Saturday, April 23, 2011

Lessons In Financial Literacy

I’ve been a convert to the idea of promoting financial literacy at the earliest level of education. It’s such a critical life skill yet very few have any knowledge of it, particularly in light of the consumerist society the modern world is turning into.

Now, Prof Frances Wooley explains why financial literacy alone isn’t enough (excerpt):

Don't eat the marshmallow

Canadians are increasingly indebted. 31% of us struggle to make our bills and payments. We're pretty clueless when it comes to retirement - just 40% have a good idea how money we need to save in order to maintain our standard of living in retirement...

...I regard the the whole financial literacy exercise with some cynicism. As Canada has reasonably adequate government-funded income support programs for seniors, governments have a strong interest in ensuring that Canadians have enough savings that they do not need to rely upon those supports.

Moreover, financial literacy campaigns frame excessive debt or insufficient savings as a financial problem - expenditures exceed income. Yet, as the the familiar circular flow diagram shows, financial flows are simply a reflection of real flows…

…Framed in real terms, excessive debt and insufficient savings becomes either a problem of "too much stuff" or inadequate incomes: the value of goods and services coming into the household exceeds the value of that household's labour and capital.

The problem of inadequate incomes (rightly) receives much attention - governments devote billions of dollars to education, training, and other initiatives to promote success in the labour market.

But what about the problem of too much stuff? Nick Rowe has argued that people don't save now, but did in the past, because values have changed. I am not convinced that shifting values are the primary cause of diminished savings. There is not enough evidence about people's values, and too many alternative explanations, such as the greater availability of consumer credit...

...The ability to resist temptation is developed early in life, as shown by the famous Stanford marshmallow experiment...

...It all comes down to: Don't eat the marshmallow...

...Real world economies are characterized by monopolistic competition. As Nick Rowe explains, this means that firms will want to sell more at the existing price. Thus firms do everything in their power to persuade people to buy more marshmallows...

...We're surrounded by marshmallows, and then berated for our inability to resist eating them...

...The message: Don't eat the marshmallow. Yet. Save up for it first.

A better message might be: Don't eat the marshmallow. Period...

I’ll be the first to admit that I wasn’t as financially responsible as I should have been when I was younger. But I’m learning, and I’m finding it easier to resist temptation and postpone gratification, even as my income has grown (I’m close to being completely debt free at the moment). And in terms of investment, I’m making up for lost time.

But these skills (and the knowledge they spring from) should still be imparted to the broader population as early as possible. At least that provides the basis for good decisions, even if the self-discipline to enforce them might still be lacking. Even if its not a systemic risk, we’re already seeing the signs of trouble with young workers getting stuck in credit card debt. That’s an avoidable social problem, if we’re brave enough to take the necessary steps.

Remember: Don’t Eat The Marshmallow.


  1. Dear Sir,
    I am trying to understand this concept of high income economy that the country is vigorously directing its energy to achieve.As I understand it the bench mark is GNI per capita of USD 15 K.My questions is;
    1. Whats the downside if we don't achieve this ?Will the country be blacklisted n ppl go hungry?
    2.Its easier for the wealthy to get wealthier due to their higher disposable incomes.assets and better access to education.Will the policies for higher incomes benefit them more and thereby makes the less fortunate poorer?
    3.There's focus on internal consumption.and not necessarily productivity.Will the cost of living outstrip earning potential for most.Already we are feeling the pinch.

  2. Thanks for your thoughts. In answer:

    1. Nothing, but maybe hurt pride that we didn't get there. But don't worry, we'll get there eventually (I think earlier than most people expect).

    2. You forgot less relative taxation. But yes, I'm concerned that distribution of wealth and income is not being addressed by the NEM or ETP. People won't be poorer, except on a relative level.

    3. The first priority should be jobs for those capable of working - labour force growth will be above average for the next couple of generations. But the greater depth and breadth of the market should enable more opportunities for productivity improvements (higher competition and new markets). The real question is whether wages will keep up with both productivity growth and inflation - that's where we have failed before.