We’re working on a new Freakonomics Radio podcast about financial illiteracy, a topic we’ve visited a few times on this blog. Two guests you’ll hear from in the episode have held the same title: chairman of the White House Council of Economic Advisors.
First up is current chairman Alan Krueger, whom I asked what would improve if Americans were more financially literate:
KRUEGER: I think first and foremost, we’d probably have greater savings. People are often in a situation where they have to live paycheck to paycheck. That’s something I think we need as a country to work to improve. Most importantly I think we can improve income growth for the broad middle class. But many people who seem to have the wherewithal to save for the future find it difficult to save. So for example, they don’t take advantage of some of the tax benefits of some of the savings plans, which is really unfortunate because they’re leaving money on the table. And when it comes time to retirement, or when it comes time to needing those savings, they have a very thin cushion. So I think the biggest difference would be if we can improve financial literacy and if as a result people act based on their own personal interest to a greater extent, I think we would see higher savings, which would in the long run translate to greater investment and probably higher income growth for the country.
You’ll also hear from Krueger’s predecessor in the job, Austan Goolsbee, who’s now back at the University of Chicago. I asked Goolsbee how big a problem financial illiteracy really is. I was surprised to hear him list it as a major contributing factor to the Great Recession:
GOOLSBEE: I think it’s pretty important at most times, but as we saw in this last financial crisis it can become unbelievably important. So just for your own sake, you know, your own retirement, or your own making sure that you can send your kid to college and this sort of thing, you’ve got to at least know the basics of how to save money — if you’re going to invest the money, where are you putting it, that you’re not taking crazy risks that you don’t understand, and things like that. But then, you know, we saw through the 2000s as we in some ways ripped up the rules of the road and took away some of the restrictions that financial institutions had in offering financial products to consumers, there were a lot of people with limited financial literacy who got into extremely complicated mortgages. And those mortgages blew up, and that the magnification of those explosions essentially caused the financial crisis and the worst recession of most any of our lifetimes.
Keep an ear out for the entire episode, in a week or so.
and 
. You can also watch it on 
“How Much Did Americans’ Financial Illiteracy Contribute to the Great Recession?”
Not as much as Wall Street’s either economy illiteracy or outright deception and theft.
The American public is not as economically literate as they should be by design, by the design of the top 1%. American economic “education” and information provided via corporate media is nothing but propaganda.
Hot debate. What do you think?
14 
36
People’s attitude toward savings mirrors their attitude toward wasting money. You won’t believe how much stuff people buy that they don’t need, or worse, how much a premium they pay for convenience. Some of it is big stuff, but others are like plunking down $2 a pop for bottled water or $3-5 for fancy coffee. Over the course of a year these little things costs the average person thousands of dollars. Pay television and rip off wireless plans are another source of money bleed.
Well-loved. Like or Dislike:
30 
1
The fact is that people tend to do things that they are repeatedly encouraged to do. What people are repeatedly encouraged to do in our society is spend all the money they have, plus borrow more to spend what they don’t have. Not only this, but our economy relies on people over borrowing to drive demand, because workers are summarily under paid, thus the wages of workers cannot possibly support the production of the economy, unless workers over borrow.
Workers are encouraged to over borrow because this drives the profits of the capitalists. Profits are driven by under paying workers and getting them to borrow money to over pay for the commodities that they produce, thus widening the gap between the cost of production and the revenue from sales.
All borrowing essentially accrues to profits of capitalists, hence, in our capitalist society, everyone is encouraged to over borrow.
The American public is simply doing exactly what the economic system has been designed to encourage them to do.
Hot debate. What do you think?
18 
22
So who actually has an incentive to encourage people to save?
I’m thinking about the most basic level of saving here, like having a little emergency cushion. I’ve read that the typical American family has “unexpected” expenses that amount to $2,000 a year (a car breaks down, one of the kids broke his eyeglasses, you have to travel to a funeral, that kind of thing). So it follows that every family ought to have a readily accessible cushion of about that amount, which means setting aside about $180 a month.
This is not really a small amount of money for a household making $50K a year, but the choice is pretty much save it in advance or go into debt and pay even more in the end. The credit card company is happy to encourage you to go into debt. Who has the incentive to encourage you to save it in advance?
(For retirement savings, I suppose that the employer’s payroll department could issue “public service announcements” with every paycheck, and the retirement plan might have a financial incentive to encourage savings.)
Well-loved. Like or Dislike:
5 
0
The first R in Reduce, Reuse, Recycle is Reduce! There are free options for things you’re using. There’s nothing wrong with buying things from nice thrift stores…
You know what? SNL did it better than I can:
http://www.hulu.com/watch/1389/saturday-night-live-dont-buy-stuff
It seems that the study of economics is, these days, all concentrated on “growth”. If there is not “growth” the economy is stagnant. This is a false premise that is axiomatic to the capitalist 1%. Sustainability and cleanliness to the environment are what should be the basis of economic prognostications.
Also, look around, classical economics and Says law are purely myth and conjecture, not reality based at all. We are now in the greatest downturn since the 1930s and prices are still going up and products are shrinking. Companys are doing nothing rational in terms of increasing demand for their wares.
My guess is that few authorities want to risk unpopularity by criticising the public and blaming them for ruining themselves. Here in Ireland I do think a great number of people made mistakes, sinking deeply into debt to buy grossly over-priced houses, talking about getting on the “property ladder” even while newspapers ran stories about how you could buy castles and villas in France for the same price as a pathetic two-bedroom house in Dublin. Since the crisis hit there has been fierce scape-goating of bankers, politicians and developers, and less introspection.
