I've long believed that true economic education includes financial literacy; and that real financial literacy must include economic education. One can usually see that much of what we call financial literacy has some roots in fundamental economics: opportunity cost and choice, money and banking, supply, demand, prices and markets. But frequently, advocates of financial literacy will begin to balk when more macroeconomic aspects are included.
Conversely, many economic educators will concede that there can be a place for some financial literacy aspects within the curriculum. After all, financial markets can be an excellent example of market functions. But many will tell you that learning how to do one's taxes doesn't really play into an understanding of fiscal policy. They may be right. Just as the financial literacy advocates are right in holding off much of economics. I just don't buy into either position. And here's why.
Economic education without financial literacy results in people who understand the theory but may be weak on the application. Are there economists who don't balance their checkbooks every month? Human nature being what it is I'm sure of it. (Marginal cost vs. marginal benefit usually comes into play in the defense.) Conversely, there are downsides to financial literacy without larger economic understanding. We can teach students how to prepare a budget; the benefits of long-term planning and saving; even how to invest. But if we don't give them the understanding of the bigger picture, we may be creating another different level of dependency. They may understand how to, but not when or why.
This post was triggered by something I saw on television on Sunday (5/20). I was in Washington, D.C. for the interdistrict Fed Challenge competition at the Board of Governors. I was escorting the champion team from the Seventh District, St. Joseph's High School from South Bend. I was getting ready to go down to breakfast, and I was flipping through channels (checking the weather and so forth), and I ran across a story on Bloomberg television. I didn't stay with the story long, just long enough to get the gist. It focused on a couple who had refinanced their mortgage two years ago, with an adjustable rate mortgage. The contract allowed for a rate adjustment every six months. Since they refinanced, their payments have growth significantly and they were having trouble meeting the payments within their budget.
The immediate conclusion that I took from the story was the couple had been taken advantage of. Perhaps the lender WAS predatory, and that IS a problem. But the next thing I thought was "would this couple have entered the contract if they had better financial education?" Perhaps. But their decision would have been even better informed if they knew a little economics, as well. Two years ago, the Fed was still in the "tightening" phase of this cycle. The target rate for Fed Funds was a full 2 percentage points lower. Most analysts and most news stories predicted more tightening coming - indeed, if one reads the financial pundits today, the predictions are still divided as to whether or not a tightening is still warranted, and the Fed has held steady for quite a while.
Did the couple need to understand the nuances and mechanics of monetary policy like the students at the Fed Challenge? Probably not, but I can't help but think that if they had been aware of and understood the larger economic picture; if they had known what the Fed was; and if they had seen that the chances were even to good that interest rates would continue to rise and that would mean their payments would rise, they might have made different choices.
I may have jumped to conclusions, and it is possible that the couple in the story were aware of all things and chose as they did in spite of the information; in which case this post is of little consequence. But I suspect that, like many people, they were unaware of the larger picture, and some knowledge of it wouldn't have hurt and may have helped. Your thoughts and comments are welcome.
Posted by TSchilling at May 22, 2007 9:23 AM
Tim, I agree completely with the assessment of focusing mainly on financial literacy. Financial literacy is important, but without an understanding of how the economy works,( the business cycle, inflation, nominal vs. real interest rates, unemployment, macroeconomic instability, fiscal policy, and the Fed and monetary policy) there remains an incomplete picture. Economic literacy needs to accompany financial literacy. The Fed Challenge program assists in creating economic literacy. It is not only the team of students who learn, but also their parents and peers. If only "eyes would not cloud over" as soon as someone begins to talk about macroeconomics and how the economy works. There are no shortcuts and it is imperative we all work to create economic literacy as well as financial literacy. "Can't have one without the other" as the song goes. I'll let you decide which one is the carriage.
Posted by: Julie Chismar at May 29, 2007 9:44 AM
Thanks Julie. But I must, in fairness, point out that I often see some intransigence among economic educators who believe there's no place for personal financial education in the economics curriculum. As I stated, I believe the real world application is the best demonstration of concepts or theory. Personal financial literacy is often where the "rubber meets the road".
Posted by: Tim at May 29, 2007 1:25 PM
You are correct Tim about teaching financial literacy within the economics curriculum. One semester doesn't often allow time to incorporate additional units. Yet, because of its importance we must find a way to incorporate finacial literacy. Real time examples may be the way to do this. Students themselves can search for appropriate articles for example and discussion. This morning's (Wednesday, 5/30/07) WSJ has an excellent article regarding the effects of the subprime mortgages on an area called Outer Banks Drive in Detroit. Creating awareness may be the
Posted by: Julie Chismar at May 30, 2007 5:55 AM
Perhaps the issue is thus:
I agree with you about the need for both and they go hand in hand. I just wonder if the financial types are "afraid" of economic literacy and its many questions-- particularly macroeconomic literay, while the economic literacy advocates are afraid of indoctrination.
Economic literacy tends to be expository and positive. Financial literacy tends to be advocative and normative (and should be, I would add.) People attracted to FL want to change lives and make people's lives better. People involved in economic literacy tend to want to inform.
It's a good question you raise, though, and I hope more people respond to your post.
Posted by: Rob at May 31, 2007 10:09 AM