects from those prevailing at that time, or would this be a workable policy today?

"Any thoughts would be much appreciated."

David Fuller's view It is an interesting question and I claim no expertise on this subject. However I do remember the Reagan years, albeit from across the Atlantic Ocean and during occasional visits, and confidence was seldom higher. Wealthy Americans were certainly the main beneficiaries but "trickle-down economics" did work, although not to the extent that Reagan's critics called for but never achieved with confiscatory policies during the earlier Carter administration, or subsequent Democrat and Republican administrations. The most valid criticism, I believe, concerned the ballooning government deficit during Regan's tenure. This was a great disappointment to him and probably occurred because he pushed the Laffer curve too far in terms of tax cuts.

No two periods are identical and today's deficits, created during the Bush presidency, and accelerated during Obama's administration to date, are nothing short of alarming. Also, the economy has never appeared more hollowed out in most sectors, defence and IT excepted. Confidence is low and Reagan did not have to contend with a burst housing bubble. Nevertheless, I think that incremental, across the board tax cuts which do not overshoot on the Laffer curve and cuts in overseas public spending, mainly a reduction of military bases in Europe and Asia to minimum administrative levels, not to mention the timely return of most troops from Iraq and Afghanistan, would help the economy more than economic redistribution. I have never believed that making the better off poorer was an effective means of making the poor better off. What does work, in my opinion, is education, training and incentivization. However tax and public spending cuts are not what the majority of American voters opted for in 2008. I suspect they will reconsider by November 2010's elections, provided there are credible alternative candidates.

Inevitably and partly due to practical considerations, this is a simplistic answer to the question above, as I am no more than an interested observer. I believe that the challenge of rekindling American economic dynamism is far more complex than the issues mentioned. It will require a cross-party, communitarian consensus which is far from evident at present.

Readers interested in Reaganomics may find this item from Wikipedia informative.

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