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Is Teaching Financial Literacy a Waste of Time?

Not long ago, I wrote about the sad state of financial literacy in the U.S., and how some people, like Annamaria Lusardi of Dartmouth, are proposing widespread education to fix the problem.

But in a brief Money magazine Q&A, Lauren Willis, who teaches financial-products regulation at Loyola Law School, says that’s a waste of time. Excerpts:

Q: What’s so bad about financial education?

A: It doesn’t work. Sellers of financial products spend billions drowning out well-meaning messages to consumers from nonprofits or government agencies. Also, financial products are always changing — credit and insurance products have changed dramatically in the past 20 years — making it hard for educators to keep up. It’s not like sex education. As far as I know, people get pregnant the same way they did when I was in high school.

I couldn’t agree more with her first point. But I’m not sure about her second point: while financial literacy is perhaps more complicated than sexual literacy (or maybe not?), there are probably 10 basic concepts that fuel an understanding of nearly everything else to come.

Q: Then what should we do?

A: Stop trying to turn everyone into a financial planner. Instead, try to get everyone to understand that the people selling you financial products often don’t have your best interests at heart.

Well, okay: it’s true that turning everyone into a financial planner is absurd. And yes, her point about the financial-products sellers is, once again, well taken. But that doesn’t go quite far enough, does it?

Q: What type of regulation do you think would work?

A: Sellers could be required to offer you a default product that is safe. Whenever you applied for a mortgage, for example, you would have to be offered a 30-year fixed amortizing loan.

Well, that’s a fine nudge (a k a Nudge), as far as it goes. But it doesn’t go very far.

On the other hand, I share Willis’s belief that having the federal government teach financial literacy is not a great idea. That is the kind of thing the government tends to do very poorly.

As for teaching children about money, she says “that’s something families can do a much better job of teaching than government can.” Again, I agree. But we’re also looking at a vicious circle here: when parents are financially illiterate — which is the problem here — they’re not going to teach their kids very well, are they? Which means that the minority of people who are smart about money will (potentially) raise kids who are also smart, while the rest … well, you do the math.