In the US, under Reagan, this effect of
Voodoo Economics was particularly clear, despite the fact that
liberals have always presented it, in subsequent years, as some great success, and proof of the validity of this
tax cutting agenda. Rather than leading to a rush of additional investment and supply, the beneficiaries of the tax cuts, i.e. the rich and affluent, used the
money to buy into rapidly inflating assets, but also to increase their personal consumption, which, in turn, led to a surge in imports. The surge in imports, with no promised increase in production and exports, meant that the US trade deficit ballooned.
To pay for it, the US had to borrow on international capital markets. At the same time, the tax cuts did not produce the promised influx of additional tax revenues, at a time when US unemployment was rising, and when it was involved in an expensive arms war with the USSR. That meant that it also faced a huge increase in its budget deficit, which it also had to cover with borrowing on international capital markets. This was the
“Twin Deficits Crisis” of 1987, which was also discussed by a certain
Paul Volcker in this paper –
Facing Up to the Twin Deficits.
In 1987, the consequence of this twin deficits crisis, leading to a sharp rise in
interest rates, led to the
US financial crash of that year, which rapidly spread across the globe. Share prices fell by 25% in a day. In other countries share prices fell by as much as 45% (Hong Kong). Volcker warned, in the paper, that the US was set to become a debtor nation, having, until that time, been the world's largest creditor nation. He was right to worry. The US went from being largest creditor nation to the largest debtor nation. Its public debt tripled from $738 billion to $2 trillion, in the space of just 7 years. It was not just a question of tax revenues failing to keep pace with the increase in government spending, but that the promised increased tax revenues, from reducing taxes failed to materialise. Federal individual income tax revenues fell from 8.7% of GDP in 1980 to a trough of 7.5% of GDP in 1984, then rose only to 7.8% of GDP in 1988.
What did increase substantially during this period, besides debt, was the prices of financial assets, as these increased revenues for the rich and affluent flowed into speculation. Between 1980, and 2000, the Dow Jones rose by 1300%, compared to just a 250% rise in US
GDP. The S&P 500 increased slightly more. Between 1982 and the 1987 peak, the Dow rose from 776 to 2722, a rise of 250%, which included a rise of 69%, in 1987 alone, up to its peak, before the crash. The average number of shares traded on the New York Stock Exchange, during this period rose from 32 million, to 181 million. But, it had nothing to do with additional productive investment or higher economic growth, or even after tax profits. Quite the contrary.
“Nominal after-tax corporate profits grew at a compound annual growth rate of 3.0% during Reagan's eight years, compared to 13.0% during the preceding eight years. The S&P 500 Index increased 113.3% during the 2024 trading days under Reagan, compared to 10.4% during the preceding 2024 trading days. The business sector share of GDP, measured as gross private domestic investment, declined by 0.7 percentage points under Reagan, after increasing 0.7 percentage points during the preceding eight years.”
(Wikipedia)
But, this is the disastrous model the Brexitories seek to emulate. They claim what they are doing is new, but it isn't, its just a return to the failures of the past. The only thing they have going for them is that this is not the period of stagnation of the 1980's, but of
long wave uptrend, but, even there, it is in conditions where that uptrend has been deliberately stifled by austerity, QE, lockdowns and so on, and, in Britain, is significantly compounded by the idiocies of Brexit, and the limitations to growth it creates.
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