Financial Literacy and Literacy
Interesting article in The Economist about an economist who goes to volunteer teaching financial literacy to poor women.
This sort of thing is an under-examined subject. It’s clear from everyone who looks at it that a huge proportion of the people who can least afford to be making bad decisions about their personal finances are doing so, and they’re doing so in large part because they don’t really understand the decisions they’re making or the options available to them. Finding ways to increase the knowledge base of this part of the population would significantly improve their economic prospects, their ability to be good parents to their children, etc. How to get that done is less clear. But one thing I would say is that these issues are an under-appreciated cost of the bad job America does of educating poor children. Basic math and literacy skills aren’t the same as financial literacy. But financial literacy is built out of reading stuff (terms of contracts, fine print on ads, etc.) and doing a little math with it. And an awful lot of people lack “financial literacy” because they’re basically illiterate:
That’s from A First Look at the Literacy of America’s Adults and though there’s some sign of improvement the absolute levels are bad. An example of “basic” level quantitative literacy is “comparing the ticket prices for two events” and they’re saying 22 percent of the public isn’t up to the challenge. An example of “intermediate” level quantitative literacy is “calculating the total cost of ordering specific office supplies from a catalog.” An example of “basic” prose literacy is “finding in a pamphlet for prospective jurors an explanation of how people were selected for the jury pool.”
Lacking these kind of basic prose and quantitative literacy skills doesn’t just hurt your potential earnings as a worker, it makes it extremely difficult to make your way financially through a complicated world. Of course if these skill deficits were distributed randomly throughout the population it might not be so bad — people could just ask a friend for help. But they’re not distributed randomly — instead you have communities of people with only minimal ability to amass the factual information they need to make informed decisions about what to do with their time and money.
46 Responses to “Financial Literacy and Literacy”
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December 4th, 2008 at 5:16 pm
Amerikans ur dum?
December 4th, 2008 at 5:32 pm
Poor people are ignorant, which makes it difficult for them to improve their lot in life. Amazing discovery!
December 4th, 2008 at 5:33 pm
Wow. Just…wow. That some people can’t even do the basic reading just boggles my mind. One has to wonder if some people weren’t trying to tank the stats, though I imagine the researchers control for that sort of thing.
December 4th, 2008 at 5:40 pm
Don’t remember the exact percentage, but one study showed that over half of the U.S. population could not compute the value of two cans of beans of different volume. That level of mathematical illiteracy makes financial literacy impossible.
December 4th, 2008 at 5:52 pm
I don’t have a link for you, but I remember Obama talking about standardizing various financial things (credit cards, mortgages, etc) the way nutritional info is standardized on packaged food, energy costs on appliances, etc. That could go a long way in treating the asymmetrical information problem.
December 4th, 2008 at 5:53 pm
In the LA school district, the nation’s second largest, they used to teach a class called “consumer math,” which was mostly about how not to get ripped off on a car or house loan, why you shouldn’t play the lottery, why you should pay credit cars on time, how to figure out whether Buy 2 Get 1 free is a good deal, why the government takes money out of your paycheck, why it’s not a good idea to take out too big a mortgage, why saving money in an interest bearing account is a good idea, etc. Useful stuff.
But there’s no room for that anymore because all Los Angeles public school students are required to pass Algebra I, Geometry, and, starting this year due to the meddling of the Bill and Melinda Gates Foundation, to graduate from high school in LA, you must pass Algebra II.
So, a huge amount of time is devoted to abstract math to prepare LA high school students for admission to the University of California system (which by law is restricted to the top 1/8th of high school graduates). And abstract math being very difficult cognitively, lots of kids can’t pass it and thus wind up going through life as high school dropouts and not knowing why lottery tickets are a bad deal.
December 4th, 2008 at 6:00 pm
Poor people realize that lottery tickets are a bad deal. They just don’t give a fuck. It’s the same reason smoke meth and beat their kids.
December 4th, 2008 at 6:01 pm
This is an interesting contrast with how the Soviet education system worked where there was a serious emphasis on teaching school children the principles of communism, how it worked, etc. But in the U.S. it seems that people are more or less okay with the idea that basic economics & finances, even though its an essential element of our society, isn’t something that should be required to be taught. And this sucks because if this kind of education was in place, though Wall St. still probably could have gotten away with causing a massive financial crisis, at least the damage from sub-prime mortgages would probably be a lot lower.
