Practical analysis for investment professionals
07 January 2022

Progress in Economics

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.

Subscribe Button

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.
Capitalism for Everyone tile

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%.

Tile for Geo-Economics

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.

If you liked this post, don’t forget to subscribe to the Enterprising Investor.


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


Professional Learning for CFA Institute Members

CFA Institute members are empowered to self-determine and self-report professional learning (PL) credits earned, including content on Enterprising Investor. Members can record credits easily using their online PL tracker.

About the Author(s)
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.

5 thoughts on “Progress in Economics”

  1. Physics Envy says:

    You would be hard pressed to find a sane economist that wouldn’t admit that money printing has caused ASSET price inflation. This is only exacerbating the wealth inequality issue.

    The takeaway from this article for me is that economics is a deeply flawed practice. Practitioners largely disagree and move the goal post on most economic issues so that they can never be wrong. I refer to this as “Economist speak.” Carefully listen to most professional econ people talk and they frame answers in the most dodgy and non-committal way possible.

    I respect economists like Shiller because they often respond to difficult questions with “I don’t know.” That is refreshing in the world of econ, where most problems are filled with a great degree of randomness and time lag that don’t fit well into models.

    1. Joachim Klement says:

      Agree, low interest rates and QE have created asset price inflation but not consumer price inflation, which is what I referred to in the sentence.

  2. Kirk Cornwell says:

    I gather “inflation” refers to increases in price levels. The test in the next few years might be of “Modern Monetary Theory” at the virtual level as nearly all major governments insist on operating at colossal revenue deficits. Watching the Federal Reserve dance between making news and reacting to news will be fun.

  3. Paolo Orifici says:

    … “This is why arguments about how money printing leads to inflation and similar nonsense still draw an audience.”

    It is clear to me that you have never lived in high inflationary environment and earned your wage in an inflationary currency ..

    I beg to disagree with your statement and your post

    1. Joachim Klement says:

      I have linked the statement that money printing does not lead to inflation to a somewhat deeper analysis on my blog.
      In a world of free capital flows around the world, money created by central banks can flow freely to wherever it generates the highest returns. This is why we see asset price inflation in weird corners of the world. But for consumer proce inflation to rise the money has to end up in the real economy as banks lend the money to households and businesses. And at near zero or even negative interest rates lending is so I profitable that banks curb lending. The BIS has a series off papers that show that empirically and it is the biggest problem for stimulating the real economy with monetary policy today. It is literally Key es problem of pushing in a string.

      As an aside I am German and my parents fled from Hungary. These two countries had the highest hyperinflation ever recorded and I remember the high inflation of the late 1970s and early 1980s even though I was a child then.
      Emerging markets often experience high and hyperinflation as a result of money printing but for then there are two structural differences: (I) a lot of their debt is denominated in hard currency meaning a depreciating home currency creates a debt spiral and (ii) the flows in and out of the home currency are overwhelmed by investors from developed and foreign markets. These investors flee if they lose trust thus creating a deadly depreciation spiral and thus a spike in inflation (see Turkey for example or all the Latin American countries in the 1980s and 1990s). But this is fundamentally different from major economies in the developed world.

Leave a Reply

Your email address will not be published.



By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.

Close