Who knows, in this peculiar economic environment, Reaganomics may even work

If you’re a Brit, all of a sudden a few mid-afternoon keggers at Prime Minister Boris Johnson’s office during the depths of COVID doesn’t seem like such a terrible thing.

And so what if Boris Johnson lied about it? Lies are the currency of the ugly new world we’re living in, who cares?  And if you’re busy partying, that gives you less time to drive your nation’s economy off a cliff.

Which is what Britain’s new Prime Minister did just three weeks after taking office. In her first budget, Truss jettisoned the 45% tax rate on those making more than $163,000, announced an expensive program for helping homeowners pay for heat and counted on the bond market to finance it all.

The bond market, how do we say, did not respond well to this fiscal course, all but kicking the pilings out from under the market for government bonds and forcing the Bank of England to step in and buy government paper when no one else would.

Borrowing money to pay for tax cuts for the wealthy, while continuing to spend lavishly, once went by the name of Reaganomics. Instead of home heating bills, the government in the 1980s spent heavily on the military, but that was the only material difference.

The myth is that the wealthy, relieved of heavy tax burdens, will invest in research and development, machines, and technology, giving birth to great new industries that provide jobs for the little guy.

The reality is that the wealthy invest the extra money in exotic instruments like the credit default swaps that led to the 2008 global financial meltdown, and hedge funds that gut functioning companies for a quick profit before sending them into bankruptcy.

Republican politicians seem never to understand that Reaganomics — aka supply side, or trickle-down — doesn’t work, and commit to agitate for tax cuts for the rich. But bond-house professionals remember quite well, and hence their terrified response to Truss’s budget.

Making this even more confounding, Britain’s inflation rate is at 10%, and of course cutting taxes, borrowing money and programmatic spending are all forms of economic stimulus, which will throw gasoline onto an existing fire. By bailing out the government while simultaneously raising interest rates, the Bank of England is pressing as hard as it can on the brakes and the gas. We’ll see how that works out.

In America meanwhile, the Democrats learned that you can’t throw trillions of dollars worth of fuel into the economy without creating a fire. Who knew? Yet some economists had been reaching the conclusion that spending and the ensuing debt no longer mattered, particularly in a nation that basically serves as Monopoly money banker to the world.

That economic theory, too, has been proved false. There is a point out there where stuffing the public’s bank accounts full of cash becomes counterproductive. Remember, too, that Democrats were on their way to spending trillions more than they actually did. West Virginia Sen. Joe Manchin, who as little as six months ago was the villain of villains, might have saved his party from having a far greater inflationary headache than it already does. Is it too soon to talk about an apology?

The great big fat caveat to any discussion about economics today is COVID. Inflation has hit the entire world, and in many countries it’s far worse than our 8.3%. This seems to suggest supply chain issues created the shortages that drove up prices — not to mention Putin’s disastrous war, which has amplified about every negative trend imaginable.

Economists are nothing if not a confident lot (experience might suggest otherwise), but for the first time in memory there seems to be genuine befuddlement about what will come next. If you are the cautiously optimistic type who believes history will be a guide, you put the odds of recession at about 50-50, with a bump in unemployment yet to come, along with declining prices somewhat offset by higher interest rates.

Those rates will make it harder to buy a house, but the recent run-up in prices have all but made them unattainable anyway. No harm no foul. The stock market, meanwhile, is in one of those once-in-a-generation buying opportunities that by 2040 will have minted a new crop of 401(k) millionaires. Nothing looks so out-of-kilter that some bubble or another is ripe for busting.

Over the past 18 months, nothing we have expected to happen economically has happened. We thought COVID would cause a major global slump. We thought people would end up out of work, with nothing to spend. Thanks to stimulus, changing consumer habits and remote work, it didn’t happen.

So who knows, in this peculiar economic environment, Reaganomics may even work. There’s a first time for everything.

Tim Rowland is a Herald-Mail columnist.

This article originally appeared on The Herald-Mail: COVID, inflation and supply-side economics: What's going to happen?