December 4th, 2008 at 6:01 pm
Let me be clear: the de-emphasis by high schools of courses teaching simple financial literacy is a direct result of our society’s obsession that every student can and must go to and graduate from college. Thus, we force students who are below average in intelligence to study the quadratic formula instead of why they shouldn’t let a balance pile up on their credit cards. Not surprisingly, they generally don’t master the more abstract math and don’t learn about how the credit card company is ripping them off either.
This is all a direct outcome of political correctness about human cognitive inequality, pushed by smart people like Bill Gates to make themselves sound morally superior. But it hurts poor, dumb kids.
December 4th, 2008 at 6:06 pm
Good in abstract math does not automatically equal “smart”. Other kinds of intelligences are neglected by focusing on abstract/academic intelligence to the detriment of crafts and trade skills that could be strengthened.
Paul has a good point, though, it’s odd that our system doesn’t teach itself.
December 4th, 2008 at 6:29 pm
Maybe given the topic an arithmetic blunder would be better.
December 4th, 2008 at 6:43 pm
This is partly why the country is reaching diminishing returns with college education. People who can’t find a total, given a calcuator and told what numbers to add, don’t belong in college. There are plenty of jobs, like assembling cars, that don’t require Algebra II and the priority should be making more jobs like that available to Americans at livable wages, rather than taking those jobs away and telling people it’s their own fault for being too dumb for college.
December 4th, 2008 at 7:00 pm
“This is partly why the country is reaching diminishing returns with college education. People who can’t find a total, given a calcuator and told what numbers to add, don’t belong in college.”
What they really should be getting is vocational training, which costs a lot less and will better serve them in the job market.
December 4th, 2008 at 7:01 pm
Well, yes, but….the magnitude of the current crisis is the result of the most financially literate people in the whole world swindling themselves and us with tranches, bundle risks etc etc. The great hoi polloi, with all their shortcomings, constitute well less than half of the disaster.
It would be nice, in a general sort of way, if people could figure. I’m sure a lot of people would choose the opera over a prize fight if the prices were right. But if the smartest people among us would turn their intellects towards making this place work better, we could probably easily afford to maintain the dumb ones in ignorance.
December 4th, 2008 at 7:02 pm
The way I look at it, by learning Algebra I and II and Geometry and Trigonometry I learned the other stuff indirectly. Anything taught in that consumer math class is something that should be inferred by a student who passed real math classes. Why would I need a class to tell me the lottery is a shitty deal? I already learned permutations back in sixth grade. I think they came up with that class as a safety net for the kids they know weren’t going anywhere. It sounds like a program for future day laborers who are likely to fall into financial troubles and then later blame the education they could have got but chose not to. Sorry if I sound bitter but most of my class time was wasted by idiots who never stopped complaining ‘why do I need to learn this?.’ We went to the same school, same classes but I’m the only one who gets the joke, ‘the lottery is a tax on people who are bad at math’. I wonder why? Actually I don’t because I know their parents. Yes that’s right. Parents are the downfall of our education system. Not the schools nor the books nor the teachers. They are either not involved or actively sabotaging their kids education by letting the kids know what should be learned and what the teacher says that they can ignore. Science class must be a frickin riot in the bible belt.
December 4th, 2008 at 7:05 pm
11: This is true!
December 4th, 2008 at 7:12 pm
Well, some educators have argued that the problem is that education is divorced from a cultural context:
http://seattletimes.nwsource.com/html/localnews/2002927599_bcc13e.html
December 4th, 2008 at 7:32 pm
I hate to say it, but I agree with Sailer.
December 4th, 2008 at 7:32 pm
This post would have been much better if it included one or more of Matthew’s egregious typos, homophones, or grammatical mistakes.
Well, it does include a standard MattY feature: intellectual dishonesty. It might be helpful for him to note one of the major factors involved in such things as illiteracy: MassiveImmigration.
But, at least MattY has a variety of scrumptuous restaurants to choose from, so it’s OK.
December 4th, 2008 at 7:37 pm
Clearly, we must privatize Social Security, and let people manage their own money.
December 4th, 2008 at 7:49 pm
University of California system (which by law is restricted to the top 1/8th of high school graduates).
I’m calling shenenigans on this. Per this doc:
http://www.universityofcalifornia.edu/news/compreview/1204_meeting/undergrads01-03_page1.pdf.
around 20% of undergraduates are from the lowest 40% of the (I presume California’s) Academic Performance Index (API). The ‘top 1/8′ would mean, by definition, 100% of the students would be in upper 12.5% of the index, which is obviously not the case.
Now, with about 1.8 million students in Ca High schools, and a total in state undergrad enrollment of 150,000, it does look like less than 10% of Ca high school students go onto the UC system.
