Editor's note: The following speech was given before the
annual meeting of the Georgia Council on Economic Education
in May; a similar speech was given late last year at a comparable
event in Arkansas. The September 2002 issue of The Region
reports on the recent National Summit on Economic and Financial
Literacy, referenced in this speech, which was convened in Washington,
D.C., by the Minneapolis Fed and the National Council on Economic
It is a distinct pleasure to join you today in Atlanta, and here
at the Federal Reserve no less, for the 30th annual meeting of
the Georgia Council on Economic Education, and to have the opportunity
to share some thoughts on the subject of economic education. Let
me also take the occasion to thank David Martin and those who
work with him for their efforts and accomplishments here in Georgia.
As I suspect you know, the Georgia Council is among the most effective
and most widely admired in the national network, and deservedly
so. And in light of this, I have a few words of advice for my
colleague Pat Barron, the incoming chairman of the board: Don't
screw it up.
Now, as some of you know, the Minneapolis Fed and the National
Council on Economic Education (NCEE) just organized and hosted
a "summit conference" on economic and financial education
in Washington. A number of significant things came from the summit,
but especially, perhaps, the need to redouble our efforts in this
area in view of the multitude of competing initiatives under way
in elementary and secondary education today.
I have been associated with economic education for more than 15
years now, first in Minnesota and more recently at the national
level on the board of the NCEE. For those of us who have been
involved in this effort for a long time, it is an article of faith
that economic education is a worthy undertaking. And yet if one
pauses and reflects on Adam Smith —the old, original Adam
Smith, one of the fathers of modern economics—one recalls
that Smith, writing in the 18th century, emphasized the role of
the "invisible hand." Moreover, most if not all professional
economists believe that the invisible hand works even if no one
has ever studied economics. Thus, one might legitimately ask:
Why study economics? Why is economic education important? These
questions might be particularly relevant for the United States,
where economic literacy is "low" and yet the economy
has done well and living standards are high.
I am convinced that the short answer to these questions is that
the invisible hand works better when participants in the economy
and its myriad of markets—when consumers, business people,
elected officials, investors, policymakers and so on—are
well educated in economics, when they are economically and financially
literate. Going one step further, the economy performs better
when its participants are well informed because well-informed
participants make decisions that enhance resource allocation,
and thus contribute to rising efficiency, productivity and living
Interestingly enough, there is a growing body of evidence that
economic education is effective in just this way, in improving
decision-making. You will be relieved to learn that I do not plan
to review the literature on the efficacy of economic education
in depth this afternoon. But let me cite just a few examples to
make the case. On the economic education front:
Homebuyers who participate in homeownership education have
significantly reduced rates of loan delinquency.
At the secondary school level, studies reveal that saving
is positively related to participation in financial planning
programs. This is hardly a surprising result; as students gain
an understanding of compound interest, they can appreciate the
benefits of routine saving.
Moreover, those who have had the benefit of classes in economics
or finance in secondary school appear to have significantly
higher levels of wealth in adulthood than others.
And such education attunes students to the need to save,
not only for wealth accumulation but also for possible financial
setbacks and for major investments such as higher education.
Of course, correlation does not prove causality, so we have to be careful
we don't claim too much for economic education. But a little reflection
suggests that there is something significant going on here, and that these
correlations are not just happenstance. There is, moreover, another highly
positive aspect of economic education, namely the role of education in
helping to avoid financial distress. There is no doubt that educated consumers
are less likely on average to make decisions with severely negative financial
consequences. This aspect is critical, for poor economic and financial
decisions can take years to overcome. It also underscores the importance
of beginning the learning process as early as possible, to provide a strong
and broad-based foundation for financial literacy.
In this regard, I had the opportunity back in November, along with other
members of the NCEE Board, to spend half a day at the Ralph Bunche School,
P.S. 125, in New York City, in Harlem. There we met with a group of fourth-grade
students immersed in an economic education program, and specifically in
a program called community publishing. They had formed a business to produce
and sell greeting cards, with the proceeds used to purchase printers for
use with the school's computers. The pride, enthusiasm, knowledge and
confidence of the students was truly something wonderful to see, and visibly
demonstrated why economic education matters.
Let me highlight just two relevant public policy issues to further make
the case. We hear a lot today, unfortunately, about predatory lending—that
is, about unscrupulous, frequently unregulated firms that take advantage
of naive consumers with loan packages that clearly threaten the borrowers'
financial stability and well-being. I can think of no better antidote
to predatory lending than educated borrowers; borrowers who understand
the pitfalls and take their business elsewhere.
At the same time, I think it very important to distinguish between predatory
lending and what I like to call the "democratization of credit."
The latter is clearly highly desirable, in that it has made credit available
at competitive terms and conditions to those who formerly were virtually
shut out of many markets. Now it is certainly true that, with the benefit
of hindsight, not all consumers and businesses will use their access to
credit wisely, and there will be some stresses and strains along the way.
Surely, however, we do not want to reduce access to responsible lenders
for those with legitimate needs. In short, we have to distinguish between
predatory lending and the democratization of credit.
A second policy issue that helps to make the case for economic literacy
is the ongoing debate about "globalization." I happen to think
that globalization represents the principal, if not the only, hope for
meaningful improvement in living standards in the poorest countries of
the world. They need access to markets, and especially access to the markets
of the large industrial economies, if employment and earnings and all
the rest are to increase. They also need to attract financial capital
from the West. In this sense, the anti-globalization movement has the
economics exactly backwards. But the point isn't whether I am correct
or not—the point is that economic literacy should be high enough
so that there can be a reasonable, informed debate about the issue.
In another setting, I remarked recently that those of us committed to
economic education have an unprecedented opportunity today, and I think
that this observation remains valid. An unusual confluence of events—most
notably, increased interest in the economy and in financial markets together
with heightened concerns about the quality of elementary and secondary
education and emphasis on educational standards—presents those directly
or indirectly involved in the effort with an environment uniquely receptive
to economics in the classroom. I believe it is urgent that we seize this
It is urgent because the beneficiaries of the programs of the Georgia
Council on Economic Education and its sister organizations are the classroom
teachers and, ultimately, their students. In short, strengthening economic
education will contribute to improvement in economic and financial literacy.
Thus, the students are the "winners" and, if my earlier observation
about the performance of the invisible hand is correct, the economy at
large will ultimately benefit also.
Of course, in raising the specter of the invisible hand at the outset,
I was setting up a bit of a straw man. Some of the evidence I cited earlier,
together with the significance of the economic issues before us as well
as good old-fashioned common sense, all testify to the importance of economic
education. So, in closing, I want to congratulate today's award winners
for their accomplishments in the classroom, and all those here who participate
in this valuable economic education effort. Your commitment is deeply
appreciated, and it is critical both to individuals and to the nation.