Published April 8, 2025
President Donald Trump’s tariff bomb has finally been dropped. It is predictably being panned as ineffective and dangerous from elites on the left and the right. Trump can take solace, though, from history—if he learns the right lessons.
President Ronald Reagan’s 1981 effort to remake the American economy was also widely criticized. Reagan took office after a lost economic decade. The post-war boom had given way to economic stagnation, reinforced by the dominant economics of the day. Inflation was over 6% most years and had hit double digits in 1979 and 1980. Unemployment was also high, above 5% every month since early 1974. Reagan believed these problems were caused by government overspending, poor monetary policy, and overregulation of the economy.
His economic plan aimed to tackle all three issues simultaneously, but it was predictably assaulted by Democrats. His 25% reduction in marginal tax rates was derided as inflationary and a windfall for the rich. His spending cuts were attacked as cruel and often watered down by Congress. His deregulation of the prices for gasoline and natural gas was attacked as potentially making the United States “hostage” to the Organization of Oil Exporting Countries (OPEC).
Even his efforts to bring inflation under control—tightening the money supply through the leadership of Federal Reserve Bank Chair Paul Volcker—were attacked because they caused a massive spike in unemployment and raised lending rates to over 20%. Reversing course after over a decade of often double-digit inflation was not easy, and unemployment peaked at 10.8% in late 1982. For many, the pain was too much to bear despite the obvious need to end the cycle of high and rising prices.
Reagan was doing the same thing that Trump is doing now: taking on the established global economic doctrine. The then-regnant view, known as Keynesianism after the economist John Maynard Keynes, whose writings inspired it, held that governments could and should control macroeconomic activity by manipulating fiscal and monetary policy.
The Keynesian view assumed that private economic activity inherently tended toward instability. Born in the Great Depression, it sought to maximize employment by influencing consumer demand. Do it correctly, the elite consensus held, and serious downturns were ancient history and prosperity would march forward. Economists—in government and beyond—were overwhelmingly in thrall to this view from the 1930s into the 1980s.
Would that it was so. By the 1970s, it was clear that this doctrine was fatally flawed. Keynesian theory held that economies could never have high unemployment and high inflation at the same time. Inflation would spur spending, which would reduce unemployment, while the drop in demand caused by higher unemployment would, in theory, bring inflation back down.
Yet, in that dismal decade, much of the Western world had high inflation and unemployment simultaneously. In the U.S., both measures crept up no matter what governmental interventions were tried. Great Britain suffered even worse, even though both Labour and Conservative governments increasingly turned to a heavy state hand to reverse the tide.
Reagan knew he would be in for a fight. He understood people well, and once wrote, “human nature resists change and goes over backward to avoid radical change.” 50-year-old shibboleths were not going to be abandoned without a fight, and Reagan was ready to meet the challenge.
He made sure, though, to fight smart. He pushed forward with his plans but compromised where necessary to protect public support as best as possible for such a radical change. His original idea for a 30% immediate cut in rates was passed by Congress as a 25% reduction spread out over three years. As the budget deficit grew, he backed a bill to undo some of the corporate tax cuts his bill had included. He compromised with Democrats on Social Security reform to take that issue off their plates. At the depths of the 1982 recession caused by his fight on inflation, he even signed a bill raising gas taxes to fund highway repair work.
Reagan understood, however, that he could not compromise on the core elements of his plan. He knew that abandoning his restorative path forward meant going back to the failed Keynesian system, one that had caused the economic crisis in the first place. It may have been more politically expedient, but it would’ve doubled down on the underlying problems. Deregulation sped forward. He refused to delay implementation or even repeal the final stage of his tax rate cuts. And he stood fast behind Volcker, even as unemployment rose to levels not seen since the 1930s and the Dow Jones Industrial Average declined by nearly 15% over his first 18 months in office.
But Reagan had prepared the people rhetorically for what was to come. He always told Americans his plan would take time to work its way through the economy. As political pressure grew in the recession (and midterm) year of 1982, he said voters should “stay the course”. Even losing 26 House seats that year, giving Democrats effective control of the House agenda, did not dissuade Reagan from his course.