December 4th, 2008 at 7:56 pm
to clarify, that’s 1.8 million in Ca *public* high schools
[1]http://www.ed-data.k12.ca.us/Navigation/fsTwoPanel.asp?bottom=%2Fprofile.asp%3Flevel%3D04%26reportNumber%3D16
December 4th, 2008 at 8:13 pm
http://www.universityofcalifornia.edu/news/compreview/1204_meeting/undergrads01-03_page1.pdf.
“Page Not Found”
December 4th, 2008 at 8:32 pm
Looking at this Adult Literacy report that Matt cites,
http://nces.ed.gov/NAAL/PDF/2006470.PDF
one thing that jumps out at you is that that we’re really in a hole. We’ve got a lot of people who can’t function well cognitively in a modern society.
What should we do about it? Well, the first thing you should do when you find yourself in a hole is to stop digging. The most obvious way to relieve some of the problem is to stop letting in so many illegal immigrants who don’t speak English and don’t have much education past fifth grade.
For example, the % of Hispanics in this National Center for Education Studies analysis who are Below Basic (which is quite bad) in prose literacy level grew from 35% to 44% from 1992 to 2003, while other groups were seeing improvements, such as whites Below Basic improving from 9% to 7%, blacks from 30% to 24%, and Asians from 25% to 14%. Clearly, the anomalous Hispanic result comes from letting in an enormous number of illegal aliens who aren’t literate in English (or, often, Spanish, either — more than a few illegal aliens don’t even speak English or Spanish — they speak only indigenous languages like Mixtec.)
Figure 10 on Quantitative Literacy also shows that our society in general is making progress: the percentage of whites below basic fell from 19% in 1992 to 13% in 2003; blacks from 57% to 47%; and Asians from 31% to 19%. But Hispanics were stuck at a full 50% being Below Basic in both 1992 and 2003. And the percentage of the population that is Hispanic is growing fast (will hit 50,000,000 within a year or two), so the bad Hispanic Quantitative Literacy combined with demographic change has a deleterious impact on the country as a whole.
December 4th, 2008 at 8:36 pm
Matt says:
“instead you have communities of people with only minimal ability to amass the factual information they need to make informed decisions about what to do with their time and money.”
Yes, a lot of the mortgage meltdown has to do with Spanish-speaking immigrant mortgage brokers and real estate agents buffaloing their fellow immigrants into ridiculous liar loans whose numbers never had a chance of working.
December 4th, 2008 at 8:44 pm
Here’s a classic story from the Washington Post illustrating the point Matt is delicately making: that having a whole bunch of people with no financial mental skills taking out big mortgages is a recipe for disaster, especially when the whole community (e.g., Spanish-speaking immigrants) doesn’t have a lot financial acumen to draw upon to get help:
http://www.washingtonpost.com/wp-dyn/content/article/2008/03/21/AR2008032103512_pf.html
Looking back, Glenda Ortiz can see she did everything wrong when she bought her house in 2005. In fact, to understand the housing crisis that has swept the country, one need only listen to the tale of the Ortiz family.
She looked at only one house and paid too much for it: $430,000 for a run-down, one-story duplex in Alexandria, triple what the house had sold for the year before, and $5,000 more than the asking price, according to real estate records.
She agreed to a high-interest loan that would cost her more than $3,000 a month, more than 70 percent of the $4,200 that she and her husband brought home monthly.
She signed papers in English that she didn’t understand. One said she was married to a man she didn’t know.
She placed her financial future in the hands of a woman she barely knew who sold cosmetics and jewelry door to door. She sought no one else’s advice.
Her loan application sailed through an originator and was accepted by a mortgage company, both specializing in customers with “less than ideal” credit.
And so, in August 2005, Glenda Ortiz, a cook at a Best Western who lived in a cramped apartment in Arlington County, became a homeowner. By last March, the home was in foreclosure. The loan originator and mortgage company had gone out of business. And Ortiz was headed to court.
“It was all a mistake. One hundred percent,” Ortiz said recently in Spanish. “I had such a burning desire to have my own house. I didn’t think about anything else.”
Ortiz and her husband, an air conditioner installer, are examples of what can happen when a hot real estate market collides with cheap credit, lax lending standards and little oversight. No one is free from blame in this tale.
Theirs is a story that Erick Gutierrez, housing director for the Washington-based Latino Economic Development Corp., said is all too familiar. Gutierrez blames the government for allowing so many subprime loans, such as Ortiz’s, which required no proof of income. “You could say: ‘You clean houses on weekends? Great!’ And then put down that they made $1,000 a week,” he said.
