Financial Literacy and Our Addiction to Individualism

I’ve written before about debt and our self-deception when looking at our debts opposed to the debts of others.

In discussions regarding debt, the first (and usually only) line of defense offered is financial education or financial literacy training.

Financial literacy education as a solution to debt rests on the following assumptions. Individuals owe debts or experience economic hardship because they make poor decisions and exhibit reckless behavior. They spend more than they have on things they don’t need. Indebted people do this because they lack a particular type of knowledge called “financial literacy.” Thus, it easily follows that if they enroll in financial literacy training, they will improve their financial knowledge, make better decisions, and experience better economic outcomes.

These truths form the basis of just about every financial literacy class. I’ve seen them touted time and time again as the solution to individual indebtedness. For many, they feel right. People that have a level of debt they can handle almost always believe it’s because of their own thrift, planning, and individual decisions.

In a conversation about debt with some friends recently, they touted financial literacy classes as a core component of what our church ought to do to help alleviate the burden of debt and financial hardship in the lives of our members or people in our community.

There’s just one big problem with financial education as the key to improving people’s economic situation: it doesn’t work.

In 2013, a group of economists wrote an article in the Annual Review of Economics entitled, “Financial Literacy, Financial Education, and Economic Outcomes.” They reviewed a wide array of studies on financial literacy and whether or not financial education improved literacy and economic outcomes.

In looking at the the research, they find that there is a correlation between financial literacy and better outcomes. People with higher financial literacy have better financial situations than those with lower literacy scores. However, the problem is that there is no evidence that the correlation is causal. That is, there is little evidence that pins better financial outcomes to financial literacy as a strongly determining factor. It’s one of many. Further, it could just as easily be that people have higher financial literacy because they have better financial outcomes to begin with. They deal with money more often and grow in their knowledge of differing financial products and mechanisms.

The other big problem is that it’s not clear that financial education actually works to raise literacy, and there’s an even weaker correlation between education classes and good outcomes. It turns out that learning more about compound interest doesn’t actually improve one’s ability to pay down a credit card. Just because a hundred year old man knows the rules of basketball doesn’t mean he’s any match in a game against Lebron James. Knowledge does not translate into ability and for the vast majority of people their financial ability lies outside of their control and with their employer, their healthcare provider, and their government.

The research, of which plenty exists, is clear: financial education just does not work. It doesn’t increase people’s financial literacy in any meaningful way nor does it lead to better economic outcomes.

But why not? Why doesn’t better education lead to better literacy and thus better outcomes?

I was thinking about this yesterday while a couple of the youth from church worked on homework before our church-wide meal. One student finished up her chemistry homework. I told her, “I probably couldn’t pass a chemistry test if my life depended on it.” And that’s when it hit me.

For a full school year, I sat in a classroom and studied chemistry. I listened to lectures five days per week, read chapters of textbooks, answered relevant questions, and even practiced chemistry through guided experiments. And yet, with all of that education, my knowledge of chemistry today is extremely limited. Even with the knowledge I do have, you certainly wouldn’t want me going near any chemicals.

Based on the research, it sounds like that describes most people’s experience with financial education.

I recently went over these findings with a friend of mine. After taking it all in, he asked “So why does Dave Ramsey continue to push education and literacy? Why do people keep insisting that this works when it doesn’t?”

Besides the fact that Dave Ramsey is interested in sales not results, it’s because as a people we are deeply addicted to individualism. When we assume people are responsible for themselves and that their economic situation is strictly the result of their own decision making and knowledge, what else is there to do but try to change them as an individual? If debt is an individual problem, it must have an individual solution, and if we aren’t going to work together to provide for one another, there’s really not much else to do but budget and learn about compound interest.

Our lives are subject to forces outside our control. The past 30 years have brought on stagnating wages, drastically rising costs in housing, healthcare, and education, and a transition from stable employment and growth to infrequent jobs and fluctuating payments.

Take a look at this chart from a 2004 paper by Elizabeth Warren called “The Over-Consumption Myth.”

While the costs of things like clothing, food, furniture, and clothing have all dropped, the costs of health insurance, child care, and overall spending on cars have gone up.

Or look at this one:

That’s your indebtedness right there.

At some point we are going to have to admit that all of our lives are subject to economic pressures and forces that require us to stay in debt. Then we can begin to look around and ask what we owe one another. From there we could work together to build a different world, one far less cruel than the one addicted to the individual.

We need to refuse financial literacy education but not just because it doesn’t work. We ought to refuse it because when we impose it, we further feed an addiction, the addiction of individualism that is slowly killing all of us.