more revenue. The theory was that lower taxes
gave firms more profit, and consumers more
money in their pockets; this in turn would lead
to more investment and greater employment;
people would have more incentive to work
harder, and with increased economic activity
more tax revenue would be collected and unem-
ployment and welfare benefits saved. Reagan
grasped that this was an attractive policy to put
to the American people. It left out of account,
however, the effects of inflation, from which
higher taxation inevitably followed as more
people’s earnings were pushed into higher tax
brackets. Without constant rate reductions of tax,
taxation would actually become heavier.
The objectives of Reagan’s economic policies,
as put forward by the administration, were to
lower taxes, to reduce government spending, to
balance the budget and to restrict money supply
so as to lower inflation. Professor Milton
Friedman of Chicago University was the money-
supply guru; he and Frederick Hayek attacked the
notions of the welfare state and socialism which,
they taught, would lead to a totalitarian state. The
correct policy was to deregulate, to remove
restrictions on business and to allow free-market
competition. The combination of all these ideas
became known as Reaganomics. The economic
cures for inflation and stagnation had already been
tested in Pinochet’s Chile with some success. Now
they were going to be tried in the US.
It sounded too good to be true; indeed, before
George Bush became vice-president, while he was
still competing with Reagan for the Republican
nomination, he coined the memorable phrase
‘voodoo economics’ to describe Reaganomics.
And it was too good to be true; all the objectives
could not be harmonised. The US did not balance
its budget as promised and turned a small national
debt into a large one. In other words, the excess
of government expenditure over revenue income
in the Reagan years injected a significant stimu-
lus to the economy in good old Keynesian fashion
at the cost of a ballooning deficit.
Deregulation, too, had its limits. Environ-
mental concerns cannot be completely ignored.
And there were instances where only one-half of a
business’s activities were deregulated. This stored
up for the 1990s the Savings and Loans Associ-
ation disaster. While depositors were federally
insured (up to $100,000 in any one Savings and
Loans account), the financial managers could now
operate without the severe restrictions on their
activities of previous years. To attract customers
they vied with each other to offer higher savings
interest rates and so had to engage in more risky
investments themselves to be able to pay them.
With the collapse of real-estate markets at the
close of the 1980s, the insolvency of many of them
and of some banks involved the federal authorities
in a huge financial bail-out to compensate the
investors. This is one important example of how
deregulation has not always led to the expected
good results.
There was little sign that Reaganomics was
really working during the first two years of the
administration. Reagan wanted a 10 per cent
reduction in corporate and personal taxes in each
of the first three years but this meant cutting the
federal budget too. Compensating completely for
the tax cuts would have been an exceedingly
painful process, though Reagan undertook not to
cut any essential welfare benefits to the needy and
elderly. There was much waste, ‘pork barrel’
expenditure, that could have been cut, but mem-
bers of Congress fiercely defended their electors’
favourite subsidies. Getting his budget proposals,
substantially unaltered, through both Houses of
Congress in 1981 despite the Democrat majority
in the House of Representatives was a major tri-
umph for Reagan personally.
In the end, Congress modified the biggest tax
cut in US history only slightly; in the first year
the cut would be 5 per cent instead of the 10 per
cent originally proposed, so as not to increase the
budget deficit to inordinate heights, but accepted
10 per cent in each of the following two years.
But the budget director, David Stockman, had
presented an incomplete financial prospectus. It
would have got any company director into severe
trouble. In his very critical inside story of his years
in the administration, published after his resigna-
tion in 1985, Stockman depicts an almost unbe-
lievable blindness to the realities of financial
arithmetic. The budget could not be balanced
given the large tax cuts andan increase of defence
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