Personal Finance and the Economy

Economics is a science, but it isn’t exactly a cut-and-dry one. The most educated and experienced economists often disagree about what, exactly, would boost the economy and what might stagnate it. And that’s perfectly okay. Our nation’s economy and the economy of the world are incredibly complex, and they just keep getting more complicated.

Yet in the American voter pool, especially on the left side of the political spectrum, everyone seems to think they have the answer. They think that a new policy like, say, increasing federal minimum wage would have a direct and permanent positive effect on the economy. And to be fair, a worker making more money doing the same job would likely be better able to support a family, and more likely to spend money on consumer goods. But they ignore the ripple effect that such a policy would have, such as business owners cutting hours and cutting positions to make up for the difference in wages, or the long-term effects on inflation.

A gigantic minimum wage increase is just one example of a “bad” economic perspective -- not bad because it’s inherently wrong, but because it’s poorly thought-out and ignorant of downstream repercussions. There are dozens of these, on both sides of the political spectrum, and millions of Americans are pushing for them to be executed despite their economic ignorance.

Why is this the case? I’d argue that it’s all rooted in poor personal finance and financial education in the United States.

Poor Financial Education

It’s commonly understood that the American school system is practically devoid of any topic related to personal finance. Students aren’t taught about the basics of financial systems, nor are they taught how to budget, how compound interest works, or even the advantages and disadvantages of a free-market, capitalist system like the one we have. Colleges tend to be slightly better, but not everyone goes to college, and not everyone who goes to college takes an economics or personal finance course.

Today, there are plenty of online resources you can consult to learn about these topics, like Money Task Force, which has countless articles on personal finance and economics. But to access and learn from resources like these, a person must be self-motivated enough to seek them out. This is highly uncommon.

The only other place someone might learn about financial topics is from a parent. While this is advantageous for children of parents with good financial habits, the more common reality is that it creates a multi-generational line of ignorance; parents with no personal finance knowledge or skills raise children who are similarly devoid of these knowledge and skills.

The Ripple Effect of Poor Financial Education

Having no foundation of personal finance or economic knowledge has three important effects, all of which directly or indirectly produce an ignorant population who holds poorly-conceived economic viewpoints:

  • Budgeting and personal economic conditions. First, people who don’t understand basic financial topics like budgeting or the power of compound interest aren’t going to do well financially. They’re going to max out their credit cards, live paycheck to paycheck, and generally make poor financial decisions. Ultimately, this puts them in a bad financial situation, but rather than questioning and improving their own habits, they’re likely to blame “the system.” For example, they don’t believe they’re poor because they spend their paycheck immediately on wants, rather than needs; it’s the fact that minimum wage isn’t high enough.
  • Ignorance of secondary effects and bigger systems. Economic systems are big and complicated; accordingly, every action, even a minor one, has secondary effects on the systems around it. When you increase a variable like tariffs on a foreign country or taxes on high-earners, it’s going to change the way the individuals, countries, companies, and organizations within that system behave. A poor financial education can easily make one ignorant to this.
  • Dunning-Kruger. The Dunning-Kruger effect seems to get invoked every time someone encounters a differing opinion these days, but here it applies perfectly. According to this effect, people with low levels of knowledge in a given field are more likely to overestimate their knowledge of that field. In other words, people with the least understanding of economics are more likely to believe they know more than they do. This effect is likely at least partially responsible for the millions of uneducated people all claiming they have the answer to the country’s economic challenges, as well as the experts at the top of their field admitting that the economic complexities of the world are too nuanced for any single policy to work perfectly.

Let me be clear: I don’t have all the economic answers, either. Nobody does, and that’s my entire point. The people most educated about economics and financial topics in general are the ones most likely to acknowledge that economic policies are too complex for any one simple solution to “fix” a given problem. If we want more people proposing and supporting sane, nuanced economic policies, we need to put a greater emphasis on public understanding of complex financial topics.

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