We all know what happened then. Inflation dropped precipitously throughout 1983, hitting 3.8%, a level not seen since the 1960s. Unemployment plummeted, dropping 3% in eighteen months to 7.2%. America’s economy became the envy of the world. Reagan’s vision was vindicated, and Americans rewarded him with an historic landslide 1984 re-election.
Trump is facing a similar situation. America has seen its manufacturing base hollow out over the past 30 years as factories closed at home and moved overseas, leading the country to run massive trade deficits for decades. In 2024 alone, for example, American consumers sent a net $900 billion to other countries. Illegal immigration also costs Americans billions more, both in terms of what immigrants and their children take from the public and the over $79 billion foreign workers sent out of the country in 2022.
The result has been staggering. Millions of people lost their jobs over the past three decades, and millions more saw stagnant or declining wages because of competition from foreign labor at home and abroad. Nothing has changed despite the misery, though, because orthodox economics, left and right, is wedded to a free trade model that focuses on aggregate growth, globally and domestically, rather than broadly shared rising prosperity.
Trump, like Reagan, plans to take this deeply rooted problem head on. His expansion of energy production is aimed at lowering energy prices while also increasing U.S. energy exports. His tariffs are intended to create incentives for manufacturers and producers of raw materials to reshore their plants, thereby giving jobs back to Americans. His proposed tax cuts will give cuts to working-class Americans and to firms that make things in America. Finally, his crackdown on the border and mass deportation program is meant to eliminate the unfair competition for jobs and wages from foreigners not legally able to work in the country.
There are a number of lessons Trump should take from Reagan’s example. First, he has to move forward on all fronts simultaneously. His attack on globalization depends on making America attractive for capital intensive investment and on creating a tight labor force so those gains are passed on to workers.
Each plank in his plan is meant to do that. The mass deportation of illegal labor tightens the labor market and removes people most likely to accept wages that are low by American, but not by their home countries’, standards. Tax and regulatory changes that favor energy exploration and factory construction will expand employment in those areas. Keeping tariffs high enough to compel companies to move production back home will, over time, increase manufacturing employment as well as spur growth in sectors that service those entities or their employees. He cannot let up even as pressure from his party and business intensifies.
Second, he has to be willing to make compromises to keep the core elements of his program intact. Relaxing tariffs on Canada and Mexico, for example, may not be what he wants, but doing so would alleviate much of the immediate pressure off, given how closely American manufacturers are already tied to factories in those countries. This would relieve pressure on American manufacturers in sectors like automobiles, which rely heavily on factories producing cars or parts in our two neighboring countries. These types of pressure-release valves should at least be considered, where they don’t endanger the broader system.
Third, Trump and his team have to make a clear case for a realigned economic system to the American people, explaining how each part of that plan will work together to revitalize American growth. Most importantly, the administration has to explain that there will be short term pain in reordering the existing system. Businesses need time to adjust their investment. Many of the blue-chip stocks that have grown rich from the existing order won’t like the new direction—certainly not at first. You can’t flip a switch and expect the global system of trade to be fixed overnight.
Reagan’s victory makes clear that doing all of that will make voters more likely to support Trump, as he actualizes a better economic direction. Knowing that Trump’s vision will take a while to implement, they should be less likely to give Democrats a landslide midterm win while the plan is still being implemented.
But voters won’t wait forever for things to improve. Trump will have to show a significant economic improvement by 2028 for a successor to be elected—Americans historically turn against presidents whose big project does not appear to be working within four years. The upturn does not need to total; unemployment could still be higher than 5 percent, for example. But if Americans see things getting better and good jobs going to legal workers, they will likely stick with the party that is delivering real change to a system that many recognize as harmful to Americans and American interests.
Trump has launched the biggest assault on conventional wisdom since Reagan. It can work, but he needs to maintain political support as he implements his plan. If he imitates the Gipper, he can reap the Gipper’s reward: historical accomplishments coupled with a historic political realignment.
Henry Olsen, a senior fellow at the Ethics and Public Policy Center, studies and provides commentary on American politics. His work focuses on how America’s political order is being upended by populist challenges, from the left and the right. He also studies populism’s impact in other democracies in the developed world.
