The Resurgence of Calls For Financial Literacy

Today is the last day of National Financial Literacy Month. At a time when the economy has come to a grinding halt, it seems pertinent to talk about financial literacy, or, more accurately, the fallacy of financial education. Agata Soroko recently published a short essay in Public Seminar -- The Financial Literacy Delusion. In it, she details how calls for financial education already are ramping up in light of the coronavirus's highlighting how little savings most Americans have. I suspected that the refrain that it's people's fault that they didn't have sufficient savings to cover a few months, and thus that they exacerbated the economic downturn with their inability to control themselves enough to save, would emerge with a vengeance in the coming months.

Combating that narrative will become more important than ever, as a matter of economic policy, but also of kindness and understanding to each other. Indeed, it's important right now as Congress considers how to help American families during the crisis. As Slipster Dalie Jimenez, Chris Odinet, and I wrote in our just-uploaded-to-SSRN essay, The Folly of Credit As Pandemic Relief, forthcoming in UCLA Law Review Discourse, in the CARES Act, Congress predominately provided relief to Americans in the form of credit products, not actual cash. This very likely will prove to be problematic because people will be unable to repay in the coming months, just as they are unable to pay for their necessities now. They simply do not have the money, and will not in the future because people still won't have sufficient income to accumulate meaningful savings. As Soroko writes, financial education cannot solve widening income disparities, rising costs, and wealth inequality--the roots of why many Americans have so little savings.

Yet the narrative that people cannot control their spending and thus save remains. Soroko points to calls for millennials to quit the avocado toast. Avocado toast is the new latte that Helaine Olen wrote about in Pound Foolish: Exposing the Dark Side of the Personal Finance Industry (one of my favorite books and one that I assign every time I teach a consumer credit seminar). Worse, now people are buying both! It's their fault that they don't have any savings. It's their fault that this crisis is so bad!

The truth is that it is harder and harder for Americans to save. A couple with at least one kid making $50,000 to $69,999 per year need to save for more than two years to accumulate enough to cover one month's worth of expenses. That's a lot of time for not much financial cushion. And it explains why, according to a new Pew Research Center survey, about half of all Americans, and more than three-quarters of lower-income Americans, now find themselves without enough savings to cover three months of expenses.

Also, it's not that people don't try to save. In the same Pew Research Center survey, 77% of respondents said that they always try to save. 63% of respondents think they should be saving more. But it's hard to save when the money is tight to begin with. Money is tight to begin with for many people because, as Soroko points out, family background and birthplace matter a lot for economic stability and mobility. As she writes, financial literacy needs to include discussions "about the distribution of wealth and power in society and the extent to which individual financial know-how can do anything about it." This is the narrative that we must emphasize in coming months.

Comments

[FJP]

It's interesting that we are good at moralizing about consumers who don't have savings, but we are less willing to say to shareholders, you dummies, why didn't you set something aside for a rainy day?

[Sam Turco]

A few years ago I posted an article called The Life Sucks Budget. The basic concept is that the bottom half of America cannot save money and reach their financial goals if they play by the normal rules. Low wages are a problem. Spotty health insurance coverage is a problem. Lack of decent jobs with benefits is a problem. As a result, lower income Americans don't feel the system works and so they opt out and don't save money or even attempt to reach long-term goals. And, they are right. The system is broke. So, the Life Sucks Budget is a call to accept that and succeed anyway. Depressing but true. Here is the article: https://www.nebraskadebtbankruptcyblog.com/2018/09/life-sucks-budget/