Art Carden  

Should Financial Literacy Be Part of the Core of K-12 Education?

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Maskin's Failure... Risk Analysis in One Lesson...

I tweeted the following last night:

Economic and financial literacy among the populace is abysmal, and my impression from my own education and from observing the passing scene is that people pay lip service to financial education but treat it more as an "oh yeah, that too" topic.

If education really is about human capital and even if it is about signaling, wouldn't it make sense to spend a lot more time and energy teaching about finance? What should we give up?


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COMMENTS (14 to date)
Jeff writes:

I think there is a lot of status-signaling by educators going on, too. For example, teaching kids math and statistics is good, because that prepares them for careers in science, and science, as a vocation, has very high (even sacred, in some circles) status in our society. Likewise, being able to read and enjoy classical literature is a mark of high social status, so it's important we make the kids read some Shakespeare, Chaucer, Hawthorne, etc, before they graduate, too.

Financial planning, on the other hand, is a fundamentally low status activity, because the need for it springs from low status motivations (ie, self-interest, greed, etc). Contrast with science, which is about the quest for Truth and Knowledge, etc: very high status motivations. Thus, basic finance gets low educational priority, while Algebra II, which the vast majority of students probably won't learn very well in the first place and won't use after they've completed the class, anyway, gets high priority.

Robert D writes:

I would love to say "yes" to this question, but schools are failing students with the current curriculum. Here are the 2013 results from my former High School:

81% four-year graduation rate

7% dropout rate

12% ??? MLive didn't say, and didn't link to the research.

16 ACT composite score (out of 36)

99.4% of students did not meet ACT college readiness benchmarks

Ranked in the bottom 11% of Michigan schools in 2012-2013, down from 29% in 2011-2012.

Even more depressing is this is the better school of the two high schools in the city.

LD Bottorff writes:

We already have a shortage of qualified math teachers. Where are we going to get teachers qualified to teach personal finance?

Paul Geddes writes:

Give our government educators something more to mess up? Imagine how a teacher instilling proper re-cycling etiquette is going to handle interest rates.

Rick Hull writes:

The two concepts every high school graduate ought to know, regarding finance:

  • The power of compounding interest on multi-decade time scales
  • Borrowing for consumption (rather than investment or greater future revenue) is a trap

Thanks to decades of demand-side economics, where rather than incentivizing suppliers to satisfy consumers and instead manipulating consumers to satisfy suppliers, we have several generations of Americans that are conditioned to consume well beyond any natural or intrinsic need, borrowing heavily in order to do so.

Borrowing only makes sense where the result of the extra funds is increased income. The expected value is at least zero and ideally positive.

Borrowing to stay afloat (keep the lights on, or pay off old loans) is the inflection point, where buying time may have some hope for an internal or external change that results in long term viability. The expected value is at most zero and likely negative.

Borrowing to fund consumption is a terrible idea, whether performed by governments, individuals, or corporations. The expected value is negative and the only question is the magnitude of the error.

There may be psychic / emotional benefit to borrowing for e.g. housing consumption, and housing may be treated also as a highly speculative investment, but speculation on assets which are many multiples of income can easily turn ruinous, as we have seen.

Hasdrubal writes:

First, what do you mean by "Financial Literacy?"

What I think kids should be exposed to would include:

-Compounding interest in a math class.
--The time value of money, probably as an example in a math class.
--Bond valuation, as an example in a math class. (The concept that you can get a value for a thing based on something other than its price.)

-The basics of the financial system in a civics class
--What the Fed does, the discount rate, different interest rates for different things.
--How the government funds itself.
--The difference between stocks, bonds, mutual funds and index funds.

-Financial planning, maybe in a civics class?
--What questions to ask and how to find basic answers about saving money: How much will I need? How will I get there over a given period of time? Possibly as a project in either math or civics or a cross between the two.
--The concept that financial planning isn't just about retirement, but choosing what kind of house to buy, or figuring out what happens when you have a baby.
--Budgeting.
--"Balancing your checkbook" style accounting. (You don't have a checkbook anymore, but you still need to know that restaurants don't run tips through their system immediately and you have to account for them yourself or you'll have overdrafts.)

