LSR Daily Note
November 18, 2016
Trumped-up Reaganomics
Markets are assuming
Trump will behave like
Reagan in the 1980s

Trump’s policies are clearly inspired by Ronald Reagan in the 1980s

Reagan introduced substantial tax cuts and trickle-down economics

But Reaganomics conflicts with Trump’s desire to close the US trade deficit
Looking old and slightly decrepit has its advantages. It means you can talk about
distant policy regimes, such as Reaganomics in the 1980s, and still sound credible. But
the truth is I was a young boy when Ronald Reagan moved into the White House.
And while I have a vague recollection of the first Nintendo video games, I wasn’t well
placed to analyse the US president’s macroeconomic agenda. I suspect this is true for
many of the investors and commentators recently making the comparison between
Reagan and Donald Trump. Yet this has already become a popular narrative in
financial markets. So let’s don our acid-wash jeans, try to imagine Bon Jovi are still
cool and travel back to 1980s to see if there is anything to the Trump-Reagan
comparison. Perhaps it will provide some clues about what happens next.
Reagan came to power in 1980 as the Washington outsider who had never served in
Congress. He had been a TV star and actor. Although he had served two terms as
governor of California, many people didn’t think he was a serious candidate for
president and the establishment regarded him as too ‘extreme’ and ‘simplistic’. So, in
terms of background, there are obvious similarities with Mr Trump. Reagan promised
There are some
obvious similarities
1980s Tax and spend
Reagan's trade deficit
Government accounts, per cent of GDP
Goods and services balance, per cent of GDP
Spending
0.0
Taxes
37
-0.5
35
-1.0
-1.5
33
-2.0
31
-2.5
29
-3.0
27
-3.5
-4.0
25
80
81
82
83
Source: BEA, LSR estimates
84
85
86
87
88
89
80
81
82
83
Source: National sources
84
85
86
87
88
89
to Make America Great Again, a slogan Trump recently claimed to have trademarked.
But, of course, when people talk about Reaganomics, it is his economic policies they
have in mind, not his personality or election strategy. Reagan is typically associated
with: lower taxes, vast deregulation and rapid increases in defence spending. (At the
time, the only Star Wars I cared about involved Darth Vader and Princess Leia, but
apparently there was also another, more sinister, variant.)
Reagan cut taxes,
increased spending
and deregulated
Trump is also a fan of
‘trickle down’
But Trump might take
a very different
approach to trade
Reagan inherited a budget deficit worth 2.7% of GDP from President Carter. Under
his presidency it averaged more than 4%. Much of this deterioration can be blamed
on tax cuts, specifically aimed at the upper income brackets. He cut the top rate of tax
from 70% to 28% and reduced corporation tax from 48% to 34%. Reagan was
influenced by Arthur Laffer, who famously argued it would be possible to cut taxes
and still raise government revenues. Tax cuts would stimulate employment and GDP:
the so-called Laffer curve. These ideas are controversial today, particularly as they
relied on ‘trickle down’ ideology. Ronald Reagan wanted to slash non-defence
government programmes, but Congress thwarted his efforts. Real public-sector
spending continued to grow, but at a slower pace compared to previous
administrations. At the same time, the president deregulated many parts of the
economy, including energy, cable TV, telephones, public transport and banking.
The similarities with Donald Trump’s proposals are obvious. Having made much of his
money during the 1980s, the Reagan influence isn’t surprising. We analysed
Trumponomics in our latest macro picture (see here) so won’t go into great detail in
this note. But the combination of Trump’s proposed tax cuts, infrastructure spending
and deregulation is striking. There is also a strong trickle down emphasis, with Trump
proposing what amounts to a 7% rise in net pay for the top quintile, but only a 0.8%
gain for the bottom two quintiles. Perhaps these plans will become slightly more
progressive as they pass through Congress. But with Republicans now controlling both
the House and the Senate, Trump has a good chance of getting what he wants. Still,
it’s not clear how this will play to many of his blue-collar supporters.
But the comparison between Trump and Reagan starts to break down when you
factor in the new president’s approach to international trade. Trump says he wants to
eliminate the US current account deficit, blaming bad trade agreements and other
countries’ manipulation of their currencies. He talks a strong protectionist game,
threatening to impose hefty tariffs on Mexico and China. Tariffs also increased under
Reagan, but the US economy generally became more open. Critically, the combination
of easy fiscal policy and very tight monetary policy (remember Paul Volcker) delivered
a powerful surge in the dollar and a rapid deterioration in the US current account. It
remains to be seen whether Trump would also tolerate similar moves – and what he
might do to counter them.
One glaring difference is that the countries running big counterpart surpluses to
America’s deficit in the 1980s were all treaty allies of the US, led by Japan and
Germany. Washington was able to arm-twist them into signing the Plaza Accord in
1985 that led to a sharp fall in the dollar. Germany still runs a huge surplus. But
today’s standout creditor is China, which might prove somewhat less tractable in the
face of Trumpian blandishments or threats.
Dario Perkins
[email protected]
LSR Daily Note | November 18, 2016
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