In 1980, George H.W. Bush, before becoming Ronald Reagan’s Vice President, coined the disparaging term, of “Voodoo Economics” to describe Reagan’s “supply side” policies, of big tax cuts.
It referred to economic policies perceived by many, as being unrealistic and ill-advised. The Supply Side Economists around Reagan embraced this concept that by cutting taxes you increased economic activity enough to offset the temporary loss of Government tax revenue.
Unfortunately, this did not work in reality, and resulted in increasing federal deficits, and increasing inflation, during the Reagan years, 1981-1989.
The increasing Government deficits produced by the tax cuts, with the benefits going mostly to the top 20% of tax payers, was offset by increasing FICA taxes which are paid mostly by middle class tax payers, and their employers.
Although it did not work in this period of time, it has been tried again and again by Republican Presidents; first by George W Bush, when he was President, in 2001. And more recently, by former President Donald Trump whose tax cuts produced a $3 Trillion Dollar deficit in 2020. But these tax cut provisions continue to be supported by politicians who benefit by increased political donations.
But these tax cuts and increased government spending programs are now going to be tried by the incoming conservative Government led by Prime Minister, Liz Truss, and her finance minister, Kwasi Kwarteng.
For the sake of our friends in England, let’s hope this economic policy does work to reignite the British economy. They will certainly need it after cutting themselves out of the European Union.
The markets initial response to this news was sharply negative both for the British Pound, and for stock markets around the world because of concerns of increasing inflation, around the world.
The only beneficiary so far has been the U.S. Dollar which rose to a 20 year record level. A strong dollar is good for American consumers, as it reduces the prices of imported products. However, it is a big negative for U.S. based corporations, as their products become more expensive on international markets, and that why the the American stock market sold off today.
I remain very cautious.
I am reminded of a quote by Mark Twain: “October: This is one of pecuilarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”