After a generation of “hands off the economy”, the age of government intervention is back. Whether its Donald Trump’s high tariffs or Joe Biden’s tariffs and targeted industrial policy, the Reagan era is over.
For Ronald Reagan, the father of the modern Republican Party, free trade was almost a religion. Smaller government, lower taxes, less regulation of business, a balanced government budget and no tariffs became accepted wisdom for three decades.
The World Bank imposed these policies on the developing world, and the World Trade Organisation (WTO) pressed SA to abide. All this came to be known as the Washington consensus, or neoliberalism. That did not mean Reagan always practised what he preached. Farmers’ subsidies remained protected, for example.
The 1980-2017 era
Reagan loved to cite what he called “the most dangerous nine words in the English language: “I’m from the government, and I’m here to help.” His father, a New Deal Democrat, would no doubt have turned in his grave.
Reagan’s 1980 campaign against president Jimmy Carter rested on three legs: cut taxes; cut government spending; and expand the military. Reagan’s argument was that government debt had ballooned under “tax-and-spend” Democrats, and if you voted for fiscally responsible Republicans, the budget would balance.
I covered that campaign as the Washington correspondent for SA’s morning newspapers and the Sunday Times, where I wrote that the problem with this plan was ... arithmetic.
Why? Because cutting taxes will increase the government’s budget deficit. So will increased military spending. And you could not rely on cutting the size of the government enough to offset those enormous negatives. I myself wondered if I was right. I was 29 years old and only a few months into my Washington beat, but my secret weapon was that I like basic arithmetic.
Of course, Reagan had an argument. It was called the Laffer curve. Arthur Laffer promised that if you cut taxes, the government would collect even more taxes, because the economy would grow enough to offset the cost of lower taxes with higher overall tax revenue. It didn’t. It’s not that the Laffer curve is always wrong. It’s just that it’s almost always wrong.
Now, 44 years later, the effects of the Reagan political order in decaying infrastructure and ballooning government debt are clear. The failure of the Laffer curve ensured that Reagan’s budget deficits and debt soared way beyond Reagan’s inheritance from “tax and spend” Democrat Carter.
Even so, under Reagan cuts were made. Infrastructure maintenance stopped. In 2016 I walked through New York’s iconic John F Kennedy International Airport wondering if I was in a developing country. By the time Trump became president in 2017, America’s infrastructure was in crisis.
America’s rail system is old-fashioned and decaying. China, Japan, Europe and others have high-speed rail. The US has thousands of dangerous bridges and roads, and health and education facilities have not kept up. America’s health costs are the world’s highest, with the worst results of the developed world. US longevity is 60th among nations.
In Britain, the errors of Thatcherism also came to light. By the time Keir Starmer won power this year, it was common cause that privatising the railway lines was a mistake, and most parties want the government to take back control. Why? Private companies milked the profitable routes and cut the underused ones. They distributed the profits in dividends, so when bad times came, they started to go under.
It turns out that while the private sector is obviously the engine of growth, there are some things best left to the government, because it has a public interest mandate. Public and private interests are not the same.
It was left to Dick Cheney, loyal Reagan defence secretary, to let the cat out of the bag. “Reagan proved that deficits don’t matter”, he said later — the exact opposite of the campaign theme that got them both elected. As George W Bush’s vice-president, Cheney was part of the steady rise of government debt.
Republicans in Congress who campaigned as debt cutters voted for the tax cuts, forgetting their debt concerns. When a Democrat took over in 1993, their amnesia lifted. With Republican speaker Newt Gingrich breathing down Bill Clinton’s neck, Clinton negotiated a tight budget, handing over a rare budget surplus to his successor, George HW Bush. It was the last balanced budget the US had.
Clinton’s presidency was consistent with the Reagan order. He did what Reagan said he would but failed to do, and more. He negotiated the free trade agreement, Nafta, with Canada and Mexico. He set vice-president Al Gore to cutting excessive regulations. And he freed the banks of restrictions Franklin D Roosevelt imposed to ensure there would not be a repeat of the 1929 crash.
True to form, when Bush Jnr took the White House, debt amnesia was back. The good old Laffer curve, right? Whereas Reagan had said the way to get out of debt was to cut taxes, now they were getting out of debt, Bush needed a new argument. So he argued the opposite — we have a surplus, so it belongs to taxpayers, who should get it with a tax cut.
