Definition
“Voodoo Economics” is a derogatory term referring to the belief that reducing tax rates, particularly for corporations and wealthy individuals, stimulates economic growth enough to offset the initial revenue loss. This theory is commonly associated with supply-side economics, trickle-down theory, or Reaganomics, as popularized during Ronald Reagan’s presidency. Critics argue that it leads to larger deficits and inequalities.
Key Takeaways
- Voodoo Economics is a derogatory term used to describe economic policies considered to be unrealistic or based on wishful thinking. Originating from George H.W. Bush during the 1980 presidential primary campaign, it was used to criticize the ‘supply-side’ policies of his opponent, Ronald Reagan.
- Supply-side policies, or ‘Reaganomics’, implemented by Reagan, at the heart of Voodoo Economics, emphasize benefits for corporations and wealthy individuals with the belief that this wealth will ‘trickle down’ to the rest of the economy ultimately stimulating economic growth. The theory relies on the notion that reducing taxes on businesses and the wealthy boosts investments in sectors of the economy and leads to economic improvements for everyone.
- While the term has been adopted to criticize any economic policy perceived as unrealistic, it is most often associated with supply-side economics. Critics argue that these policies can lead to increased inequality and have not delivered on promises of broad economic benefits. It is a highly debated concept with proponents arguing it leads to overall economic growth and critics claiming it benefits only the wealthy.
Importance
Voodoo Economics is a derogatory term used to describe the economic policies considered to be unrealistic and ill-advised. Originating in the 1980s, it was first used by George H.
W. Bush in reference to President Ronald Reagan’s economic policies, which proposed the reduction of tax rates, particularly for high-income individuals and corporations, in order to stimulate economic growth.
The significance of this term lies in its critique of supply-side economics, challenging the notion that reducing taxes alone can increase government revenue and improve the economy. This term represents an important economic debate about the efficacy of tax cuts as a fiscal policy tool, a topic that continues to fuel economic policy discussions today.
Explanation
Voodoo Economics is a derogatory term, popularized by George H. W. Bush (who would later be President) while campaigning against Ronald Reagan in the 1980 primary.
The term specifically refers to economic policy proposals that promise to reduce government budget deficits without reducing public services or increasing taxes, typically by relying on the power of the market to increase government revenues. The suggestion behind the phrase is that such proposals rely on implausible or naive assumptions – much like magic or voodoo – about how the economy works and how policy changes might affect it. The chief application of Voodoo Economics centers on the notion of supply-side economics, specifically the Laffer Curve.
The Laffer Curve presumes that reducing tax rates could potentially lead to increased total tax revenue. The hypothesis is that lower tax rates encourage more economic activity, thereby expanding the tax base and generating more revenue, despite lower per-transaction rates. Critics, including those who coined the term Voodoo Economics, argue that this approach is overly optimistic and can lead to economic imbalances including inflation, asset bubbles, and increased income inequality.
They perceive that this movement from theory to reality is far from straightforward, hence it’s akin to believing in ‘Voodoo’ or magic.
Examples of Voodoo Economics
“Voodoo Economics” is a derogatory term used to describe economic policies considered to be unrealistic or based on wishful thinking. It is most often applied to policies that propose significant tax cuts, while promising deficit reduction and an increase in government revenues. Here are three real-world examples where the term “Voodoo Economics” has been applied:
Reaganomics (1980s): Reaganomics or supply-side economics was the economic policy propagated by U.S. President Ronald Reagan. These policies included substantial tax cuts, reduced government spending, and deregulation. Critics dubbed this approach as “Voodoo Economics”, as they argued that it created budget deficits and increased income inequality despite promises of economic growth and prosperity.
George W. Bush’s tax cuts (2001, 2003): Upon taking office, President George W. Bush enacted significant tax cuts, asserting they would stimulate the economy and lead to job growth. Critics named these changes “Voodoo Economics”, arguing that the tax cuts escalated the federal deficit without producing substantial economic growth.
Trump’s Tax Cuts and Jobs Act (2017): The major tax reform signed by President Trump promised to boost the economy, create jobs, and reduce deficits. Critics claimed these promises were reminiscent of “Voodoo Economics”, insisting that the tax cuts would not pay for themselves and would instead drive up the federal deficit.
FAQs for Voodoo Economics
What is Voodoo Economics?
Voodoo economics is a derogatory term used to describe the economic policies considered to be unrealistic and ill-advised. It is specifically linked to policies that suggest that cutting tax rates can lead to increased economic growth sufficient to compensate for the loss of revenue due to the tax cut itself.
When was the term Voodoo Economics used for the first time?
The term “voodoo economics” was first used by then-presidential candidate George H.W. Bush in 1980 to criticize Ronald Reagan’s economic policies, which he thought would lead to budget deficits.
Why is it called Voodoo Economics?
The term ‘voodoo’ in voodoo economics is used to suggest the magical and doubtful nature of these economic policies, in a similar way to how ‘voodoo’ is used in popular culture to reference practices believed to bring about certain outcomes via supernatural processes.
What is the impact of Voodoo Economics?
Some critics believe voodoo economics can lead to budget deficits and economic inequality. The impact of such policies can be that high-income individuals receive the largest tax benefits, while the anticipated spur to economic growth does not materialize, leading to increased deficits.
Related Entrepreneurship Terms
- Supply-side Economics: This theory posits that tax cuts for businesses and the wealthy stimulate economic growth, an idea closely linked with Voodoo Economics.
- Trickle-down Theory: This concept argues that benefiting the wealthy will indirectly benefit the less affluent, a principle often associated with Voodoo Economics.
- Fiscal Policy: The use of government revenue collection and expenditure to influence a country’s economy, which is often a key part of discussions around Voodoo Economics.
- Reaganomics: This term refers to the economic policies promoted during the presidency of Ronald Reagan, that relied heavily on the ideas of Voodoo Economics.
- Economic Inequality: This term describes the disparity in wealth and income, a social issue that critics of Voodoo Economics argue can be worsened by such policies.
Sources for More Information
- Investopedia – A comprehensive online portal for learning about finance and investment terminology.
- Encyclopedia Britannica – A well-respected and comprehensive online encyclopedia covering a wide range of topics.
- The Library of Economics and Liberty – A rich resource for understanding terms and principles of economics.
- The Balance – A personal finance website dedicated to offering information on topics that include investing, budgeting, taxes and retirement planning.
