It’s not often that I speak kindly of government programs of any kind. But a few days ago, I praised a financial literacy initiative recently announced by the City of Richmond with the goal of empowering citizens, especially lower-income citizens, with the knowledge to make better consumer decisions. The program not only educates but preaches the virtues of saving money, building assets, and participating in the banking system.
Now a column in Governing Magazine calls into question the value of financial literacy education, especially if it is tied to obtaining Medicaid benefits, as has been proposed in Kentucky. Matt Darling, vice president of Ideas42, a nonprofit that “uses behavioral science for social good,” argues that poor people already know how to handle their money better than wealthy people. They, unlike the wealthy, have to stretch a dollar. Additionally, he cites a 2014 study, “Financial Literacy, Financial Education and Downstream Financial Behaviors,” as evidence that “financial education programs, while well-intentioned, don’t noticeably improve the financial behavior of their participants.”
The City of Richmond isn’t proposing participation in financial-literacy education as a pre-condition for any other program, so that’s not an issue. But the Virginia Board of Education does require Virginia high-school students to take a class on economics and personal finance. Personally, I believe the course teaches extremely important subject matter. However, I am open to social-scientific evidence on whether it makes a difference.
The 2014 study, co-written by University of Virginia McIntire School professor Richard G. Netemeyer, conducted a meta-analysis of 168 papers covering 201 prior studies about financial literacy and financial education across the world. Their broad conclusion: Interventions to improve financial literacy explains one-tenth of one percent of the variance in financial behaviors studied, with even weaker effects in low-income samples. A big part of the problem, the authors say, is that financial education decays over time. “Even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention.”
One possible way to improve the efficacy of financial education, the authors suggest, is to provide financial education in the form of “just in time” tutorials tied to specific needs at specific times. For example, provide a financial education module for mortgages when people are thinking about buying a house.
The authors’ review of the literature found that financial literacy is more strongly tied to personality traits than it is to financial education. Financial literacy is positively correlated with PNI (preference for numerical information), and NFC (a tendency to engage in and enjoy rational/analytical thinking and engaging in problem solving). Other factors are numeracy, the propensity to plan, confidence in one’s ability to make decisions, and a measured willingness to take risks.
Virginia’s financial literacy requirement sounds terrific in theory. What kid couldn’t benefit from learning more about economic principles and personal finance? But learning decay is a widely recognized problem in education. A kid can learn about mortgages, car loans, and credit cards, but it he doesn’t buy a house, buy a car, or start managing his own credit cars within 20 months or so, he will likely forget most of what he “learned.” While Virginia has won accolades for teaching financial literacy, is there any evidence that the classes make consumer behavior more responsible?
The Debt.org website observes of the Old Dominion: “Virginians have high amounts of every type of debt, especially credit card, mortgage and student loan debt.” Virginians have the sixth highest credit-card debt per capita among the 50 states, the sixth highest level of mortgage debt per capita, and the sixth highest level of student-loan debt per capita.
On the other hand, acknowledges Debt.org, Virginians do have comparatively high incomes and “Virginians are doing well when it comes to paying their bills.” So, at least they seem to be handling their debt responsibly.
Even if financial literacy education sounds like a great idea — one that appeals to people across the ideological spectrum, no less — take nothing for granted. We should subject this educational mandate to the same scrutiny we do for all categories of educational spending. Dollars devoted to one thing are dollars that cannot be spent on another something else — a key insight, incidentally, of financial literacy.