Learn from the Gipper
Reagan years should inspire Trump Allister Heath
It is crunch time in America. The financial markets surged on Donald Trump’s election, on the assumption that his economic policies would, on balance, be pro-growth. Yes, Wall Street rightly loathes protectionism, and the tech industry in particular is opposed to proposed restrictions on immigration. But business as a whole hopes that the president’s policies on tax, healthcare, spending, banking, regulation, energy, infrastructure and maybe even in time monetary policy would be neo-Reaganite.
It is still too soon to tell how all of this will pan out, but time is running out for the Trump administration on the economic front. It needs to get a lot more done a lot more quickly. There is, of course, healthcare reform. But the first real, tangible piece of good news has come from a very different area: there has now been some genuine movement on energy, with the Keystone pipeline authorisation. That is good news: the US needs to embrace all kinds of domestic energy production, and other countries should follow suit. The shale revolution has already transformed the US economy, which would be in a far weaker place without it.
But while Trump has delivered on energy, he will need to turbocharge the rest of his agenda if he wants to keep on side those in business and Wall Street who thought that, despite his many negatives, the new president would end up improving the US economy overall.
Reagan ought to be the Republican role model: a true believer in free market economics, he was a brilliant, lucid and powerful advocate for individual liberty. He cut marginal tax rates and simplified the tax system, while slashing the number of pages in the Federal Register from 70,000 in 1980 to 45,000 in 1986, as a note by Adam Slater from Oxford Economics reminds us.
Reagan did what very few politicians manage: he genuinely took an axe to red tape, deregulated extensively and simplified what rules remained. By contrast, the regulatory burden rocketed under Barack Obama. The Fraser Institute’s index of economic freedom confirms that the US became a more free market and economically liberal economy during the 1980s; in recent years, it has fallen back dramatically.
All of this is one reason why the trend rate of total factor productivity growth increased from roughly nothing to 1.5pc a year by the end of the 1980s; some of this increase was cyclical, but a lot of it was because of Reaganomics.
There were some problems, of course. From 1982-86, the cyclically adjusted US budget deficit rose from 1.8pc of GDP to around 4.5pc of GDP. Small-government advocates were worried, and argued that Congress failed to do enough to cut spending on non-military matters (the US had to spend much more on defence to defeat the Soviet Union). One theory that failed was the idea that cutting taxes, by “starving the beast”, would force the government to cut spending. Instead, it just meant that the government borrowed more, and then eventually taxes were raised again. The lesson is that to truly downsize the state, spending needs to be eliminated at the same time as taxes are cut.
It is clear that Trump’s monetary policy cannot look like that of the Fed under Reagan: short-term interest rates fell from 16pc in 1981 to 6pc in 1986, partly because inflation was brought under control. But this paved the way for the emergence of the central banker as super economic planner, and led to many of today’s problems. The US needs a stricter monetary policy in the years ahead: it will be interesting to see what happens when Janet Yellen’s term expires in nine months’ time.
Trump needs to inspire himself from Reagan’s many triumphs and learn from his less successful policies. The healthcare reform nightmare must not derail the rest of the administration’s supply-side agenda. That said, it is also clear that high noon is fast approaching for his ideas. If major reforms are not pushed through this year, they never will be, and even the president’s die-hard supporters in the US business world will desert him. allister.heath@telegraph.co.uk
‘Reagan did what few politicians manage: he genuinely took an axe to red tape’