This article first appeared in Forum, The Edge Malaysia Weekly on December 7, 2020 - December 13, 2020

We have witnessed unforgettable economic episodes over the past few decades. Each episode touched our lives in different ways, taught us new lessons and even changed political landscapes in some instances. They also brought new policy perspectives and forced policymakers to look for different approaches in dealing with various challenges. Indeed, many crises have humbled and forced us to reflect on our past judgments.

We remember how economic thinking has changed since the 1960s (we can go back even earlier if we wish to) and how macro policies were often recalibrated and fine-tuned to suit different economic environments. We saw how the Phillips curve — the idea of a trade-off between unemployment and inflation once deeply ingrained in many economists’ minds — was sidelined after the first oil crisis erupted following the Yom Kippur War in 1973.

The emergence of stagflation in the mid-1970s, as economist Milton Friedman envisioned during his presidential address to the American Economic Association in the late 1960s, raised serious doubt about Keynesianism then. Some would also remember how this economic thinking was later extended by Robert Lucas in his “rational expectations” argument in the 1970s.

We also recall the chaos of the Latin American debt crisis in the early 1980s, when oil prices skyrocketed and interest rates surged due to the “cold turkey” approach taken to mitigate inflation in the US and Europe. Although the late Paul Volcker was widely credited for bringing down the stubborn inflationary threat in the US, his actions also came with the high cost of a deep recession during the early part of Ronald Reagan’s administration.

Who could forget the “new economic dogma” of the supply side (Reaganomics, which George H W Bush termed “voodoo economics”), championed by Reagan in the US in the 1980s? And remember the controversy over the “Laffer curve”, which was used to justify cutting taxes to generate higher revenue? But as we saw, enthusiasm over such unorthodox economic thinking fizzled out over the years.

In Asia, the economic model of the 1990s was hailed as the source of prosperity for many nations. Not surprisingly, the World Bank churned out a special study, The East Asian Miracle, in the early 1990s. But then, economist Paul Krugman, drawing from the work of Alwyn Young and Larry Lau, warned us about the myth of Asian economic miracles — just a few years before the 1997/98 Asian financial crisis. That led many of us to question the economic miracles that Asian countries experienced in the 1990s.

Also, in the 1990s, economists were tempted by the idea described as the “New Economy” by former US Federal Reserve chairman Alan Greenspan, who viewed that revolutionary technological developments in the mid-1990s have changed the economic landscape for the better and led to the dampening of business-cycle volatility. We then realised that business cycles were not dead after all, especially when the global financial crisis erupted in the late 2000s.

It is not surprising, then, that experts often think the economy had fundamentally changed when prosperity flourished. This conclusion can be derived from the popular publication This Time is Different, written by economists Kenneth Rogoff and Carmen Reinhart. Whenever such a situation unfolded, economists, bankers and investors became convinced that the old rules of valuation were no longer applicable. In fact, there was a strong belief that nothing in the past resembled the healthy economic situation they were witnessing. It turned out that, in many circumstances, people were fooled by unrealistic optimism that things have fundamentally changed. Indeed, there is so much more that we need to learn as crises tend to recur.

Having said this, new unorthodox economic thinking will keep springing up as time goes on. This is partly because over the decades, despair over economic conditions would emerge when things do not look as good as people remembered them. Krugman, in one of his popular publications, said the disappearance of “a magic economy” often leads to a search for “new magicians” to find ways to turn things around. He opined that the magic economy went off in the US in the early 1970s, while in Asia, I believe the magic faded after the Asian financial crisis in the late 1990s.

It comes as no surprise, then, that new economic thinking like the so-called MMT (Modern Monetary Theory) is gaining traction, although it has not gained in popularity among mainstream economists. I believe the scepticism among mainstream economists is partly due to the feeling of déjà vu over past policies that were associated with an eccentric group of economists. Reaganomics in the 1980s is a good example.

More importantly, even if this new policy idea gets a general acceptance, its applicability across different economic environments is questionable. In particular, when such a policy is discussed in the emerging market media, it catches a lot of attention among foreign investors. Many fear that it could trigger foreign capital outflows which, if substantial, could take a toll on the real economy. That is because foreign investors tend to remember past crises in emerging economies (for example, the Tequila crisis and Asian financial crisis) and fear that similar financial market chaos would recur.

Similarly, my past experience at a credit rating agency tells me that global credit rating agencies would scrutinise countries that pursue certain unorthodox policies in fear of economic dislocations and imbalances. Warnings from global credit rating agencies could also trigger capital flight.

This is not to say that improved economic conditions over the decades do not warrant new, unorthodox policy thinking. But in my opinion, from the perspective of asset managers, the way to assess economic fundamentals remains almost the same, especially when it comes to emerging economies. Run when you hear “twin deficits”, cut exposure when international credit rating agencies voice out concerns over structural budget deficits and get out when a country starts to promote what the rating agencies deem as imprudent policy measures.

Nor Zahidi Alias is a former chief economist at Malaysian Rating Corp Bhd

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