Economics is an endeavor where progress can feel terribly 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 persist for a long time, at the same time as the empirical evidence disproving them accumulates yr after yr. This frustrating “life after death” of economic theories has inspired no less than one economist to write down a complete book Book in regards to the phenomenon.
The problem with economics and finance is that you just are coping with people who find themselves consistently changing their behavior. Therefore, there may be all the time an excuse as to why a specific theory failed in practice: “If the price of butter in Poland had not skyrocketed, the value would have exceeded the growth” and so forth.
Another crucial factor is that many economics and finance experts learned about these topics in university and haven’t updated their knowledge to reflect the changing consensus amongst researchers. For this reason there may be debate about how Printing money results in inflation and similar nonsense still attract an audience.
One of my goals with these posts is to provide investors a refresher course on the newest research in order that they don’t make the identical mistakes as others. That does not imply we can’t make mistakes. Because knowledge is consistently changing and what could also be “true” today could also be naive and false tomorrow.
But even in economics and finance, knowledge shouldn’t go around in circles. We don’t abandon one theory in favor of one other only to later return to the old, debunked model. We reject a theory or perspective since the evidence for it’s incomplete or incorrect and move on to a greater description and model of the world. We shouldn’t resort to an outline of the world that we all know is mistaken and the explanation why it’s mistaken.
The consensus of economists: survey says?
For this reason I used to be excited to see the outcomes of a Study I participated in by Doris Geide-Stevenson and Alvaro La Parra Perez. Conducted every ten years since 1990, this survey of members of the American Economic Association (AEA) examines how the consensus amongst economists has and has not evolved on key issues. It can be a superb barometer of where the consensus actually lies.
In 2020, the survey covered 46 topics and located some areas where there was broad agreement:
- Tariffs and quotas generally reduce welfare.
- Income distribution within the United States needs to be more equal.
- Immigration generally has positive economic effects on the U.S. economy.
- The long-term advantages of upper taxes on fossil fuels outweigh the short-term economic costs.
- Universal medical insurance coverage will increase economic prosperity within the United States.
And then the survey identified areas where there was little agreement:
- The economic advantages of a growing global population outweigh the economic costs.
- The level of presidency spending relative to GDP within the United States needs to be reduced.
- Macromodels based on a “representative rational agent” generally provide useful and fairly accurate predictions.
- Reducing the tax rate on capital gains income would encourage investment and promote economic growth.
Some of those issues reflect a changing consensus amongst researchers. Take, for instance, the query of whether a growing world population is a net positive. In 2000, 63.5% of economists disagreed, in comparison with 36.5% who agreed or largely agreed. By 2020, the balance had reversed: only 42.4% disagreed and 57.6% agreed.
Deficits really don’t matter
And while many practitioners still imagine that “a large trade deficit has a negative impact on the economy,” the view amongst economists has modified. In 1990, two out of three respondents agreed with this statement. Today two out of three reject it. Large trade deficits aren’t any reason to fear.
The consensus on government deficits has also modified, even when conservative politicians haven’t yet understood this. In 1990, 42.2% of economists said government deficits needs to be reduced, while 38.6% said deficit reduction was not vital. Today, federal deficits are higher than they were in 1990, but 57.3% of economists don’t imagine they have to be reduced, in comparison with 23% who say deficits needs to be reduced.
The share of economists who imagine the broader statement “A large budget deficit has a negative impact on the economy” fell from 39.5% in 1990 to 19.7% today, while the share who disagreed fell from 14, rose 1% to 38.6%.
We are all Keynesians (again)
And finally, my favorite: “Control of the business cycle should be left to the Federal Reserve; Activist financial policies should be avoided.”
In 1990, at the tip of the Reagan and Thatcher revolutions, 71.6% of economists agreed or largely agreed with this statement. Today, 66.6% disagree and see a transparent role for fiscal policy in managing the economy. The phrase “We are all Keynesians now” regained prominence after the worldwide financial crisis (GFC).
In terms of research consensus, this looks like what happened. The query is: what should we make of this Keynesian revival? Was the Keynesian view correct from the beginning? Or will or not it’s mistaken again?
We’ll just must wait and see what the consensus looks like in ten years.
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Photo credit: ©Getty Images / Masaki Hani
