Financial Literacy Month

Now that April has ended, lets all pause for a moment and remember that it was Financial Literacy Month .

Its hard to imagine how anyone could be opposed to financial literacy. Being against it would be the financial equivalent of hating Mom and apple pie. What could be more essential to the American way of life than the ability to make informed, prudent and appropriate decisions about budgeting, saving, borrowing and investing?

And financial education is a booming industry, with more than 2,100 nonprofit organizations, hundreds of financial-services companies and thousands of schools nationwide competing for billions of dollars a year in government and private funding. Nearly two dozen federal government agencies support financial-literacy programs. RBS Citizens Financial Group gave $2 million last month to various financial-education groups, while PNC Financial Services Group announced two years ag o that it would give $12 million to support children’s financial-literacy programs, including videos on saving and spending featuring Elmo and Cookie Monster.

It all sounds wonderful but does it make sense?

Despite the immense resources being marshaled in the cause of financial literacy, there isnt even a consensus on what the term means or how to achieve it.

And theres remarkably little evidence that financial-literacy education (lets call it fin lit for short) works.

Year after year, surveys find that Americans are as financially and economically illiterate as ever.

Even more worrisome are the studies that purport to prove that financial-literacy education works. The typical such study, according to an authoritative review. includes no experimental control group and relies on peoples reports of their intentions not an independent measure of their actions to measure whether the classes work.

If someone taking a fin-lit course says, Now that Ive taken the class, Im going to start paying my bills on time, researchers report that the program was a success even if the person goes on to be as bad a deadbeat as ever. In other studies, people are asked whether they think they know more at the end of the class than they did before it started; if they say yes, the class is declared to be effective.

There is even some evidence that fin-lit classes can make people worse off. One study found that soldiers who had studied fin lit ended up significantly less likely to have systematic control over their household budgets. Another showed that people who had taken a fin-lit class in high school later reported that they were less thrifty, less likely to pay their credit-card bills in full and more likely to bounce a check.

After all, a little knowledge is a dangerous thing: Taking a fin-lit class might well give the least financially knowledgeable people just enough confidence to make them think they can safely take extra risks. (That might also explain why the victims of fraud tend, on average, to be more financially literate than those who arent victimized.)

None of this stops the fin-lit juggernaut. The typical financial-literacy event mixes information from government agencies and nonprofits along with presentations from banks, brokerages and other financial firms that wouldnt otherwise have such handy access to large captive groups of impressionable, novice consumers.

In one Federal Deposit Insurance Corporation survey, nearly two-thirds of banks said they participated in a fin-lit program because it was a way of taking advantage of a good business opportunity .

So is fin lit an educational enterprise, or a marketing gimmick?

In a series of brilliant polemics meticulously backed up by empirical evidence, Loyola Law School professor Lauren Willis has argued that fin lit is a colossal waste of time and money for everyone except the companies that sponsor it.

Dont get me wrong. Wed all be better off if everyone were more financially literate, and some fin-lit programs undoubtedly work.

But you could easily argue that technological literacy and medical literacy are at least as important to peoples well-being as financial literacy is. Even so, most of us just call the help desk when our computers dont work, and nearly all of us call a doctor when were sick. Thats partly because were lazy (I dont feel like learning how to reformat my hard drive), partly because were busy (I dont have time to read every article on acid reflux in the New England Journal of Medicine) and partly because were rational. In a capitalist system built on specialization and the division of labor, it makes sense to trust the folks at the Genius Bar to fix your MacBook better than you can and to assume the orthopedist knows more about repairing your anterior cruciate ligament than you ever will.

Viewed this way, much of the fin-lit movement looks like a bait-and-switch maneuver by the financial industry.

The technology industry and the medical profession dont spend billions of dollars a year propagandizing for technology literacy or health-care literacy almost certainly because they know their customers are willing to delegate decisions to professionals in those fields. Why, then, does the financial-services industry invest such ungodly amounts of time and money including the taxpayers money in promoting fin lit?

One obvious possibility: The banks and brokers know the public doesnt trust them and thus want to give members of the public the false impression that they themselves are in charge of their own financial destiny. Once you accept the myth that we can just let consumers be their own regulators, Willis told me in an interview, then you dont have to acknowledge that were at the point where the financial system has gotten too complex and sophisticated for many folks to be managing it on their own.

In my opinion, the best way to think of most fin-lit programs is as the equivalent of the alcohol industrys Drink responsibly campaign.

We expect individuals to monitor their own drinking behavior; we dont expect alcohol companies to do it for them. We also recognize as a society that some people are alcoholics who cant easily monitor their drinking behavior and that education produced by brewers and distillers probably isnt be the best way to help these folks.

No one sees the words Drink responsibly and seriously believes that alcohol companies want people to drink less.

Nor should we expect to solve problems like undersaving and overborrowing with educational materials produced by companies that profit from financial illiteracy.

Before we invest in the luxury of making people financially literate, shouldnt we first take care of the vastly more urgent problem that millions of them cant read, write or do basic math? According to the National Center for Education Statistics. an estimated 30 million Americans were unable to read basic English prose and roughly 47 million were functionally innumerate as of 2003, the latest available survey.

As a society, shouldnt we be ashamed that we are awash in studies of peoples financial literacy, while we cant even be bothered to survey basic literacy and numeracy more than once a decade?