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Update: Return To Reagonomics?

By beled | January 26, 2017

Extract from the December 2016 quarterly report:

While it is still too early to see if US President-elect Donald Trump practises what he preaches, if he honours his campaign promises in respect of fiscal stimulation (but not trade tariffs) we would view it as very positive from an economic point of view. If you refer to our previous reports, we have repeatedly referred to the need for a better balance between (austere) fiscal policies and (reflationary) monetary policies in the major economies. Until recently when Japan adopted a stimulatory fiscal policy to supplement its aggressive QE program, all major economies were effectively “driving with one foot on the accelerator and one on the brake”. Those who drive cars will realize that all this does is generate a lot of heat without going faster. This heat is analogous to lack of growth and loss of jobs which has directly or indirectly led to Brexit and the election of Trump. Europe is likely to experience something similar, e.g. the rise of arch right-winger Marine le Pen in France.

There is a successful precedent to what Trump appears to be proposing in the “supply side economics” of the early 1980’s and 1990’s where a large US fiscal deficit was turned into a fiscal surplus by 2000 (see chart):

Government Spend (US)


According to Wikipedia, “Economist Stephen Moore stated in the Cato analysis, ‘No act in the last quarter century had a more profound impact on the US economy of the eighties and nineties than the Reagan tax cut of 1981.’ He argued that Reagan’s tax cuts, combined with an emphasis on federal monetary policy, deregulation, and expansion of free trade created a sustained economic expansion, the greatest American sustained wave of prosperity ever. He also claims that the American economy grew by more than a third in size, producing a $15 trillion increase in American wealth. Consumer and investor confidence soared. Cutting federal income taxes, cutting the US government spending budget, cutting useless programs, scaling down the government work force, maintaining low interest rates, and keeping a watchful inflation hedge on the monetary supply was Ronald Reagan’s formula for a successful economic turnaround.”


Will there be a replay under Trump? We think there is a good chance unless the negative of protectionism (increasing trade tariffs) dominates. We think this unlikely but it will be closely monitored. Sceptics of the benefits of repeating supply side economics refer to high debt to GDP levels in the major developed economies (see table):

Debt/GDP (%) as at December 2015

      Developed economies %       Emerging economies %
      Japan 229       Brazil 66
      US 104       South Africa 50
      Euro area 91       China 44
      United Kingdom 89       Russia 18


Adherents of this economic approach believe that reflationary growth is the only way to pay down fiscal debt and we concur. The alternative, major sovereign debt defaults, is so ghastly to contemplate that we do not believe that any politician would choose it willingly. In addition, it is very cheap to service new debt issuance at very low or even negative interest rates. Although this is not sustainable in the long term, it appears that Trump is hoping to repeat the above scenario in which the US outgrows its debt as before. We attach a high probability that this scenario will also find favour in other major economies (particularly Europe) which are the engines of world growth.


*Stephen Moore was the Cato Institute’s director of fiscal policy studies, and afterwards, a Cato senior fellow. Moore is the co-author of It’s Getting Better All the Time: 100 Greatest Trends of the Past 100 Years and the author of Government: America’s #1 Growth Industry.*

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