The fantastical world of Republican economic thinking

FEW ECONOMICS conferences open with a burst of patriotic ceremony. But as the sun rose over the hills of California’s Simi Valley on May 30th, the pipes and drums of the Ventura County sheriff’s honour guard blared at the Ronald Reagan Presidential Library. Attendees stood, hand on heart, for the pledge of allegiance and national anthem. “I always wondered what the shining city on the hill looked like and it’s pretty cool to see it,” quipped Kevin Warsh, a former Federal Reserve governor.

The Reagan National Economic Forum is not a typical gathering of business leaders, academics and think-tankers. Among the crowd were the elites of the American right, old and new. The Republican Party has been transformed since President Donald Trump’s victory in 2016, but the veteran and insurgent wings rub along well enough when it comes to economic goals. All are excited for a combination of tax cuts, deregulation and drumming corporate wokery out of American business. Reliable lines for laughs, cheers and consternation from the audience include attacks on the antics of communists, whether those that reign in Beijing, or in San Francisco.

But in this dreamy setting there was an air of unreality too. The clubbish atmosphere depends on an amiable refusal to engage with the thorniest tradeoffs at hand, especially when it comes to trade and tax policy.

Turning a blind eye to some of Mr Trump’s most outrageous pronouncements is one tactic. Both Mr Warsh, a candidate to replace Jerome Powell as chairman of the Federal Reserve in 2026, and French Hill, the chairman of the House financial services committee, frame Mr Trump’s belligerence towards Mr Powell as part of the regular rough and tumble of politics and central banking. Lyndon Johnson, Richard Nixon and Ronald Reagan all pressed Federal Reserve chairs to cut rates, they note. But they swerve the fact that Mr Trump’s public threats to fire Mr Powell, which have spooked financial markets, go further. The Supreme Court hinted in a recent judgment that it may well defend the Fed’s independence from presidential wrath. Mr Trump could still test the legal limit.

Another tactic is to stick to crowd-pleasing classics. Chris Wright, the secretary of energy, offered the hungry audience in California plenty of red meat. He spoke positively about the future of fossil fuels and pointed to mistakes made by Democrats and Europeans with regard to energy policy. Alaska, he joked, faced greater sanctions on its energy production than Iran under the Biden administration.

But Mr Trump’s tariffs, which Mr Wright did not mention, are a headache for the energy industry, which relies on imported commodities and equipment. The worsening outlook for global growth and rising production from OPEC have also reduced the price of oil from $80 per barrel in January to just $60 now, limiting the interest in drilling. The number of working oil and gas rigs in America has dropped for five consecutive weeks, and now sits at its lowest level since 2021.

The thickest air of fantasy lingers over the subject of tax, spending and borrowing. Mr Trump’s One Big Beautiful Bill, passed by the House on May 22nd, both renews the tax cuts implemented during Mr Trump’s first term and lumps on more, such as the elimination of taxes on tips for service employees. The Tax Foundation, a fiscal-policy watchdog, expects that the law will increase America’s cumulative budget deficit by $1.7trn by 2034, even after the effect of slightly higher growth, and before any rise in borrowing costs.

The zeal for tax cuts among both Reaganites and Trumpists clashes with growing worries—at the conference and far beyond it—about America’s growing levels of debt. Jamie Dimon, the CEO of JPMorgan Chase, told the conference that excessive government spending will eventually cause a crisis in the bond market. Gary Cohn, a key architect of the 2017 tax cuts, warned of the risk of a failed auction of American debt.

Many attendees, including Mr Cohn, complain that spending never returned to pre-pandemic norms during Mr Biden’s time in office. They have a point: the new administration inherited a deficit worth 6.3% of GDP in 2024, almost two percentage points larger than the one recorded in 2019. But the deficit grew during Mr Trump’s time in office too. There is little appetite for spending cuts on the scale required to limit it, and none at all for tax increases.

These inconsistencies will not resolve themselves naturally. They cannot be ignored forever, and blaming the Democrats will wear thin as the administration’s months in office become years. For Reagan it was always morning in America. For the modern Republican Party, it is past time to wake up. ■