But by then, real estate agents would have made their commissions, mortgage brokers would have their closing costs, and the risky loans would have been repackaged and sold to Wall Street. No one cared as long as the housing market continued to boom.
According to the Center for Responsible Lending, 40 percent of loans to Latinos are subprime, and it projects that one out of five of these loans made in 2005 and 2006 will go into foreclosure.
“This is emblematic of people preying on their own and emblematic of bad brokers, but also emblematic of legitimate financial institutions either helping this happen or ignoring some facts so they can make a lot of money,” said Alys Cohen, an attorney with the National Consumer Law Center. “The problem is the system and that no one cares until Wall Street stops making money. And that’s what’s happening now.”
* * *
Glenda Ortiz, 40, had been struggling for nine years, since the day she fled Hurricane Mitch in Honduras and arrived in the United States to find her “own little piece of soil.” She dreamed that owning a home would bring her scattered family together. She fantasized about being able to bring home the daughter she’d left behind as an infant. “I know her only from photographs,” she said wistfully. “I wanted a future for my family, for my children.”
Ortiz, who speaks little English, said she didn’t know much about the U.S. banking system. So when a Mary Kay saleswoman, Maria Esperanza Salgado, came to her door and said she could help her buy a house, Ortiz said, she believed her.
Salgado had a business card with a blue Realtor logo identifying herself as a “sales assistant” to real estate agent Jorge Aguilar. Salgado is not licensed with the Virginia Real Estate Board. Aguilar said Salgado “was a very good sales promoter.” He said he paid her $500 for every referral she brought him, although board regulations prohibit paying commissions or referral fees to anyone but a licensed real estate agent. Salgado said he gave her only “gifts.” Aguilar said Salgado no longer works for him.
When Ortiz protested that she and her husband didn’t have good credit and had only a few thousand dollars in savings, Ortiz said Salgado, whom she had known for less than a year, promised to help her.
Ortiz said she and Salgado came up with a plan. They would buy the house jointly, using Salgado’s credit rating. Salgado also would pay half of the $11,000 down payment. The agreement is spelled out in court papers Ortiz has filed.
In a year, when the house had increased in value, as they assumed it would in the hot market, Ortiz would refinance. Ortiz said they had planned to take out $70,000 in equity, half of which she would pay Salgado for her share of the down payment and for allowing Ortiz to use her credit. Salgado would remove her name from the title, and Ortiz would own the house outright, according to the court documents.
But on the day of the closing in August 2005, Salgado’s brother Saul Salgado Hernandez showed up to sign the papers. Ortiz said that she was surprised but that she figured Salgado knew what she was doing. She said she did not understand any of the papers in the thick stack of documents that she signed, not even the one that said she and Hernandez were married. “I signed the papers,” she said. “I didn’t notice.” She also discovered that the woman handling her mortgage was Aguilar’s wife.
December 4th, 2008 at 8:49 pm
University of California system (which by law is restricted to the top 1/8th of high school graduates).
I’m calling shenenigans on this.
FYI: At the time I attended UC San Diego (mid-80s) the rule was that any California student who graduated in the top 10% of his class was guaranteed admission to the UC system, although not necessarily to the UC of his choice. I’m not sure if this rule has changed over the years, or if Steve Sailer has just garbled his recollection.
December 4th, 2008 at 9:03 pm
Educating consumers is well and good, but please don’t use it as an excuse not to regulate industry. “Disclosure” statutes don’t work even for financially literate consumers. Good policy would ban abusive consumer lending practices.
December 4th, 2008 at 9:17 pm
“Page Not Found”
The extra period at the end threw it off.
Try This(pdf)
December 4th, 2008 at 9:18 pm
I’m not sure if this rule has changed over the years, or if Steve Sailer has just garbled his recollection.
No, Sailer garbled it again. As usual, it is difficult to tell when he is being dishonest and when he is merely ignorant.
http://en.wikipedia.org/wiki/California_Master_Plan_for_Higher_Education
December 4th, 2008 at 9:18 pm
What is it with trolls and multiple adjacent posts lately? Having trouble gathering your thoughts, guys? I wonder if it’s an outcome of the election, with liberals (their electoral goals achieved for the present) abandoning the blogosphere in droves to live life while the likes of SS (perfectly fitting initials, btw) are left to post with nobody to read it (and presumably be offended by it). What about it, friend Yglesias? Are there any hit figures since Nov 4th?
