Whither Economics?

In an interesting post on Critical Mass, Erin O'Connor confesses her ignorance about "how money works." She writes: "But I'm like most of us. . . . Everybody thinks he is an authority on how money ought to be managed and spent. But few of us really understand what money is, how it works, or what kinds of consequences can come from certain kinds of financial decisions."

It's no wonder, she says, so few of us have a clue about financial matters. Nobody studies economics. A study of leading universities' degree requirements (ACTA, The Hollow Core, 2004) showed universities don't require a course in basic economics as part of the core curriculum.

O'Connor attributes our nation's staggering financial ignorance to "academe's broadly socialist monoculture." Universities embrace "collectivism and cooperation, redistribution of wealth, government-run social programs, single-payer health care," but are hostile to capitalism and the infrastructure that makes markets work. "You don't have to look hard at all to find colleges and universities that press students, in course after course, to make moral determinations about how economies ought to be run--but you would be hard pressed to find a school that requires students to ground those determinations in actual economic knowledge."

The Treasury Department's Financial Literacy and Education Commission should take note. Instead of requiring disclosure of more information to consumers who cannot interpret it, Treasury should focus on introducing all Americans, inter alia, to the guns 'n butter tradeoff, the speed and time value of money, and the effect of marginal change in supply or demand on the price of widgets. I'm not expecting that any time soon.

What's in your wallet?

Not that any of this is a surprise to me, but Consumer Reports just came out with a new report about credit card reward programs. Not only does Consumer Reports conclude that we spend more with rewards cards, but also that complicated rules and restrictions makes most cards pretty troublesome. Consumer Reports also found that many of these cards also carry annual fees and higher interest rates. So why do consumers like them anyways? It must be the lure of getting something for free. Or, at least thinking it is free. Of course, one must ask whether the airline miles or charitable donation are worth the potential interest if you carry a balance. It might be easier just to make a donation and take the tax deduction!

While not tackling this particular problem, the Federal Reserve has announced plans to alter Regulation Z’s provisions regarding: (1) bank increases of rates on pre-existing balances; (2) bank practices of applying payments in ways to maximize interest charges; (3) certain practices that impose interest charges using the “two-cycle” method to increase the amount of interest due; and (4) the amount of time consumers have to make payments. Of course, the banks have not welcomed these changes by the Federal Reserve. While I give the Federal Reserve kudos for beginning to tackle the complex credit card fee issues, it would seem that this should only the beginning. In addition to fees associated with carrying a balance on a card, the fees associated with using credit cards are far from clear (see Good Results For Visa). I hate to be a cynic, but I would guess that the final result after wrangling with the credit card industry will be a watered down version of some modest consumer protections.