I’m going to start blogging out a longer project I’m working on, one I really want your input for. One thing that I always hear from people across a wide range of the political spectrum is that we need more ‘financial literacy.’ In so much as there are products or practices out there that may be harming consumers, the best way to fight them is to make sure consumers are ‘financially literate.’ This is always something that is easy and good to say. Did you know that since 2003, when the subprime market really took off, April has been Financial Literacy Month? Now you do. But in an age where financial expertise seems so discredited what qualifies someone to be financially literate?
(I’m going to table the serious debate about whether financial literacy is a bad thing, and whether or not we should be, in law professor’s Lauren Willis provocatively titled paper, Against Financial Literacy Education. If we can’t even put our finger on what it is, it doesn’t make sense to be for or against it, much less to give it a lot of agency.)
One way to investigate this is to see who the academic gatekeepers are on this body of knowledge and see what they say. If you want to think critically about any subject, one looks for the departments where people with expertise study it, and see where the debates are. And one thing I notice about ‘financial literacy’ is that it doesn’t exist in economics. Or anywhere else.
California has been considering taking its one-semester required course in economics for high school graduation and splitting it with a personal finance class. A panicked high school economics teacher wrote to Greg Mankiw, and he responded on his blog:
I agree with this teacher that this law would be a step in the wrong direction. The legislation is akin to requiring high school biology teachers to spend half their class time on issues of personal health and nutrition. Personal finance is a useful life skill, but students need a more thorough grounding in other basic economic principles than what can be learned in the other half of a single semester course. They need a framework to think about such as topics as market outcomes, price controls, taxes, international trade, environmental regulation, monetary and fiscal policy, and so on. The goal of high school economics should be to produce not just smarter decision makers at a personal level but better informed voters on election day.
(For the David Harvey fans in the audience, please do note that the last sentence makes clear how much of a specific political project Mankiw considers this, akin to hypothetical Marxist English professors talking about “consciousness raising” their students.)
Time students spend in class is a scarce resource, and I’ll leave it up to you to decide whether or not it is a better idea to beat kids over the head with the idea of compounding interest versus getting them to mimic just enough calculus to reproduce the Slutsky equation on a test. But do note that an economist studying ‘personal finance’ is a subject akin to a biologist studying something that is not biology; it’s not within the discipline. I hear this from people within finance and economics PhD programs; one really can’t publish in this topic on personal finance, and since one can’t publish in it is doesn’t get researched. Given we are in an age where everything from voting to marriage to criminology has an economist doing a PhD in it, why is there little to no research in this realm? Some thoughts:
- Economics is more interested in representative households, households that can be aggregated to a macro level. Financial literacy involves dealing too much with heterogenous households to be modeled.
- There’s a normative part of this – how should a person manage their finances? – that the methodology, which studies actions and choices as given and reflecting deep preferences, can’t handle.
- There’s something that reeks of terrible remedial education in the subject, long boring lectures about how to read a paystub, or the gendered “home economics.”
- This isn’t just to single out economics; sociologists are much more likely to be concerned with the way consumption and financing gets embedded and performed within a fields and networks. A lot of that sadly ends up as a kind of David Brooks level of analysis in the broader culture (and I encourage Andrew Seal to continue his project of saving Bourdieu’s Distinction from glib readings!).
Who Fills The Gap?
I want to point out this excellent Mary Kane article in TWI, in which she talked about financial literacy groups and their connections to subprime lenders. What I want to note is the two professors quoted as experts who study consumer finance are professors in Family Studies and Consumer Affairs. They are doing excellent work in the field of financial literacy: but, and this is my high-level read on it that may be wrong, it seems to be something they do in addition to their proper studies and duties in their fields.
As there’s little academic backing, there’s no money for journals, research grants, conferences, the development of theory and expertise that is deployable into policy. That leaves the field wide open to be funded by credit card companies, subprime lenders, and others with a vested interest in certain modes of thought becoming the norm. And for expertise to be filled by people who come from motivational speaking backgrounds, and theory to end up as a mess of common-sense adages and low-level morality plays. The theme of Financial Literacy Month for 2008 was “Financial Responsibility Begins with Me”; why didn’t they call it “caveat emptor”?
Realizing this, Robert Shiller’s call for subsidized financial advice for the working and middle class seems like a good way to go, but the question remains: what would they advise?