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.
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.