Business Forum: Teaching People to Think – Badly

Business Forum: Teaching People to Think – Badly

by David Morris

Originally published in the Minneapolis Star Tribune, July 25, 2004

In 1998, with much fanfare, the Federal Reserve Bank of Minneapolis formally launched its “Economic Literacy” initiative.

As President Gary Stern explained: “Economic literacy is crucial because it is a measure of whether people understand the forces that significantly affect the quality of their lives.”

The initiative includes student essay contests. This year, the Minneapolis Fed invited high school juniors and seniors to tackle this question: “What role, if any, should the government play in addressing income inequality?”

To guide the students, the bank issued a primer. “One often hears the phrase, ‘The rich get richer and the poor get poorer,'” the primer begins and then refutes the adage because “income inequality is widening [while] … poverty rates steadily decreased.” The primer concedes that some people believe inequality weakens society’s bonds but wants the students to know that there are “possible external benefits of income inequality … In fact, some contend that … income inequality provides incentives for those who are at low- to middle-income levels to work hard, attain more education and advance to better-paying jobs.”

The Minneapolis Fed received nearly 250 essays from high school juniors and seniors from 39 schools in six states. The overall winning essay is titled, “Income Inequality: Not a Government Issue.”

The essayist declares: “Income inequality in fact provides those in poverty an incentive to work hard, achieve higher levels of education and eventually advance to higher-paying positions.” She notes that “the average CEO is paid over 400 times as much as the average worker” but explains, “Without these top earners to aspire to, the productivity of the American economy would collapse.”

Writes a second-place winner (there were two): “Inequality isn’t as bad as everyone believes. Without a differentiation in income among classes, the lower classes have nothing to attain to.”

This is economic literacy? What’s going on here?

The bank’s introductory essay on economic literacy, “Why Johnny Can’t Choose,” offers a clue. The title was consciously purloined from, “Why Johnny Can’t Read,” an essay that arguably launched a thousand reading literacy efforts. But even the casual observer recognizes the fundamental difference between reading and economic literacy. Johnny needs to learn to read because he can’t read. He already knows how to choose. What the Fed wants is to ensure that he chooses correctly.

What does “correctly” mean? Part of the answer can be gleaned from a 1998 bank-sponsored questionnaire titled, “Are You Economically Literate?” Here are some of the questions:

• “Which of the following occurs when one country trades wheat to another country in exchange for oil?”

The correct answer? “Both countries gain.” Why? Because, the Fed tells us, “all other answers are ruled out, for if one country did not benefit, there would be no incentive for it to participate in additional exchanges.

• “In a market economy, individuals pursue their own self-interest. Does this serve the public interest because of the … ?” The Fed offers four answers. All presume individual greed serves the public interest.
• “What would happen to employment if the government mandated a minimum wage above what employers currently pay?” The economically literate answer? “Employment would go down.”

The average American did very poorly on the test. In other words, their answers were different from the Fed’s. Does that mean they answered the questions incorrectly? Well, yes it does.

Bryan Caplan, an economist at the Center for the Study of Public Choice at George Mason University and a vigorous proponent of economic literacy, puts it bluntly: “Economists are right and the public is wrong.”

The solution? A good dose of economic education.

“Education tends to make people think more like economists, suggesting that education — both economic and general — makes people more rational, not just more informed,” Caplan argues.

And where does becoming more rational lead? A major essay in the bank’s 1993 Annual Report by Vice President Preston Miller offers a hint. Provocatively titled, “The High Cost of Being Fair,” the essay concludes: “If the costs of achieving fairness are higher than formerly thought, government interventions to achieve that goal ought to be scaled back.”

Miller concedes that will not be easy. “Politically, it seems difficult. … Public attitudes toward government redistributions must change first.”

How to change public attitudes? Economic education.

In a recent letter to the Federal Reserve System’s Board of Governors, Tom Schlesinger of the Financial Markets Center, a thoughtful critic of the Fed, suggests the Fed leave economic education to others. Failing that, “Everyone involved would benefit” if the Fed diversified the outside sources of expertise and economic philosophies that play a role in its economic education programs.

The Fed should expose its audience to the growing number of studies that identify the stress caused by inequality — not poverty — as a cause of many social ills. Abundant information is available on Web sites like Inequality.org or Inequality.com.

The Fed might inform students that even conventional economic thinking supports fairness. The theory of marginal utility tells us that the more of something you have, the less satisfaction you get out of having a bit more. Thus a dollar taken away from a very rich person and given to a very poor person makes society as a whole better off because the loss of satisfaction from the very rich person is far outweighed by the gain in satisfaction by the poor person.

Oh yes. For the record, poverty rates did fall dramatically from 1959 to 2000. But all of the reduction occurred in the 1960s, the result of massive government involvement. From 1980 to 2002, the number of people living in poverty increased by 6 million, according to Poverty in the United States 2000, a U.S. Census Bureau study.