From Pocketbook to Policymaking, Economic Education Matters
Top of the Ninth
Published June 1, 2002 | June 2002 issue
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 Education.
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 standards.
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 opportunity.
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.
Special study: The Economic Literacy Project