I think you missed the point. Rather than saying Reaganomics is on the ropes, you should have said “fiscal stimulus” is on the ropes. Earlier this week the press said we had an $891 billion goods trade deficit with China. And that is just one country.

There are two ways that “new“money” impacts economic growth. The amount of money moving through the economy (volume) and the speed of money moving through the economy (velocity). The amount of money moving through the economy can be impacted by the government through fiscal stimulus. The speed of money moving through the economy can be impacted by many things. So let’s spend a small amount of time on “speed” and then talk about “volume”.

Under Reaganomics (lower taxes without spending cuts) or under government entitlement program spending (like “Cash for Clunkers” or extended unemployment benefits without tax increases), the same thing is happening. Government is adding money to the economy. In the first case, the money is largely given to the rich and then as they spend it or invest it, it “trickles down” through the economy depending on “speed” until it reaches everyone. In the second case, government programs designed to give money to the poor is spent on goods and in much the same way “trickles” through the economy depending on “speed” until it reaches everyone (including the rich who benefit from the profits they earn on businesses selling goods to the “poor”).

In theory as the “money” moves through the economy, the government makes its money back through income taxes, sales taxes, payroll taxes and the host of other taxes it collects as people conduct their everyday lives. As long as the money is being “invested” or “spent” in America both approaches work and the only question is which approach is better in the long term and which is better in the short term.

Arguably, Reagonomics is better in the long term term since a greater amount of the government stimulus ends up in long term investments in which lead to long term job creation. Shorter term government program fiscal stimulus is better since it translates into almost immediate consumption and so the money tends to “move faster” and the impact on the economy is more immediate but “burns out” quickly.

But to work for the US economy, we need both approaches to “cycle” the money through the economy multiple times even if the different approaches do so at different speeds. Economists refer to this “cycling” as the “multiplier effect” and it translates into a measurement that indicates the dollar value of all transactions arising from the injection of spending into the economy. But various factors can dramatically impact this multiplier effect and two of those are the rate of return on investments domestically vs abroad and the tendency by US consumers to spend marginal dollars on foreign made products.

For example, let’s say you pass a tax cut where the wealthy are the primary beneficiaries, but overall investment returns remain greater overseas. If you give the wealthy more money and they are likely to invest it in new plant and equipment in places like China. This is unlikely to help the US economy much and may well harm it as new cheaper Chinese products suck even more money out of our country.

Or, we could give it to the poor. Now if the poor choose to spend the money buying clothes they need at Walmart, that are manufactured in China. Then pretty quickly all the money intended to stimulate our economy is stimulating China’s economy.

In other words, the more our economy gets intertwined with the global economy, the more leakage occurs from any form of stimulus and the less “multiplier” effect is realized by our country. Without the multiplier effect it is hard for the US government to recover their “investment” (the stimulus) in our economy and at the same time the national debt is likely to grow further. To the extent the “national debt” is held by foreign countries, it acts as a long term drag on our economy as government spending in the form of interest payments go overseas instead of being spent domestically. So arguably, program spending can be a real “killer” long term when the fiscal stimulus does not “pay for itself”.

By cutting corporate taxes, Trump did change the math a bit. Since cutting corporate taxes makes investing in America more attractive, it is likely that more of the stimulus from tax cuts will be invested in America rather than going overseas since we have become more attractive as an investment option. If these tax cuts making investment in America are also supported by more balanced trade creating greater domestic and foreign demand for US goods and services, then the tax “rate” cuts will work to stimulate investment in the US economy and hence be a far better solution, then Reaganomics was.

Government programs since they are targeted at consumption. Will produce greater immediate consumption but the long term impact on government debt if we do not get the “multiplier” effect necessary to pay back the “stimulus” is negative to the economy and potentially the poor as debt service may crowd out some entitlement spending in the future.

So maybe “fiscal” stimulus be it trickle down tax cuts or bottom up short term government spending are simply not viable strategies for government any longer. They add to debt and their effectiveness is greatly diminished in this global economy. In contrast, “monetary” stimulus appears to remain a viable and practical tool the Fed can use to do things previously achieved with “fiscal” stimulus.