Americans have a truly depressingly low level of financial literacy, raising questions about whether many of our fellow citizens have the basic cognitive skills necessary to prosper in a complex modern economy.

Can anything be done about this?

The behavioral economics types want the government to craft rules that would nudge the illiterate to make smart choices. Unfortunately, this program is hobbled by the reality of government operations. Instead of nudging the illiterate toward wise financial decisions, any paternalistic program will likely nudge people toward decisions that benefit influential special interest groups.

Perhaps we could try to provide better financial education. This is the favored policy of many on both the center-right and center-left, who want to empower people to make good decisions for themselves.



Last Friday, for instance, officials from the SEC, FINRA and the Jump$tart Coalition for Personal Financial Literacy visited 18 elementary schools throughout the county to teach a class on financial literacy. “Teaching children about money is an investment in the future, because an investment in financial literacy can pay a lifetime of dividends,” SEC Chairman Mary Schapiro said.

Unfortunately, this may just be wishful thinking. Lisa Fairfax at the Conglomerate blog dug up a 2008 study that shows that our efforts to invest in financial literacy have a grim rate of return. Eleven years ago the Jump$tart program began measuring financial literacy and discovered the average financial literacy score for high school students was 57.3%, which is frighteningly low. After a decade of effort to improve financial literacy, including hundreds of efforts at the state and federal level, the average score declined to 48.3%. Jump$start notes that high school students who take financial literacy courses do not fare any better than those who don't.



On one level, this is startling. It challenges the very notion that we have any real clue about how to improve financial literacy. But, beneath those raw numbers, there is some hopeful news. When the survey was first taken, children of wealthier parents performed worse than children of poorer parents on the exam. After a decade of financial education, that situation was reversed. So it seems we can educate some youths in financial literacy.



Perhaps we shouldn't be that surprised that scores are declining. During the same period, overall literacy and numeracy rates among Americans also fell. So the problem isn't really confined to financial literacy.

"[O]ne 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," Matthew Yglesias wrote a year ago.

Unfortunately, we don't really know very much about improving the situation. Experience suggests that putting more funding and attention into education isn't doing the trick. Some have suggested that de-emphasizing college admissions, where students are expected to do well on abstract math tests instead of practical applications of math such as paying off credit cards, might improve financial literacy.

Perhaps one practical solution would be to adopt policies aimed directly at limiting the number of poor people in the country, or at the very least not increasing the number. It seems like common sense: if the poor are doing badly in terms of financial literacy, let's have fewer of them. A program of "less poor people" would include tax policies that encourage wealth creation and business formation, of course. But also we'd want to avoid wealth destroying asset bubbles or savings destroying inflation. A likely part of this policy mix would include restrictions on immigrants who can be expected to be on the bottom rung on the economic ladder.

Would this work? To be honest, we don't know. We'll always have poor people, and we're continually discovering the limited efficacy of poverty programs and education to alleviate many of the maladies that accompany poverty. But what we're doing now sure isn't working.