Not surprisingly, voters liked it.
Bush cut taxes. The US’s government deficit has never recovered, but the economy he left was a wreck for a different but related reason: the global financial crisis.
Its causes are disputed, but most economists agree on two. Clinton’s bank deregulation, coupled with the certainty of Reagan acolyte Alan Greenspan, chair of the Federal Reserve, that derivatives did not need regulating. The market could be relied on to act in the public interest, Greenspan believed.
With the global economy on a knife edge, Bush felt able to relax the hands-off mantra enough to send his treasury secretary to the office of Democratic speaker Nancy Pelosi, where he actually got down on one knee and begged her to provide $700bn of government money to prop up banks and businesses. She complied.
Bush left Barack Obama a wrecked economy, which needed to be further shored up with government funds.
This early relaxation of Reagan theology would begin government largesse to a brilliant former SA entrepreneur who would later prove as good at amnesia as the politicians he supports.
Obama passed an even bigger stimulus bill to save the economy, but the Reagan sentiment still had legs. His signature achievement, Obamacare, had to be crafted in Republican-friendly language. Instead of universal healthcare, the political winds blew him towards a more limited programme, with a stronger private sector component. It was modelled after Republican former Massachusetts governor Mitt Romney’s healthcare reforms.
Obama’s deficits were unsurprisingly high, though they began to fall before he left office, and the economy was righted.
The FDR order, 1933-1980
The order that Reagan reversed, and which successors of both parties continued, was Roosevelt’s New Deal, beginning in 1933. The world was in global depression, and US unemployment hit 25%. He was determined to use the government to keep trying till he found what worked.
Though the US economy only fully recovered with the advent of World War 2, Roosevelt’s political order stayed in place under Republican presidents, just as Reagan’s would later.
Republican president Dwight D Eisenhower’s signature domestic project was to build the interstate highway, necessary for the first time once safer cars were on the road after four years of war, where every car factory was converted to make tanks, planes and ships. Eisenhower left office with a top tax rate of 91%. That’s unimaginable now, but it wasn’t seriously challenged then. People remembered how the government helped in the bleak 1930s.
The next Republican president, Richard Nixon, started the Environmental Protection Agency and signed the biggest social security expansion since Roosevelt. Reagan would never have done either.
There was another major benefit of the Roosevelt order. From 1933 until the late 1970s, inequality steadily narrowed. The rich got richer, but they were not so far from the rest of us that they inhabited an entirely different world. They drove luxurious cars, but we could see them in the neighbourhood.
Since Reagan, inequality has soared stratospherically. The seventh-richest man in the world, Warren Buffett, reminded us he pays a lower tax rate than his secretary. Trump can pay $1,000 in taxes one year despite being a billionaire. His secretary assuredly pays somewhat more.
Intervention mark 2
Then Trump moved into the White House. In his first term, from 2017 to 2021, he ruthlessly torpedoed Reagan orthodoxy, imposing sweeping tariffs on imports from abroad, friend and foe alike.
His disagreement with Reagan is fundamental. Centre-right former German chancellor Angela Merkel remembers that Trump did not share her free trade views. “He believed that all countries were in competition with each other, in which the success of one was the failure of the other,” she writes.
Old guard Reagan Republicans on Capitol Hill made sporadic attempts to restrain him, to no avail. Trump set out to eliminate the Reagan order. By November 2024, it is Donald Trump’s Republican Party.
In his first term, Trump’s interventions were large but often scattershot. Tariffs covered large ranges of products from countries as different as Canada and China. Few independent economists rate their effectiveness highly. Still, a Rubicon had been crossed. No more “keep government out of the economy” as a blanket goal.
Trump recognised the infrastructure crisis, but cutting taxes was his priority. So taxes were cut and the government deficit soared. The Laffer curve failed to kick in again. Ho-hum.
When Joe Biden took his place, industrial policy was back with a vengeance. He targeted sectors considered economic and strategic priorities. First, he got a landmark infrastructure bill through, one Trump had promised but not delivered. The government’s role in protecting rail, road, bridges and schools got back its due, 40 years after Reagan. It is creating jobs for blue-collar workers and reviving depressed areas.
