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If the problem is the economy, what is the answer?

Published: 06 Mar. 2025, 00:02

Kim Sung-jae

The author is a professor of department of business and accounting at Furman University.

In his 1981 inaugural address, President Ronald Reagan famously declared, “In this present crisis, government is not the solution to our problem; government is the problem.” With that, Keynesian economic solutions — relying on government spending to resolve economic crises — came to an end.

Treasury Secretary Donald Regan spearheaded bold tax reforms, implementing the largest tax cuts in U.S. history. The administration dismantled government regulations on key industries, including finance, and drastically slashed budgets for social welfare and education.

For many Americans, Reagan evokes the image of a “great America.” His economic policies are largely remembered favorably, though their starting point was grim. The economy was mired in deep recession, with double-digit inflation and soaring interest rates.

Unemployment exceeded 7 percent, and after Reagan took office, the stock market plummeted by more than 20 percent through the summer of the following year. However, beginning in 1983, the economy rebounded and maintained a strong annual growth rate of around 4 percent until his departure in 1988. Unemployment fell to the low 5 percent range, and the stock market surged by more than 120 percent during his tenure.

[KIM JI-YOON]

The economic indicators of 1983 were nothing short of remarkable. Growth in the second half of the year surpassed 8 percent, inflation — once as high as 12 percent — dropped to the 2 percent range, and more than a million new jobs were created. This economic resurgence paved the way for Reagan’s landslide re-election in 1984, securing 97.58 percent of the electoral votes — the second-highest in history after Franklin D. Roosevelt’s 98.49 percent in 1936. Reagan swept 49 out of 50 states, losing only Minnesota. His vice president, George H.W. Bush, went on to secure a Republican third term in 1988.

Reagan, who played a pivotal role in isolating the Soviet Union and hastening the collapse of communism, remains an icon of conservative politics for his achievements in both economic and foreign policy. Since then, every Republican administration has drawn heavily from the Reagan playbook, and Trump’s second-term presidency is no exception.

Treasury Secretary Scott Bessent has fiercely criticized the previous Biden administration, arguing that excessive spending and regulatory overreach weakened the economy’s fundamentals — leaving the private sector in a recessionary state. Bessent has also been a staunch advocate of Trump’s tariff policies, asserting that tariffs bolster industrial infrastructure, create jobs, expand tax revenues and enhance national security. He further endorsed the government downsizing led by Elon Musk.

Elon Musk speaks next to U.S. President Donald Trump in the Oval Office of the White House in Washington, D.C., U.S., Feb. 11. [REUTERS/YONHAP]

Amid this backdrop, a shocking forecast has emerged: the U.S. economy is likely to contract in the first quarter. Yet, Trump will likely remain unfazed by a potential recession, believing in a Reagan-style resurgence akin to 1983.

However, the economic conditions today are vastly different from those of 1981. Back then, big government had already triggered stagflation. Now, an administration that sought to prevent stagflation through investment has withdrawn.

Can Trump truly become the “second Reagan”?

Translated using generative AI and edited by Korea JoongAng Daily staff.