I recently came across several articles insisting that the new president-elect Donald Trump’s economic policies, greatly trumped up in the run-up to the US election, should not be compared with those of the late Ronald Reagan.

Indeed, we have not yet seen how this TV personality’s policies would unfold. History shows that not everything that presidential nominees propose before elections is implemented. And comparing Trump’s possible policies with Reaganomics (remember the term “Voodoo Economics”?) may spark criticism from quarters that put the Supply Side ideas of the 1980s on a pedestal. After all, Reagan was sometimes regarded as the person responsible for the prosperity achieved in the 1980s.

But was he, really?

The huge tax cuts and massive spending (on military and so on) proposed by Trump sound similar to what we heard back in the early 1980s — for those who went through that period, that is. And the repercussions of Reaganomics at the end of this period remain vivid in people’s minds, what with budget deficits surging, bond yields rising and so on. Of course, some glorify the higher growth rates achieved at the time, arguing that the first two years of the 1980s should not be considered as they were the period in which then-US Federal Reserve chairman Paul Volker had to dramatically lift interest rates to quash surging inflation.

But it is hard to deny that Reagan had new ideas as an outsider of Washington politics at the time. The “Star Wars” programme, that is the Defense Strategic Initiative endorsed by Reagan and the push to minimise the role of government after an alleged economic disaster during Jimmy Carter’s administration led to arguments that extolled the need for massive tax cuts to reinvigorate businesses and the private sector in general.

The Supply Siders, to some extent, promised miracles — from exceptional growth to improvements in the government budgetary position that would arise from higher revenue. And there were indeed serious economists (and academicians) behind the idea, although the move to champion the idea partly came from the media, for example, people like the late Robert L Bartley, who publicised the phenomenal period of Reagan in his popular publication, The Seven Fat Years.

Of course, the unforgettable influence at the time also came from Arthur Laffer, an economist who served in Washington in the early 1970s, during Richard Nixon’s administration. Another individual commonly associated with the Supply Siders is economist Robert Mundell, who is well known for his Mundell-Fleming exchange rate framework in international trade studies. Laffer’s popular (but controversial) Laffer Curve was the basis for the argument that threw previous mainstream economic ideas (for example Keynesian and monetarism) out the window.

The argument is pretty simple: there is no such thing as a demand-side failure — everything boils down to supply factors, as encapsulated in the famous Say’s Law set out in most economics textbooks. Therefore, one can forget about the Keynesian problem of lack of demand. Similarly, the money supply argument does not fit the real world, according to the Supply Siders. Hence, they do not regard highly Milton Friedman’s ideas that were experimented with in the late 1970s in the US.

Indeed, according to Supply Siders, taxes discourage contributions from the private sector. Therefore, reducing them would spark incentives that would translate into phenomenal growth and rising revenue. Budget deficits would, in turn, be reduced. Many, however, questioned the Laffer Curve’s argument, saying that it is not possible to determine whether the economy is at the backward-sloping part of the curve, as argued by the Supply Siders. But Reagan went ahead to slash tax rates, fuelling growth that accelerated to 7.3% in 1984. For a moment, it looked as if the magic Supply Side formula really did work.

Whether Supply Side was really behind the prosperity in the 1980s remains debatable. But what happened during the period when Reaganomics was in place will always be remembered, for example growth that averaged 3.5% (derived from a simple average from 1981 to 1988), budget deficits that soared from 2% of gross domestic product in 1980 to roughly 5% of GDP in 1983, a Fed funds rate that climbed from 8.5% in 1983 to nearly 12% in the third quarter of 1984, and US Treasury yields that surged by nearly 400 basis points from mid-1983 to mid-1984. Of course, there were other unforgettable events, like the departure of Office of Management and Budget director David Stockman in 1985, who later became a major critic of Reagan’s budget plan.

So it is not surprising that when Trump was announced as the next US president, the plunge in bond yields did not last long — hardly 24 hours, in fact. Global equity markets rebounded and US bond yields surged by almost 40 basis points within 24 hours. Many began to wonder whether the future path of the US economy would mirror the mid-1980s, if Supply Side economics is implemented again by a president deemed an outsider to Washington politics (everyone is aware that just like Trump, Reagan was also a TV personality).

Of course, some hail Trump’s victory as the starting point of massive fiscal spending that is clearly needed to lift the US economy to a more sustainable level. And my personal gut feel is that US economic growth could benefit from this to some extent. This is probably the kind of fiscal spending that the world’s largest economy has been waiting for. But there are bigger issues to consider at this juncture. In particular, the fragility of the bond market remains a key concern among financial market players. This is especially true when global bond yields have plunged precipitously to even enter negative territory in some countries.

Ultra-accommodative monetary policies by several central banks have also caused a flush of liquidity in some regional bond markets, with Southeast Asia being one of them. When we have been accustomed to such ultra-low rates for so long and a reversal is likely to happen, how fast the bond market would react remains the million-dollar question. After all, the market may have already priced in the fact that Trump’s policies would mirror the ones implemented in the 1980s. And do not forget, the financial world is much more connected these days. Hence, the repercussions on real economies could be more pronounced.

We will have to wait and see.

Nor Zahidi Alias is chief economist at Malaysian Rating Corp Bhd. 

The views expressed here are his own.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.