So-called “Reaganomics” practiced during the 1980′s by the Reagan Administration in the USA was nothing more than a distorted Keynesian Great Depression policy practiced in the wrong context.
The theory was that large tax cuts would boost economic activity by giving people more money to spend on goods and services. A larger government deficit was seen as necessary in the short term, but this would be wiped out by increased tax revenues, at the lower tax rates, because economic activity would increase to such a large extent.
What happened was that economic activity increased for a while, but the deficit grew to unprecedented size, to the point where just the interest on the cumulative debt owed by the government to the banks was the third largest item in the federal budget, after armaments and social welfare (see also the post on “The Problem of Government Debt”).
This huge deficit took years to bring down to manageable size.
The brief, modest increase in the flow of goods and services was bought at the expense of a greater flow of goods and services in the future. The effect was to plunge the economy into a deeper recession, i.e., depress the throughput rate and its derivative to a greater extent than before, with unemployment yet higher in the absence of special action to give full employment maintenance priority over real wage maintenance (see posts on Wages).
The famous Laffer curve purported to show the effect on the federal deficit of reducing taxation. Instead of the deficit increasing indefinitely as taxation decreased, the curve showed the deficit increasing up to a point, then levelling off and falling as taxation was further reduced, due to the increase in economic activity out of proportion to the decreases in taxation that were supposed to cause it.
The assumptions behind this curve are consistent with those underlying the supply-side economics that formed the core of the Reagan administration’s economic policy.
It is ironic that a policy of effectively increasing wages through larger government deficits, which would have led to increased economic activity and reduced unemployment in the Great Depression, should be tried in a different and inappropriate context fifty years later by a political party that opposed it during the Great Depression.
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