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Financial Literacy

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"Financial Literacy"

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Monica Potts has a nice article about how financial literacy programs make the difference between the financial system being an engine of economic opportunity for the poor and an engine of disaster as people’s wealth is drained away by products they don’t properly understand.

I always want to drag this conversation back to the core case of education in general, since to a large extent the kind of financial literacy people need is really just reading comprehension and math. I think situating it in that context reveals a number of points. One is that the very same conservatives who tend to be hyper-skeptical of the merits of semi-paternalistic regulation of financial products also tend to be heavy emphasis on the role of educational attainment in driving economic inequality. The tension here is palpable. It’s just a fact that many adult Americans don’t read well and/or don’t understand how to compute compound interest. It’s common sense that profit-seeking businessmen will try to find ways to exploit that fact, so there’s at least a prima facie case for regulatory authorities trying to counteract that—to require not simply that information be disclosed, but that it be disclosed in a way that people will understand.

I think it also suggests the idea that arguably we should try to implant financial literacy more directly into K-12 education. Maybe tests for high school students should give people actual credit card contracts, or descriptions of savings accounts, or mortgage terms or student loans and ask math questions about that. “If you sign this mortgage, how much will you pay in interest over 10 years?” “If you spend spend $1,000 on this credit card and make the minimum payment every month, how much will you spend before the payment goes to zero?” These are issues people need to be able to deal with, and bringing real world material into the classroom might help students understand why what they’re being taught actually matters.

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