• The Invisible Hand

Trumponomics vs Reaganomics

What are the similarities and differences between Ronald Reagan’s and Donald Trump’s economic policy?

Trump and Reagan come from equally unconventional backgrounds. Reagan was a Hollywood actor while as we all know Trump was a reality television star. They are also similar in respect to their economic policies with both Reagan and Trump pursuing ‘free market’ policies. In this post, I will compare these Republican Presidents to see if any legitimate economic comparisons can be made.

Trump signing his tax plan in December 2017

Reaganomics is normally classified into four pillars of economic policy: reduce government spending, reduce income tax, reduce government regulation and tighten the money supply to reduce inflation. Trump has only been in office for a little less than two years, compared to Reagan’s eight, so he may not have had long enough to establish his economic legacy, however, his intentions are clear from his regular tirades.

In respect to government spending, Reagan failed to produce radical reductions in government spending as a percentage of GDP. In fact, it was higher in 1988 than it was in 1980 under Jimmy Carter (28.7% compared to 27.9%). Reagan largely maintained the value of public spending and cuts to it only affected projected spending not current spending. Reagan reneged on his promises to abolish the budget for the Department of Education and the Department of Energy which both saw their budgets rise. Social security spending increased by over 50% between 1981-1986 along with Medicare spending. Reagan even had to force increases in foreign aid through a reluctant Congress. Reagan’s legacy concerning the role of the government seems to be non-existent and the state had a similar influence over the economy in 1989 as it did in 1981. However, what Reagan did leave behind was an extra $1800bn in public debt.

Meanwhile, Trump seems to not be following the ideological Reagan who wanted to decrease the role of government, but rather he seems to be following the pragmatic Reagan who increased public spending. While Reagan was influenced by neo-classical economics and the Chicago School (Milton Friedman was one of his advisors) it appears Trump has no such influence and instead he is opting for populist policies. For example, increased spending on infrastructure ($1trn over 10 years) and an astronomical defence budget of $603bn. With all of these increases government finances are no better off especially as the government’s revenue from taxes is due to decline as the tax rates are lowered, meanwhile outgoings are no lower. Like Reagan, Trump lasting legacy could be greater government debt.

It appears Trumps does not have the same ideological commitment to low government spending. He is trying to get the best of both worlds by lowering taxes and increasing government spending yet Trump’s economic ineptitude means he is neglecting the fact that these short-term policies will accelerate the US government’s already high mountain of debt. However, Trump is similar to Reagan in respect to his policies in practice because they both increased public spending although Reagan to a lesser extent than Trump.

Something which they do have more in common over is their tax policy. Reagan’s tax reforms were spearheaded by the Economic Recovery Act of 1981which lowered the top rate of tax from 70% to 50% and the bottom rate from 14% to 11%. There were also $150bn worth of tax cuts to corporations over five years. Overall, the US Treasury thinks it reduced government revenue by an average of $111bn on average during its first four years.

Trump’s tax cuts came in the form of the Tax Cuts and Jobs Act. It only made minor income tax cuts in contrast with Reagan (although income taxes were already low), however, the big change came with corporate tax which was lowered from 35% to 21%. Like Reagan, it is thought this change will significantly increase National debt (by over $2.2trn in ten years according to the CBO).

Both Trump and Reagan are similar in the fact that they have pursued reckless tax cuts which have and will leave government finances in a dire condition. They do however differ in the nature of their tax cuts because Reagan largely targeted income tax while Trump targeted corporate tax. That is one reason why Trump’s policies are expected to channel even more money to wealthy owners of capital and not to the ordinary citizen.

Ronald Reagan announcing his tax plan on television in 1981

The third pillar of Reagan’s policies was deregulation, although out of the four it was perhaps given the lowest priority and much of the progress had already happened in the 1970s. However, the number of pages added to the Federal Register, a book of all US regulations, plummeted in Reagan’s term after following a long-term upward trend, although this is a rather crude measure of levels of regulation.

Trump perhaps has an even greater disdain for regulation than Reagan and slashed the number of pages in the Federal register by 36% in 2017. Not only is deregulation occurring but the pace of regulation is 70% less than Obama’s first 18 months. Trump’s determination for deregulation is reflected in his requirement that two rules must be scrapped for every new one created.

Both Presidents share a will for greater deregulation but Trump’s is even more vociferous.

Finally, the money supply. Reagan was a distinctive monetarist and stood for election with a pledge of reducing inflation. Like Britain the US saw a period of stagflation in the 1970s. Reagan is widely considered successful in reducing inflation although much credit can be given to Paul Volcker, the head of the Federal Reserve (1979-1987), who raised interest rates up to 20.5% in August 1981. Reagan did this by tolerating a recession in the short term during which unemployment rose above 10% and he didn’t increase government spending in response.

Although Trump is yet to make a significant mark on the economy and inflation is low, his actions suggest he does not have the same monetarist tendencies as Reagan. Firstly, his attitude appears not to be hawkish because he has persistently protested against the Federal Reserve increasing interest rates quickly. This suggests he is not a monetarist because he prioritises inflation below economic growth. Secondly, his protectionism and triumphalism concerning the current unemployment rate suggests he would not be as willing as Reagan to tolerate unemployment. This is especially true given his populist support base would feel the impact of unemployment the most.

Overall, it appears Trump differs greatly from Reagan because he doesn’t have the same ideological commitments to monetarism.

Comparing Trump and Reagan’s economic policies may be misleading and the link is in some aspects quite tenuous. Ideologically, they are not very similar except with their support for business and Trump clearly isn’t committed to Reagan's first economic principle of minimal government. What they do share in common is a zeal for deregulation and to a lesser extent reduced taxation.

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