December 4th, 2008 at 9:21 pm
It’s a weird graph. You define basic, normalize everything to 100%, and then have negative values that add with positive values to equal 100%. Or 101% as is the case in the bottom most bar graph. Freakin social scientists shouldn’t be allowed to put numbers on anything.
December 4th, 2008 at 9:28 pm
Various commenters are nitpicking over one bit of my statement:
“So, a huge amount of time is devoted to abstract math to prepare LA high school students for admission to the University of California system (which by law is restricted to the top 1/8th of high school graduates).”
One then quotes the UC Master Plan to show how I got it all wrong:
“Hence, the Plan laid out that the top 12.5% (1/8th) of graduating high school seniors would be guaranteed a place at one of the University of California campuses (Berkeley, Los Angeles, etc.);”
Which basically substantiates what I said.
There is of course the back door route of going to a community college or the like and then transferring into the UC system as a junior — that’s about 3500 students get into UCLA each year. It’s much easier than getting in as a freshman. Some of the Armenians in my neighborhood have figured out that they can have their smart kids pass the GED at 16, attend community college for free at 17 and 18, then enroll at UCLA as a junior at 19 and have a prestigious college degree at 20.
December 4th, 2008 at 9:47 pm
It does not substantiate what you said. You got it completely backwards. You need a remedial course in reading comprehension.
December 4th, 2008 at 10:04 pm
Deceased Equine Pugilism Squad here-
“admission restricted to top 1/8 of h/s graduates” != “top 1/8 of graduates guaranteed admission”
It would be equivalent if everyone guaranteed admission wound up going (but even then the UC system would have to almost double). but obviously they do not, some go to Harvard (or even UVA!). And the corrected link shows that at least 1/5 of the students are from the bottom half
December 5th, 2008 at 12:19 am
Yeesh. This is what I get. When I said before I agreed with Sailer, I was talking about the Consumer Math class. Not all that other shit about how hispanic immigrants caused the mortgage crisis, ruined the schools, and ate the last of the peanut butter. Francisco The Man is not down with that shit.
December 5th, 2008 at 8:42 am
Sailer-
Actually, unless enough of the top 1/8 of California students choose to go to a UC system college to prevent anyone else from going, the statement does not substantiate whta you said. You said that admission was restricted to the top 1/8. The current rule guarantees the top 1/8 admission, but it does not automatically deny admission to people not in the top 1/8.
jg: The way I look at it, by learning Algebra I and II and Geometry and Trigonometry I learned the other stuff indirectly. Anything taught in that consumer math class is something that should be inferred by a student who passed real math classes. Why would I need a class to tell me the lottery is a shitty deal? I already learned permutations back in sixth grade.
The point is, these kids aren’t learning Algebra I and II and geometry. Yes, if you can learn the abstract math, than learning it teaches you the other stuff indirectly. But you can learn the practical stuff without the highly abstract stuff, so people who will have severe trouble with the abstractions ought to be able to learn the practical stuff on its own, rather than putting them in a class where lif they cannot understand the harder stuff, they don’t learn anything.
December 5th, 2008 at 9:24 am
The most stunning thing about this survey for me has always been that “proficient” literacy includes the skill to compare and contrast two editorials. And even post-college graduates get barely 50%. IIRC.
December 5th, 2008 at 10:24 am
I went to Arkansas (the Delta) a few years ago and met a least one man who had been out in the fields picking cotton in 5th grade; he had missed going to school (he was one of 18 children of an alcoholic mother) and was illiterate and innumerate. He worked driving and tractor, spoke just like you and me (thanks to televsion) seemed intelligent and deeply ashamed of his deficiency. I imagine there must be many like him.
One of the best things that could be done with our media, I think, is to devote a large portion of its time to adult literacy and numeracy. There should also be adult schools and programs where people could go without shame to brush up on their literacy skills (or build them from scratch if necessary). (Literary skills include cultural and civic literacy, of course.) This is something that people could do to increase employment and is also a fruitful field for educational research.
December 8th, 2008 at 9:29 pm
My sister was involved with a program at the DC public library to help people with tax preparation. Financial illiteracy was only partially to blame- for a lot of people, the difficulty and effort required for tax preparation or itemizing made the problem seem too daunting to want to tackle. It sure as hell was hard for me to get in the swing of tax prep, and I have a college education.
Regardless, the point made in the post is totally valid. Even that little bit of engagement with finance was really worthwhile, and most of the people saved a ton of money that would otherwise be siphoned away by H&R Block (or something similar) or left unclaimed.
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