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Progress in Economics | CFA Institute Enterprising Investor

January 7, 2022 Joachim Klement, CFA
Progress in Economics | CFA Institute Enterprising Investor


Economics is an endeavor where progress can feel awfully slow. In the hard sciences — physics, chemistry, biology, and the like — experiments and data can and do settle debates once and for all. But in economics and finance, theories often linger on for decades even as the empirical evidence against them piles up year after year. This frustrating “life beyond death” of economic theories has inspired at least one economist to write an entire book about the phenomenon.

The problem in economics and finance is that they deal with human beings who change their behavior all the time, so there is always an excuse as to why a given theory failed in practice: “If the butter price in Poland would not have spiked, value would have outperformed growth” and so on.

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Another critical factor is that many business and finance professionals learned about these subjects at university and haven’t kept their knowledge up to date with the changing consensus among researchers. This is why arguments about how money printing leads to inflation and similar nonsense still draw an audience.

One of my goals with these posts is to give investors a refresher course on the latest research so they don’t make the same errors other people do. That doesn’t mean we aren’t going to make mistakes. After all, knowledge changes all the time and what may be “true” today may be naïve and wrong tomorrow.

But even in economics and finance, knowledge shouldn’t go in circles. We don’t abandon one theory for another only to return to the old debunked model down the road. We dismiss a theory or perspective because the evidence for it is incomplete or wrong and move on to a better description and model of the world. We shouldn’t revert to a description of the world that we know is wrong and the reasons why it is wrong.

The Economists’ Consensus: Survey Says?

This is why I was eager to see the results of a study I participated in by Doris Geide-Stevenson and Alvaro La Parra Perez. This survey of members of the American Economic Association (AEA) has been conducted every 10 years since 1990 and tracks how the consensus among economists on key topics has evolved and how it hasn’t. It is also a great barometer of where the consensus is in the first place.

In 2020, the survey inquired about 46 topics and found some areas where there is broad agreement:

  • Tariffs and quotas usually reduce welfare.
  • The distribution of income in the United States should be more equal.
  • Immigration generally has a positive economic impact on the US economy.
  • The long-run benefits of higher taxes on fossil fuels outweigh the short-run economic costs.
  • Universal health insurance coverage will increase economic welfare in the United States.
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And then the survey identified areas where there was little agreement:

  • The economic benefits of an expanding world population outweigh the economic costs.
  • The level of government spending relative to GDP in the United States should be reduced.
  • Macro models based on a “representative rational agent” yield generally useful and reasonably accurate predictions.
  • Reducing the tax rate on income from capital gains would encourage investment and promote economic growth.

Some of these issues reflect a shifting consensus among researchers. Take, for instance, the question of whether a growing global population is a net positive. In 2000, 63.5% of economists disagreed compared to 36.5% who agreed or largely agreed. By 2020 the balance had flipped: Only 42.4% disagreed and 57.6% agreed.

Deficits Really Don’t Matter

And while many practitioners still believe “a large trade deficit has an adverse effect on the economy,” the view among economists has shifted. In 1990, two out of three concurred with this statement. Today, two out of three reject it. Large trade deficits are nothing to be afraid of.

The consensus on government deficits has changed as well, even if conservative politicians have yet to catch on. In 1990, 42.2% of economists said government deficits should be reduced, while 38.6% said deficit reduction wasn’t necessary. Today, government deficits are higher than in 1990, but 57.3% of economists don’t believe they need to be reduced compared to 23% who say deficits should be cut.

The percentage of economists who believe the more general statement, “A large budget deficit has an adverse impact on the economy,” dropped from 39.5% in 1990 to 19.7% today, while the share who disagree rose from 14.1% to 38.6%.

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We Are All Keynesians (Again)

And finally, my favorite: “Management of the business cycle should be left to the Federal Reserve; activist fiscal policies should be avoided.”

In 1990, at the end of the Reagan and Thatcher revolutions, 71.6% of economists agreed or largely agreed with this statement. Today, 66.6% disagree and see a clear role for fiscal policy in managing the economy. The phrase, “We are all Keynesians now,” returned to prominence after the global financial crisis (GFC).

In terms of the research consensus, that looks like what happened. The question is, What are we to make of this Keynesian revival? Was the Keynesian view right all along? Or will it be wrong again?

We’ll just have to wait and see what the consensus is 10 years from now.

For more from Joachim Klement, CFA, don’t miss Risk Profiling and Tolerance and 7 Mistakes Every Investor Makes (and How to Avoid Them) and sign up for his regular commentary at Klement on Investing.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images / Masaki Hani


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Joachim Klement, CFA

Joachim Klement, CFA, is a trustee of the CFA Institute Research Foundation and offers regular commentary at Klement on Investing. Previously, he was CIO at Wellershoff & Partners Ltd., and before that, head of the UBS Wealth Management Strategic Research team and head of equity strategy for UBS Wealth Management. Klement studied mathematics and physics at the Swiss Federal Institute of Technology (ETH), Zurich, Switzerland, and Madrid, Spain, and graduated with a master’s degree in mathematics. In addition, he holds a master’s degree in economics and finance.



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