Second, he picked two major sectoral pushes: green energy and semiconductors. Reviving US semiconductor manufacturing is considered strategic for economic and national security. Chips are too important to rely on countries on the other side of the world where supplies could freeze when most needed. Green energy serves several goals: reducing carbon emissions, ensuring the US is not eclipsed in energy manufacture by China, and ensuring the US’s economic future as a superpower.
These programmes were so large that their real effect remains to be seen, but we do know that Biden’s economy grew faster than any other developed economy.
It was a real-time experiment that tested the alternative. Tory austerity in Britain during the same period was accompanied by low growth. Starmer probably knows it, but we have yet to see if he has a strategy to meet the moment.
Inflation was a serious downside to Bidenomics, but its main causes weren’t industrial policy. The three biggest causes were his first big stimulus package, which was less well targeted, the supply chain backups of Covid-19, and the Ukraine war. Biden’s inflation probably cost his vice-president, Kamala Harris, the presidency. Non-university educated workers were hit too hard to back the Democrats again.
But Bidenomics kick-started a boom in the creation of small businesses across the country. Entrepreneurs filed more than 20-million applications for new businesses, the most of any presidential term in history. This is an average of more than 440,000 applications a month, more than 90% faster than averages before the pandemic. Black business ownership doubled and Hispanic business ownership rose by 40%.
Biden will be remembered as a boon to economic growth but excoriated for failing to recognise the damage due to the inflation that accompanied it, and for trying to stay president after he would be too doddery for the job.
Small government
As co-head of the department of government efficiency (Doge), Elon Musk, now Trump’s knight of small government, will take his jousting lance to the bureaucratic lists. He has promised to slash $2-trillion off the government bill.
But that isn’t the end of government intervention, just a switch in priorities. Musk’s businesses need the government as much now as when the government saved Tesla and SpaceX. In 2009 and 2019 Musk admitted both were on the edge, with talk of bankruptcy.
With his Roosevelt-style stimulus package, in 2009 Obama loaned Tesla $465m in the form of a federal loan to design and build electric vehicles (EVs) at its California plant. Obama’s loan paid for the design and build of its Model S, Tesla’s first major success. It now employs 20,000 people in the Bay Area alone.
Saving SpaceX, the government signed a $1.6bn contract to fly space missions to the International Space Station. Musk used the cash injection to develop the Falcon 9 rocket, which has become its workhorse. From 2012 to 2021, SpaceX got $5.6bn in government subsidies, and Starlink $900m in 2020 alone.
But by 2019, Tesla was again on the edge. “Closest we got to bankruptcy,” Musk tweeted at the time. About $3.4bn in regulatory credits kept Tesla going, and by July 2024 Musk was frisky. “Take away the subsidies, it will only help Tesla,” Musk posted on his social media platform, X.
He’s right. Conditions have changed. Trump’s threat of a 60% tariff on Chinese EVs is much more helpful to Tesla. Tesla has its biggest plant in China, but those cars are sold in China and Europe. In the US, Chinese EVs are Tesla’s biggest domestic competition. Eliminating Chinese competition domestically is the best possible news for Tesla US.
“The foundation for Musk’s financial success has been the US government,” said Daniel Ives, tech analyst for Wedbush Securities.
Harold Feld, senior vice-president at digital rights group Public Knowledge, offers a way out of Musk’s contradictory positions. “He should just say, ‘I don’t support federal subsidies for anyone else’ — there, I fixed it for you.”
Government support for a brilliant entrepreneur so his exuberance does not derail him is government intervention at its best. Dare we say, Obama picked a winner?
Trump 2.0
It turns out Biden was good at growth, but lousy at selling it. Now we have a professional salesman in the White House, expect to be wowed by his success in microchips.
There are many unknowns for his new administration, except that it will be disruptive and he’s likely to change his mind a lot. But industrial policy is here to stay.
Musk invested at least $132m in cash in Trump’s campaign as well as the in-kind gift of the support of X. Since Trump’s election, Musk’s net worth has increased $64bn, or nearly 25%, according to Bloomberg. Not a bad investment. Analysts predict that’s only the beginning.
Reaganism remains in purdah. Government intervention is back. Fiscal responsibility, we’ll see. Reduced inequality? Not so much.
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