But more than financial know-how, I wonder if just conformity is the problem. People saw others rushing to buy property and simply assumed that this was the right thing to do. It might be hard to create education that cancels out our impulse to conform and to take our behavioural cues from our neighbours.
Well-loved. Like or Dislike:
26 
2
Greed is not good.
Hmm a course in financial literacy sounds good, can we get politicians to take it and follow it?
Some topics I can see:
If it sounds too good to be true it is.
Just because you want it to be, doesn’t make it an investment.
Spending more than you take in for more than a temporary time is bad.
Budgets should balance.
Well-loved. Like or Dislike:
17 
0
Financial illiteracy is a feature, not a bug, of modern economics.
Google ‘George Carlin big club’ for a more entertaining explanation of this phenomenon.
Nice points but financial education efforts go up against the Finance Industry’s $9 billion marketing budget (http://goo.gl/VH9Wb) and $135 million in lobbying (http://goo.gl/zoqg8) …. Good Luck getting the proper message through
http://twitter.com/M_Maven
Hot debate. What do you think?
6 
4
Exactly. American financial illiteracy is a product of design by the financial industry itself.
Hot debate. What do you think?
6 
15
OWS blew it. The overbearing clout of the financial industry should have been their focal point.. it could be remedied with populist political will. I’m no fan of populism but there is a time and place for it in measure.
The issue isn’t “financial illiteracy” as much as “financial recklessness”. Negative-amortization mortgages (among others) were simply ways to enable people to do what they wanted – live beyond their means. You can put anti-lock brakes and air bags in a car but if somebody wants to weave through traffic at 90 mph all the “consumer product safety commissions”, financial or otherwise, won’t change the result.
Hey – the Basel accords on Capital Adequacy and “mark to market accounting” have certainly worked like magic, haven’t they?
Accept it – some people want to live financially fast and die financially young. Design your policies and your regulations around that truth.
Well-loved. Like or Dislike:
16 
1
There always seems to be some effort to blame things on the consumers. And while the consumers may deserve some blame, it seems ridiculous to blame them for the big problems.
Taking the recent meltdown as an example, which Goolsbee thinks was significantly contributed to by a lack of economic literacy. There, the situation was three factors, illustrated in his quote: (1) The regulations limiting what banks could do were jettisoned. (2) the banks offered extremely complicated mortgages (to parties they knew or should have known couldn’t pay in the long run, a part he missed). (3) And people didn’t know better than to buy into the mortgages despite their inability to support them.
So you have two very complex things going on: The lending rules broke down. This isn’t a factor the average person could be expected to know. It’s hard enough for the SEC or the banks to keep track of those statutory frameworks, let alone the average consumer. Then you have the banks, making extremely risky mortgages and then repackaging those as complex derivatives. Could the average consumer be expected to cut through these purposefully obfuscated products? After all, many consumers were essentially swindled, told what are essentially lies, and they were led to believe they COULD own a house on their salary which was far too low in reality to pay the mortgage and the taxes. When people get tricked by cons, it’s usually a “you should have known” situation in many peoples eyes, but in reality the innocent “sucker” isn’t the one in the wrong, the person running the con is.
It all makes this highly suspect. After all, the risk taking by the people who were making these bad investments either in mortgages or derivatives was there, but the risk was beneath two layers: The financial institutions assurances and the guise of federal laws to protect consumers.
In reality, much greater risks were being taken by financial institutions, and I’m hesitant to believe that any degree of increase in the general population would have averted the recent “financial crisis.” Unless we’re talking about on the part of the financial institutions. Perhaps redefining their responsibilities to investors, by changing the focus to short term to long term, would have helped avert the financial crisis.
Hot debate. What do you think?
4 
9
Right. The thing is that EVERYONE was telling borrowers, “BUY NOW< GET IN WHILE YOU CAN, THE PRICES ARE GOING TO GO UP INFINITELY!"
This is what people were hearing on talk radio, on CNN, from The Wall Street Journal, certianly from FOX News, etc., etc. and then they went in to look into buying a house and they had people telling them, "Look, just buy a house now while you still can. The prices are going to go up, this is a good long term investment, because housing prices never go down. The worst case scenario is if you can't afford it you can just sell it later and make a profit, its a no lose situation!"
And yeah, a lot of people went for it, but before you start blaming the average folks for "being suckered", you first need to look at the folks doing the suckering. You can't lay the blame on "average folks" when we have the TOP HEADS OF THE BIGGEST BANKS IN THE WORLD testifying before Congress saying, "Oh, we had no idea."
The biggest authorities IN THE WORLD, were telling people to get into this market, and as for them, there has been a combination of outright lying about the fact that they had no idea, plus the fact that many of them truly did themselves underestimate the risk and the outcomes. Now if the tops heads of the biggest banks the world, who were being paid hundreds of millions of dollars a year precisely to understand it, failed to fully comprehend what was going on in 2003-2008, then I think claiming that the problems are a product of janitors, bus drivers, clerks, construction workers, and cashiers not having enough financial literary is a bit of a farce.
Sorry, but I have to say that your “innocent” sucker is equally at fault. Any successful con artist knows that it’s next door to impossible to con an honest man; virtually all the classic cons, from the lost wallet to Silver River oil stock to Enron, depend on the “sucker” expecting to use a dishonest advantage to get something for nothing.
It’s the same with the complex “too good to be true” mortgages. Sure, the average consumer can’t be expected to wade through the legalese and understand it, but s/he should be able to know that s/he doesn’t understand, and have sense enough to know that a deal that can’t be understood is almost certainly a sucker trap.
Maybe this ties in with the threads on how hard it is for many people to say “I don’t know”?
Well-loved. Like or Dislike:
11 
3