A (Too?) Simple Solution to Financial Illiteracy

image courtesy of the New YorkerIn an editorial for the New Yorker, James Surowiecki suggests that the new consumer-protection agency's plans to "review and streamline" financial education initiatives is not enough:

We really need something more like a financial equivalent of drivers’ ed. There’s evidence that just improving basic calculation skills and inculcating a few key concepts could make a significant difference. One study of the few states that have mandated financial education in schools found that it had a surprisingly large impact on savings rates. And the Center for American Progress has found that, across the country, education and counselling by nonprofit organizations, like the Massachusetts Affordable Housing Alliance, have helped low-income families buy and hold onto homes, even during the housing bubble. The point isn’t to turn the average American into Warren Buffett but to help people avoid disasters and day-to-day choices that eat away at their bank accounts. The difference between knowing a little about your finances and knowing nothing can amount to hundreds of thousands of dollars over a lifetime. And, as the past ten years have shown us, the cost to society can be far greater than that.

I agree with Mr. Surowiecki's premise, but "reviewing and streamlining financial education initiatives" sounds to me like hopeless wonkery, as though awareness of the existence of idiots is enough to end all our financial woes.  The simple solution I would offer is tough love in conjunction with access for the "worthy": contrary to the Bush Administration's noble goal to make everyone a home-owner, I suggest three things: (1) a focus on policy making it easier for more people to rent, because renting rules; (2) no home loans for people who can't pay; and (3) no more bank bailouts.

To make such a widespread shift, we need to end the party: encourage personal savings and investment over the crack-cocaine of the growth-at-all-costs community: consumption, and correspondingly pivot like Pierce from taxing income to taxing consumption.  The age old wisdom of not spending what you don't have is thrown away when your neighbor who makes the same as you is seen buying a new Porche.  During the last ten years, we entered an externality danger zone where the benefits of conspicuous consumption outweighed the benefits of responsible saving.

Also, no more bailouts, please, not even in the name of trickle-down.  If I'm a lender trying to maximize profits for my company in an amoral fashion, which all successful lenders outside of Mohammed Yunus do, I have a federally imposed incentive to give loans to people I know cannot pay them back in the noble name of making people who cannot afford homes homeowners.  And, as if Bush Administration policy alone were not enough, when my company goes bankrupt giving out loans to people who don't deserve them, we'll be given a massive sum of taxpayer money to start all over again.  

I agree with Mr. Surowiecki that basic financial education could do a lot for the American economy, but the model for this education should not be driver's ed.  It should consist of repeating as a mantra "Wealth cannot be created out of thin air."  Or, in Sarah Palin faux-folksy false full-of-shit but fairly familiar foresighted formalism, "Don't count your chickens before they hatch."

Comments

[Joseph Cox]

To be fair, I think the current crisis has sparked a revival in old time saving. Then again the trend seems to be less saving not more. The prolonged recession could mean people are socking more away, or that they can't afford to.

http://www.bea.gov/briefrm/saving.htm

The credit card legislation passed very near to the beginning of Obama's term also helps since paying down debt counts as saving.