Voodoo Economics

A term invented to describe President Ronald Reagan’s economic policies

What is Voodoo Economics?

Voodoo economics is the term George H.W. Bush used to describe U.S. President Ronald Reagan’s economic policies before becoming his vice president. Bush invented the term, which was deemed derogatory, in 1980. The former vice president was of the opinion that Reagan’s supply-side policies were not only going to fall short of stimulating the economy but that they would also drastically increase the country’s national debt.

 

Voodoo Economics

 

Voodoo economics – also sometimes referred to as “Reaganomics” – was employed by Reagan to help stimulate the economy after years of dormancy following former President Jimmy Carter’s years in the White House. Today, voodoo economics is frequently used to describe any political policies that seem overly ambitious.

 

Summary

  • Voodoo economics is the term George H.W. Bush used to describe President Ronald Reagan’s economic policies before becoming his vice president.
  • In theory, voodoo economics – or “Reaganomics” – aimed to encourage spending and investing, boosting the economy.
  • In practice, Reagan’s economic policies turned out to be successful in significantly stimulating the economy.

 

How Voodoo Economics Work

Voodoo economics – or Reaganomics – started in 1981. There were four primary objectives:

1. Reduction of inflation through a tightening of the money supply

2. Lowering of taxation on both income and capital gains

3. Reduction of government spending

4. Reduction of regulation

 

The basic theory behind Reaganomics was that the economy would be largely improved if the public was encouraged to spend more and to make investments also. The four pillars of Reaganomics were intended to ensure that financial markets remained healthy and that entrepreneurial efforts were rewarded.

 

Voodoo Economics in Practice

It is widely agreed that Reagan’s efforts in economics were sweeping. The issue is that the theory behind the reforms was fairly different than what happened when it was put into practice.

For example, Reagan initially hoped to significantly curtail government spending. He didn’t do away with any government agencies or federal programs for fear of substantial societal backlash. Though the federal spending increase seen during Carter’s administration fell by 1.5%, the country’s defense department budget soared to historic highs. It prevented the major reduction in government spending that Reagan was hoping for.

Reagan was also heavily criticized for the portion of Reaganomics that focused on deregulation, founded on the idea that the government should only step in on free enterprise if it was of critical importance.

 

The Aftermath of Voodoo Economics

Reagan’s economics were most successful at accomplishing the goal of boosting the U.S. economy. Inflation significantly declined, and the country’s Gross Domestic Product (GDP) and the stock market grew at impressive rates. In addition, his tax cuts did eventually result – as a result of the economic expansion – in the government actually receiving substantially more in total tax revenue.

 

Additional Resources

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Abenomics
  • Expansionary Monetary Policy
  • Keynesian Economic Theory
  • Quantitative Easing

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