Voodoo Economics Definition History and Validation
Voodoo economics, coined by George H.W. Bush during the 1980 presidential primaries, was used to describe Ronald Reagan’s proposal to reinvigorate the U.S. economy. Reagan’s economic policies became known as Reaganomics. Reaganomics combined steep tax cuts, domestic market deregulation, lower government spending, and a tightening of the money supply. Its main belief was that tax cuts for corporations and the wealthy would stimulate economic expansion, benefiting everyone. The phrase "voodoo economics" is now commonly used to dismiss ambitious economic promises by politicians.
Ronald Reagan, a Republican, became the 40th U.S. president after a period of economic stagflation under Republican President Gerald Ford and Democratic President Jimmy Carter. Reagan was a proponent of supply-side economics, which aimed to encourage economic growth by reducing income and capital gains tax rates. He believed corporate tax cuts would lead to investment that benefited smaller businesses, fostered innovation, created jobs, and ultimately benefitted the entire population. Reagan argued that the revitalized companies would eventually pay more taxes, boosting the government’s revenue as the healthier economy increased production.
George H.W. Bush initially criticized these economic policies as "voodoo economics," claiming that supply-side reforms would not solve economic issues and would significantly increase the national debt. However, he later denied making this statement, attributing it to a joke. Nevertheless, the phrase gained popularity among Reagan’s critics.
Critics believed that motivating the rich through supply-side economics would increase spending and boost confidence and job security among the working population. They argued that these forces would help the economy recover from the stagflation of the late 1970s. Additionally, it was believed that reduced government spending and oversight would benefit the financial industry.
During Reagan’s presidency, unemployment dropped, disposable income rose, and inflation was brought under control. However, the expectation that decreased taxes on the wealthy and businesses would lead to increased spending did not materialize. Furthermore, Reagan’s relaxed regulation contributed to the savings and loan crisis. By the early 1990s, the U.S. economy fell back into a recession, and Reagan’s policies nearly doubled the national debt due to tax cuts and increased military spending.
After serving two terms as vice president, George H.W. Bush became president in 1989. As president, he prioritized fiscal responsibility over tax cuts. In 1990, he even agreed to a tax increase, reneging on a promise made just two years earlier. This U-turn led to criticism from his own party, and he lost the 1992 presidential election to Democrat Bill Clinton.
Supply-side economics maintains that increasing the supply of goods and services promotes economic growth. Advocates of this theory call for tax cuts for corporations and wealthy individuals to put more money in the hands of producers, who will then increase their spending, benefiting consumers and workers.
Demand-side economics, on the other hand, asserts that increasing the demand for goods and services is key to economic growth. It may involve large-scale government spending on infrastructure projects to stimulate production, purchases, and hiring.
As vice president, George H.W. Bush supported President Reagan’s tax cuts on corporations and wealthy individuals. However, as president, he implemented a more moderate approach. In 1990, he raised the maximum individual income tax rate to 31% from 28%, which contributed to his failure to be reelected.
In summary, voodoo economics is a derogatory term for an economic policy that favors tax cuts for businesses and wealthy individuals to stimulate economic growth. Its formal name is supply-side economics, which argues that increasing the production of goods and services leads to economic growth.
