Economic ignorance leads to ignorant economics
I’ve always been skeptical of people that try and tell others that something is too complicated for them to understand. That’s why this recently published essay, Economics is Hard. Don’t Let Bloggers Tell You Otherwise, struck me as over the top – (Tip to Escaton and Yglesias). Economics is hard, as is global warming and global climate change, and many other scientific fields of study. But people like Athreya, and others with PhD’s are supposed to be able to explain the hard, or complicated, problems to those of us that went into other lines of work. Here’s an excellent example here.
But to a certain extent that is hard because the people in this country are not as well-versed in basic economics as they should be, as this New Yorker article points out, Greater Fools.
Halfway through his Presidency, George W. Bush called on the country to build “an ownership society.” He trumpeted the soaring rate of U.S. homeownership, and extolled the virtues of giving individuals more control over their own financial lives. It was a comforting vision, but, as we now know, behind it was a bleak reality—bad subprime loans, mountains of credit-card debt, and shrinking pensions—reflecting a simple fact: when it comes to financial matters, many Americans have been left without a clue.
The depth of our financial ignorance is startling. In recent years, Annamaria Lusardi, an economist at Dartmouth and the head of the Financial Literacy Center, has conducted extensive studies of what Americans know about finance. It’s depressing work. Almost half of those surveyed couldn’t answer two questions about inflation and interest rates correctly, and slightly more sophisticated topics baffle a majority of people. Many people don’t know the terms of their mortgage or the interest rate they’re paying. And, at a time when we’re borrowing more than ever, most Americans can’t explain what compound interest is.
Financial illiteracy isn’t new, but the consequences have become more severe, because people now have to take so much responsibility for their financial lives. Pensions have been replaced with 401(k)s; many workers have to buy their own health insurance; and so on. The financial marketplace, meanwhile, has become a dizzying emporium of choice and easy credit. The decisions are more numerous and complex than ever before. As Lusardi puts it, “It’s like we’ve opened a faucet, and told people they can draw as much water as they want, and it’s up to them to decide when they’ve had enough. But we haven’t given people the tools to decide how much is too much.”
Unsurprisingly, the less people know, the more they run into trouble. Gary Rivlin’s blistering new examination of the subprime economy, “Broke, U.S.A.,” is full of stories of financially ignorant people bamboozled into making bad decisions—refinancing out of low-interest mortgages, say, or buying overpriced credit insurance—by a consumer finance industry adept at creating confusing products. Such stories are backed up by the numbers. A study by economists at the Atlanta Fed found that thirty per cent of people in the lowest quartile of financial literacy thought they had a fixed-rate mortgage when in fact they had an adjustable-rate one. A study of subprime borrowers in the Northeast found that, of the people who scored in the bottom quartile on a very basic test of calculation skills, a full twenty per cent had been foreclosed on, compared with just five per cent of those in the top quartile.
Most Americans are not getting the proper economic education to thrive in our current economic system. As the public school system has been geared mainly toward getting kids into college and less on giving them life skills, this seems like a consequence of that system.
But if the economists won’t explain it to us because it’s too complicated, and the schools won’t teach it because they’re to busy preparing us for a standardized test or college, then, like so many other things, it’ll be left to the bloggers. And if the American people are ignorant of economics, and don’t understand what happened before, how we got here again, and how we get out it, then we get ignorant economics.
