Voodoo economics, or supply-side economics, uses tax cuts to increase labor and savings. While it was intended to reduce inflation and national debt, it had mixed results and led to an increase in national debt and reduction of social programs. It is still debated whether it works in controlled situations.
Voodoo economics is a derogatory term used to describe the economic process known as supply-side economics. The term was used by then-presidential candidate George Herbert Walker Bush, in his fight against Ronald Reagan for the Republican nomination in 1980. Voodoo economics is a complicated system that uses tax cuts as incentives to save and increase labor. .
Supply-side economics focuses on increasing the supply of goods and services. According to some economists, as supply increases, demand will increase. This may seem counterintuitive, but it is often true that a market flooded with products will induce lower prices for consumers as companies compete for business. Voodoo economics largely revolved around lowering taxes to encourage a higher supply rate.
In theory, higher taxes discourage work, since they reduce the amount of net pay after taxes. They also reduce savings, since the after-tax amount in a savings account is less. Lowering taxes on work will lead to higher pay, and it also means employers can set lower wages because workers will be satisfied with the higher percentage of money they take home after taxes. Lowering taxes on savings, such as capital gains and interest taxes, will make saving more attractive, since your money will earn more. Theoretically, the voodoo economy should lead to an increase in labor, employment, and savings.
Unfortunately, in practice, the theory had mixed results. During Ronald Reagan’s presidency, a combination of laws cut taxes tremendously for those in the highest tax brackets. The intention behind this was to encourage more investment from those who could afford it, but the benefits for low-income groups were marginal. Proponents argued that despite the tax cuts, tax revenue would increase as employment would increase significantly due to new businesses. This effect never really occurred, and savings rates actually fell during the Reagan presidency.
The main goal of voodoo economics was to reduce inflation and make a dent in the high national debt. Using the principles of supply-side economics, Reagan insisted that cutting taxes would not only stimulate supply but would generate so much revenue from increased employment and production that the country would be making money instead of losing it. With the triple promise of lower taxes, more jobs, and cheaper goods, it’s easy to see why voodoo economics was an attractive proposition on paper.
Some still hold that supply-side economics works in properly controlled situations, pointing to increased growth in the economy during the Reagan presidency. Critics point out that the growth was not the result of tax cuts, but rather a natural recovery from the tremendous recession of the previous decade. Probably the most important factor in the problems of voodoo economics is the overestimation of the increase in worker productivity. While tax cuts can create new jobs, they can’t get people to work more hours or more weeks.
The unintended consequence of the voodoo economy was a large increase in the national debt, and the loss of what many consider vital social programs, as government-funded programs had to be reduced in response to tax cuts. Branding the system “voodoo” was an attempt by one candidate to suggest that supply-side theories of economics were based on magic and imagination, rather than realistic expectations made of sound theory. Supply-side concepts still have many advocates, but many of the facts emerging from the US experiment with this form of spending do not bode well for its success.
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