Back to Voodoo Economics

Seven years ago President Reagan entered the White House having earlier been accused by the man who became his vice president of advocating “voodoo economics.” George Bush has long since recanted his accusation. Reagan, alas, seems incapable of abandoning his advocacy. In a talk the other day the President suggested that the nation’s continuing and staggering trade deficit, rather than reflecting his Administration’s fiscal failures, could instead be regarded as a sign of the nation’s robust economic health.

The trade deficit can be seen as a good thing, if we understand the President’s reasoning, because it shows that the long-term import binge that Americans have been on is really an indication of U.S. economic strength. If the country were poor, after all, it could hardly afford to go so deeply into hock overseas. Granted, buying so much more abroad than we sell has shifted hundreds of billions of U.S. dollars into foreign hands. But there’s nothing to be alarmed about. A lot of that money has come right back to the United States in foreign purchases of real estate, stocks, Treasury bonds and the like, to a grand total up to now of $159 billion. This troubles a lot of economists. Reagan, on his part, prefers to see what has been happening as a positive sign of foreign confidence in the U.S. economy.

If the trade deficit is an indication of economic strength, as the President says, then it would seem to follow that the bigger that deficit gets, the stronger the U.S. economy must become. And if that’s true for trade deficits, then surely it must be true for budget deficits as well, which under Reagan have added more than $1.4 trillion to the federal debt.

Spendthrift Americans save too little, so it hasn’t been possible to fully finance the deficits by domestic borrowing. The answer has been to import capital. And here is where it all comes together. By continuing to consume more than they produce and run up trade deficits abroad, Americans are doing their best to assure the availability of that capital. No less important, they are giving eager foreigners the chance to express their confidence in the U.S. economy. This at least seems the thrust of the President’s thinking. What is one to conclude from it? Inescapably, that with 12 months to go in the Reagan Administration, voodoo economics lives on.