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What is Voodoo Economics?

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  • Last Modified Date: 20 April 2014
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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 saving and increasing labor.

Supply-side economics focus on increasing the supply of goods and services. According to some economists, by increasing supply, you will increase demand. This may seem contradictory, but it is often true that a market flooded with products will induce lower prices for the consumers, as companies compete for business. Voodoo economics largely revolved around the lowering of taxes to encourage a higher rate of supply.

In theory, higher taxes discourage work, as they reduce the amount of take-home pay after taxes. They also reduce savings, as the after-tax amount in a savings account is lower. Lowering taxes on labor will lead to more take-home pay, and also means that employers can set wages lower because workers will be satisfied by 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, as your money will earn more. Theoretically, voodoo economics should lead to an increase in labor, employment, and savings.

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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 investing by those who could afford it, but the benefits for lower-income brackets were marginal. Proponents argued that despite tax cuts, tax revenue would actually go up, since employment would increase significantly due to new businesses. This effect never really occurred, and savings rates actually declined during the Reagan presidency.

The main purpose of voodoo economics was to reduce inflation and make a dent in the towering national debt. Using the principles of supply-side economics, Reagan insisted that reducing taxes would not only spur supply but create so much revenue due to increased employment and production that the country would be making money instead of losing it. With the triple promise of lower taxes, higher employment, and cheaper products, it is easy to see why voodoo economics was an attractive proposal in theory.

Some still argue that supply-side economics works in properly controlled situations, and point to the increase of economy growth during Reagan’s presidency. Critics point out that the growth was not a result of tax cuts but rather a natural recovery from the tremendous recession of the previous decade. Probably the biggest factor in the problems with voodoo economics is the over-estimation of increased worker productivity. While cutting taxes may create new jobs, it cannot make people work more hours or longer weeks.

The unintended consequence of voodoo economics was a large increase in the national debt, and the loss of what many consider to be vital social programs as government-funded programs had to be cut in response to the tax cuts. Branding the system as “voodoo” was an attempt by a candidate to suggest that the theories of supply-side economics were based on magic and imagination, rather than realistic expectations made from solid theory. Supply-side concepts still have many proponents, but many of the resulting facts of the United States’ experiment with this form of spending seem to not bode well for its success.

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anon285762
Post 8

Voodoo economics is a distracting pejorative of supply side economics. The Laffer Curve is officially the tax rate yield curve. Both principles were well established in the the first half of the 20th century.

Under Reagan, the results were not mixed. Tax revenue increased 75 percent according to official sources. Unfortunately, the Democrat controlled congress reneged on promised budget cuts, and spending increased 80 percent. During this period, more millionaires were created and each millionaire contributed significantly more in tax payments (smaller rate but much more in total contribution and more as a percent compared to non-millionaires.)

President Kennedy was the first president to prove that this form of voodoo economics works (hence the fabulous '60s), Ronald Reagan was the second. It is a lot less complicated than any economic theory that proposes that hungry people will be able to find food if you make them more hungry (demand side).

anon274392
Post 7

Moldova, I agree with much of what you say, but you cannot infer that supply side economics work simply because keynesian economics does not. That's an invalid inference and it opens up a myriad of other problems if we accept it at face value.

From my perspective, during the Reagan years, I did not see much benefit from his economic policy, (I think) due to the fact that I was a struggling small business owner who was trying to create assets rather than to protect existing assets. From my viewpoint, supply side economics very much ignored the middle class, of which I was a member.

anon158628
Post 6

lol what?

The Great Depression was caused by pursuing supply-side remedies, and only when FDR changed track and applied huge stimulus did it start to turn round.

The government can and does stimulate the economy because businesses give jobs to people when they need to employ them to make goods or provide services that there is or will be a demand for. It's actually laughably simple, so much so that one wonders whether neoliberals and their fellow travelers prefer not to believe it because it's so easy to understand. Butnah.

Moldova
Post 5

Subway11-I remember that. I think if you want proof that supply side economics does work just look at what happens when Keynesian economics is applied.

Keynesian economics involves increased governmental spending and regulations followed by significantly higher taxes.

The higher taxes are used to fund the new programs created by the government. This method of economic theory determines that the government can stimulate the economy by spending on infrastructure projects.

They believe in expanded federal governments with high deficits. They feel that the deficits are justified because they are trying to stimulate the economy.

The problem is that the government can not stimulate the economy, the markets do. Businesses are the ones that can offer jobs which will offer economic opportunities for all.

You just have to look at three Presidencies that all marked the darkest and most miserable times for the American people.

There is FDR during the Great Depression, Jimmy Carter’s stagflation during the 1970’s, and lastly Obama’s current Presidency where the unemployment rate in Florida is 12% and the national average is 10%, with some places seeing 15% or higher.

They all practiced Keynesian economics. I don’t think I need to say more.

subway11
Post 4

Bhutan-I absolutely agree with trickle down economics because it works.

Just take a look at the Reagan Presidency. Besides all of the economic prosperity that he brought upon us he was elected and reelected in major landslides.

In 1980, President Reagan won all of the electoral votes except for Georgia, which was Jimmy Carter’s home state.

In 1984, seeking a second term, President Reagan again won all of the electoral votes except for Minnesota which was Mondale’s home state.

So I guess the American people did not feel that President’s Reagan’s supply side economics were anything close to voo doo economics.

In fact, his Vice President, George H. W. Bush won a term following Reagan. The problem with the Bush Presidency was that he did not stick to his conservative principles like President Reagan did and the conservatives threw their support to Ross Perot.

President Bush 41, lost support when he went against a campaign promise of raising taxes which was a mortal sin for a Republican President. He should have stuck with Reagan economics.

Bhutan
Post 3

Mutsy-I agree with you. If you really study supplyside economics you will learn that only businesses stir economic activity not the government.

This is why when you provide tax incentives for all people including the wealthy everyone one wins because the wealthy tend to own businesses and will expand to take advantage of the tax savings.

This means more jobs available for the poor and middle class. A job goes a lot farther than welfare check ever will because it allows you to stand on your own two feet rather than be dependent on the government.

The sense of pride that you feel from finding a job outweighs any government entitlement because you also develop self confidence which is something that a government entitlement program robs you of.

mutsy
Post 2

Anon68147- I did not know that the term voodoo economics came from that. I have to say that Reaganomics was a highly successful economic plan under President Ronald Reagan.

Although there were cuts to social programs, the unemployment rate went down from 10% from when Jimmy Carter left to 4% when President Reagan left. Also, during President Reagan’s term in office the interest rates fell from 20% to 8% and he was able to encourage businesses to create 25 million jobs.

People had more disposable income and this was all due to the fact that President Reagan cut taxes from 70% to 24%.

So I would say that the trickle down theory works really well. When everyone receives tax cuts, then they tend to spend more and businesses begin to expand more and hire more workers. This is a positive economic cycle that has always succeeded when tried.

anon68147
Post 1

The original concept of voodoo economics was coined in relation to New York City being bailed out of bankruptcy by the US federal government. This was coined as such because it was determined that the city was using two sets of accounting methods- books.

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