Hope and Danger for Economic Literacy
Todd G. Buchholz - President, Victoria Capital, Washington D.C.
Published December 1, 1998 | December 1998 issue
Why should we care about economic literacy? Are we troubled by illiteracy in physics? Or metaphysics? Should we worry that most of us can't remember much of the periodic chart of the elements? Why should we worry more about economics? Because economic illiteracy is dangerous. I can ride on a roller coaster without understanding centrifugal force. In fact, even if I refuse to believe in centrifugal force and actually create a new religion on that basis, I will probably stay in the roller coaster as I careen around the corner. Physics can protect me, whether I believe it or not. But if I ignore basic economics, I could go broke. And if a country ignores basic economics, it could go bankrupt.
You really cannot blame most people for finding economics dull, when economists drone on about parameters, constraints and functions. Tweedy, beady-eyed and bow-tied, the traditional portrait of the economist is a virtual sleep-aid. And their dull appearance is often accompanied by teaching methods that consist mostly of scribbling graphs on a blackboard, Even our most witty hero, John Maynard Keynes, sometimes failed to inspire. Keynes, who could conduct a fascinating conversation on everything from Isaac Newton to modern art, bored Franklin Roosevelt, leaving the befuddled president with a "whole rigamarole of figures." Roosevelt's typical reaction reminds me of humorist Fran Lebowitz's advice to teens: "Stand firm in your refusal to remain conscious during algebra. In real life, I assure you, there is no such thing as algebra."
Yet real life is about economics. It is about finding a job, surviving a recession, battling inflation, saving for retirement, and investing in a mutual fund or playing the stock market. These days many 20-something children are living back with their parents because they cannot afford a home of their own, and there is a one-in-four chance that those same parents are also caring for an elderly family member. If they're squeezing their savings to pay for kids and for older parents, will there be any money left when they want to retire? We are all bounced around by seemingly abstract forces with names like "supply," "demand" and "productivity"—it helps to know which way you are about to bounce.
Students and noneconomists frequently cite a simple reason for ignoring economists: They always seem to disagree. We have heard too often George Bernard Shaw's comment that if you lay down all the economists in the world end to end, they wouldn't reach a conclusion. Two economists on a television show seem to require a marriage counselor. In truth, most of the key economic principles command overwhelming support from professional economists. For example, economists almost universally support free trade and oppose tariffs and import quotas. Back in 1930, over a thousand economists signed a petition begging Congress not to pass the Smoot-Hawley Tariff Act. Congress didn't listen, and the oppressive tariffs ignited a worldwide trade war and helped twist a typical recession into the terrible Great Depression. In the nearly 70 years that followed, the fortunes of American citizens have become even more tied up with the performance of our international trading partners, making protectionist policies even more lethal from the point of view of economists.
While serving on the White House Economic Policy Council, I learned how fine the balance is between good politics and good economics. Politicians constantly face political pressures to ignore solid economics: "Why shouldn't corn growers receive a subsidy for ethanol?" "Shouldn't we protect our sugar cane industry in Florida—after all, Florida has more electoral votes than Jamaica." U.S. congressmen can spend their entire careers consoling and consorting with victims of good economic policy. Let's admit it: Free trade hurts some domestic producers. Low inflation hurts borrowers. Falling interest rates hurt elderly savers. Technological innovation hurts some workers. Taxes on pollution hurt some corporations.
An economically illiterate public can be bullied or inveigled into thinking that the victims of good economics exactly offset the beneficiaries. Good economics is not a zero-sum game, taking from Vincent to pay Victoria. As a matter of fact, we can define good economics as policies that produce positive gains, even though victims may be created.
Because even good economic policies often produce victims, though, economists have a very tough time persuading governments to take good advice. Good economics may not be popular economics, especially in the short run. The benefits of lower inflation and higher investment may take some time to shine through—especially to shine through television images of fallen farmers and depressed homeowners, who suffered when the Federal Reserve Board squeezed inflation out of the U.S. economy. Unfortunately, the media generally prefer short bursts of wrenching violent images to lengthy exposes of pleasing, peaceful images.
Good economics does not do well in 15-second sound bites. In 15 seconds a shill from any number of lobbying groups can clobber an unbiased economist. What economists really need are lessons in sloganeering and pamphleteering. What news programs need is the patience to listen to difficult and important arguments. Let's be honest, though. To a large extent, the media only reflect the demand of viewers for titillating tidbits. Apparently, people enjoy gruesome news stories, just as they enjoy horror movies. Some of the fault for inane news programs lies in ourselves. We cannot sympathize with the free market economics and then slam networks for pandering to the public.
As a public, we have at least three psychological barriers to economic literacy. First, we prefer brief, flashy bursts of information. Second, we prefer immediate results and quickly grow impatient. Keynes had it wrong. In the long run, we, or at least our descendants, are not dead. If we surrender to every urge today, we leave nothing for tomorrow. If we do not save, if we only borrow, if we dance too merrily tonight, tomorrow will be a very long and arduous day. Societies prosper only when they think of a long run. This is not to say that a society of misers will thrive. While the medieval obsession with a heavenly afterlife probably drained the energy to innovate and excel on earth, we in our century have exalted tonight as the chiliastic moment rather than tomorrow or the day after tomorrow. This may sound rather ethereal now, but our grandchildren who will inherit trillions of dollars in debt will feel a real and true sting.
Third, despite our short-run focus, we find it difficult to recognize the "good times" even when we have them. Economic happiness is not an explosion of wealth. The Industrial Revolution, the most dramatic economic event in the history of mankind, came at a rate of barely 5 percent per year. A 5 percent rise in the living standard does not sweep a pauper into the master bedroom of a palace. Nor does it replace gruel with foie gras. Year-to-year changes come slowly. But when he nears death, the pauper may find that his standard of living has multiplied fourfold. By the time we realize our higher standard of living, we're just at the right age to sing songs about the "good old days." As we travel through time, we peer through the front window with nearsighted glasses, yet we glance through the rear view mirror with rose-colored glasses. It's hard to move forward that way. And it's hard too for economists to point us in the right direction.
There is hope for economic literacy, despite these barriers. Consider: 150 years after Karl Marx wrote the Communist Manifesto, almost half of American families are both capitalists and laborers, that is, they have money invested in the equity market and they also draw a paycheck for daily work. As a result, they have a much stronger, and more balanced, interest in the nation's finances. This does not guarantee economic literacy, anymore than it guarantees a good return on their stock portfolio. Nonetheless, we should hope for both.
Buchholz is president of Victoria Capital, which advises some of the world's leading investment funds on global strategies, and he manages a foreign exchange portfolio for the proprietary trading arm of a major international investment bank. From 1989 to 1992, Buchholz served as associate director for economic policy at the White House, and he has taught economics at Harvard University. Buchholz's commentaries on economic issues appear periodically in print and on television and radio.
Buchholz is an economist and a lawyer, with advanced degrees from Cambridge University and Harvard Law School. He is the author of From Here To Economy and New Ideas from Dead Economists.
Special study: The Economic Literacy Project