-The concept of opportunity costs, or just that everything requires tradeoffs. Probably in a civics class.

I think you can do a significant amount of financial education without giving up much other curriculum by using it as examples for concepts you're already teaching. Since this idea seems so obvious, it probably means you'd still have to give something else up because you're already using the examples to expose students to that instead.

Some schools already do this kind of education. I went to a mediocre school (they were proud to be right at the state average for standardized testing) in the 90s and I was exposed to most of these things. They weren't emphasized or tested, but we certainly went over how to balance a checkbook and what a bond was. Not so much budgeting (though I think they hit on that in Home Ec,) or opportunity costs, though.

Jay writes:

Any modern politician who campaigns for economic literacy is planting the seeds for the demise of his own platform.

We don't see a political cry for economic literacy for the same reason we don't see a cry for increased scrutiny of congresspeople's business dealings. Ignorance works to the advantage of the political class.

NZ writes:

I heard that in China, all kids start taking business classes from the 5th grade or something like that. Well, I'm sure that works great--for Chinese kids.

I went to public school from 1st-6th grade and from 9th-12th grade. At various stages during that time I distinctly remember getting word problems in math class that dealt with compound interest rates and so forth. So, to some extent at least they're already teaching personal finance in public school. How's it working out?

I'd bet that most of the kids who retain that information from class and apply it later would have learned it from their family or on their own eventually. Those kids probably learn, or would learn, a whole lot that way.

More and more, I'm convinced that beyond fundamentals of math and reading, what K-12 really teaches is how to sit still for an hour at a time for 6-8 hours a day, how to get along with other people your own age, how to interact politely with authority figures, and if you're lucky, what things you're interested in or good at that are worth pursuing further. All valuable skills, but not worth piling extra special programs on top that require specially trained teachers and expensive textbooks.

The kids who can't even learn those things (and that's a lot of kids) definitely aren't going to also learn personal finance.

Instead we should be streamlining education to make it churn out people who are literate, numerate, socially adjusted and patriotic, and know their own strengths and weaknesses, all at the lowest possible cost to taxpayers.

Mr. Econotarian writes:

There should be a class in high school where kids say what they want to do. They are then assigned the median salary for that career. Then they should see how much payroll taxes take. Then income taxes. Then they have to find an apartment ad in their area with rent that they can afford on their net salary. Will open up some eyes

Noah Carl writes:

Completely agree. We should teach teenagers how to file their taxes, how to pay bills, and how to think about pension investments. Stuff that might actually be useful to them. We can concentrate academic teaching on the middle- and high-achievers.

EclectEcon writes:

In the 1950s, my junior high school in Michigan had a required one-semester course in "Business Training". I remember learning about how to write a cheque and balance a chequebook, plus endless worksheets on bookkeeping. We may also have had some material about interest rates, but I'm pretty sure we didn't study consumer loans or compound interest. But even a course like that, with less bookkeeping and more about consumer education could be good ---- unless it got subverted by teachers who would use it as a pulpit to preach against big business.

Roger Sweeny writes:

Hasdrubal should know that most high schools don't have a civics class, and haven't for quite some time. High school courses are basically high school versions of college courses (e.g., high school physics is based on Physics 101). This makes it much easier to get teachers. And people in the ed business tend to believe that real education has to relate to college.

Mark V Anderson writes:

NZ has the best comment. We already stick those kids in the classroom much too long. And lots of them don't learn even the basics. I don't agree that we should be teaching patriotism and social skills, but we should teach the basics of literacy, numeracy and speaking skills. And even those may too much for some kids; if they learn the same outside the classroom.

JKB writes:
And people in the ed business tend to believe that real education has to relate to college.

And teaching financial literacy before college would certainly undermine the business model of the modern college. If kids were skeptical of taking on loans, they might make other choices about college.


As for what to get rid of, I'm reminded of a factoid Glenn Reynolds offered regarding his daughter. About 9th grade, she did a time audit of her school day only to discover that actual instruction in the academic topics only took up 2 hours of her day. So that leave 5 hours or so of the school day to look to drop. But the schools will seek to cut into that 2 hours instead.

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