Ronald Reagan: The temptation of ‘reaganomics’ | Business


Although we are still far enough away to have some room for manoeuvre, as the data on the evolution of oil prices and inflation in developed economies become known, the ghost of the 1973 crisis is taking shape and with it, the recipes that were applied in the eighties to combat its effects. At that time, the reaganomics and the aggressive policy of Margaret Thatcher in the United Kingdom, encouraged by what was called the “new classical macroeconomics” and “supply-side economics”, offered a package of economic measures aimed at ending budgetary imbalances, improving the competitiveness of companies and generate an economic adjustment that would end up containing inflation and reactivating the engine of economic growth. This formulation of economic policy, which was contemptuously called “neoliberalism”, an imprecise and liquid concept, maintained its intellectual hegemony for more than 20 years, and today, once again, it awakens to offer an economic program based on low taxes, deregulation, privatization and international opening. As the current levels of inflation continue, the siren songs will resonate with more force to attract not only the political leaders, but also the economic institutions that, to a large extent, prescribe the contents of the economic policies.

However, it would be necessary to revisit economic history to know to what extent it had real effects. Reagan’s tax cuts not only did not increase revenue, but led the United States to very large public deficits. The privatization of services made it possible to drain public accounts to some degree, at the cost of a reduction in their quality and coverage. The opening of the capital account and financial deregulation generated the boom of the 1980s—the famous big Bang of the City of London—and laid the foundations for the international financial crisis of 2008. And economic inequality, which had been declining for almost a century, increased notably once again to the figures we know today. In short, a poor balance to which the control of inflation cannot even be attributed, since it was the action of the Federal Reserve that ended, at the cost of significantly reducing economic growth, stabilizing prices.

So going back to the politics of the 1980s seems unlikely: there is no public sector to privatize, the economies are already open —in fact, what we are experiencing is a gradual retreat from globalization— and the margins for further tax cuts are increasingly scarce. Much of the postulates of “supply-side economics” have been discredited by the evidence, to the point that George Bush called it “voodoo economics,” and Nobel laureate in economics Paul Krugman characterized his followers as zombies. The mediocre results of the austerity policies of a decade ago certified the infeasibility of this formulation of economic policy to guarantee balanced and socially inclusive growth. In short, we will not find many answers from that side.

The bad news that accompanies this reflection is that, if the economics of adjustment, privatization and deregulation do not offer positive results, we do not have many more tools in the usual arsenal of economic policy to deal with the current crisis, and those that we have will have social effects: the only way to respond to a supply crisis like the current one is, in the short term, by adjusting aggregate demand, and this entails a social cost that is difficult for governments to accept. The other viable option, that of structural reforms, would have effects in the medium and long term, but hardly in the short term. So we have a serious economic policy formulation problem. Central banks have a little more room to act, but with limitations, such as those we have seen for the European Central Bank, forced to combine price control with financial stability, in a difficult balance that involves raising rates and ensuring that risk premiums do not rise so high as to threaten the integrity of the markets. So there isn’t much room. What we are sure of is that going back to the eighties would be a mistake.

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