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Reaganomics Redux and the Global Economy

It has been less than a year since US President Donald Trump and congressional Republicans enacted a massive tax cut, following in the footsteps of former President Ronald Reagan during his first term. And, as was true in the 1980s, fiscal stimulus in the US is being felt worldwide, and not in a good way.

MUNICH – Will history repeat itself? When US President Ronald Reagan assumed office in 1981, he lowered the maximum corporate and personal income tax rates, and allowed companies to write off capital expenditure depreciation almost instantly. Reagan described this tax package, combined with a larger effort to deregulate the economy, as a supply-side policy, when it was actually the largest Keynesian stimulus program in history (at the time).

In selling his economic agenda, Reagan invoked the so-called Laffer Curve, according to which tax cuts will finance themselves by spurring growth, and thus revenues. When this theory came into contact with reality, the result was sobering.

Over the course of Reagan’s two terms in office, the US budget deficit as a share of GDP rose to nearly double what it had been under the two preceding administrations, and the national debt increased by hundreds of billions of dollars more than it otherwise would have. Still, the economy gained substantial momentum from the middle of Reagan’s first term, and to American conservatives, he remains an economic hero.

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