What's Ahead in 2011?

2010 was not all bad, by any stretch.

Probably the best news of all was that problems that have been swept under the rug(s) for generations have now surfaced and are regular conversation topics. It is now quite apparent that the Western economies' love affair with entitlements may be coming to an end. They now know, as they should have known earlier, that there is simply no way these entitlements are affordable. That discussion is now front and center. That's good.

Public employees are finally coming under scrutiny as virtually every one of the 50 states in the United States faces bankruptcy under the weight of the benefits that have been promised to these public employees. Teachers, for one, have long been showered with guaranteed job security and extremely generous pension and health care benefits. All of these public employee benefits are now in play. Unions are in the middle of this because almost all of union organizing successes in recent years has been in the public employee sector. Unions are not really a factor of any significance in the private sector, since everywhere they have had a major presence, the companies have gone bust.

This is all good news, because failure to notice the impending disaster of entitlements and public employee largesse was moving the US and its 50 states into certain bankruptcy. Now, there is truly some hope. No solutions, but hope.

Other good news is that President Obama seems, at long last, to have awoken to the fact that his economic policies are a serious impediment to economic recovery. The tax agreement forged between the President and Senate Republicans was a foolish package, but better than the alternatives. For the first time since January, 2009, there was some recognition in that compromise that business matters. Finally!

So, there is hope that 2011 will be a better year than 2010. There will be continual reminders as 2011 unfolds that virtually every Western European nation will eventually default, in some manner, on their public debt and that several states in the United States are headed in the same direction. But, bankruptcy can be therapeutic; bailouts are never therapeutic.

Reconciling Tax Cuts with Long Term Debt Issues

Hail to the Wall Street Journal! In one short paragraph the Journal has summed up the heart of the US debt problem and why keeping all of the Bush tax cuts in force make sense as well. In today's Journal and I quote:

"While in a hopey-changey mood, let's note for his (Obama's) benefit that the real fiscal problem today is not the immediate deficit, which does not call for radical action. The real problem is a system of health-care and retirement finance that deters us from saving and budgeting for our own needs while at the same time piling up disencetivizing taxes on those who work and whom we expect to pay for us in old age. Fix this and the government is solvent again."

Wow! The WSJ nailed it. .

A Beginning

The compromise between the President and Mitch McConnell on taxes represents a new beginning for the President and, perhaps, for the country. The compromise will definitely help the economy. The economy needs it.

There are still problems, especially on the unemployment front. Employees are still too expensive, laden down by government-imposed mandates and implied litigation liabilities for businesses. But capital expansion should pick up dramatically in 2011.

It's not perfect, but this deal is definitely an improvement over the policies of the past two years.

The looming debt problems are still there -- both for the US and for Europe. Hopefully, the idea of "workouts" and "defaults" will soon take the place of "bailouts." The debt problems have no easy fix.

And Now for the States

State governments are drowning for two reasons: 1) obligations to public employees; 2) the state share of medicare and medicaid spending. Most states are now beginning to confront the public employee problem by reigning in the some of the worst abuses of overly lavish pay and benefits (teachers top the list, by the way).

Only Republican Governor Bob McDonnell of Virginia has opted to pour on more lavish benefits for public employees and leave the taxpayer to pick up the tab, but he is an outlier. Governor Christie of New Jersey has led the charge to begin to curb the enormous pay and benefits of public employees. Other Governors, Democratic and Republican, are following Christie's lead. Even President Obama has entered the fray by freezing public employee pay for two years in a symbolic gesture toward sanity.

But, there is much to be done. California's off-balance sheet pension liabilities are estimated to exceed $ 1.5 Trillion (those numbers are not in the budget, which now $ 25 billion out of balance). So life should get interesting in California. A similar pattern exists in New York and time is no longer on their side.

Again, much like Europe, look for debt defaults and workouts by state governments as they struggle to undo the poor policies of the forty years.

Europe and All That

First Greece, then Ireland. Now all eyes turn to Portugal, Spain, and Italy. Little noticed is that neither and France and Germany are likely to survive some type of default on their own sovereign debt. A combination of bad economics, a bad economy, and the tide of demographics will sink both France and Germany in time.

The idea that you can paper over the problems in the PIIGS (the new name for Portugal, Ireland, Italy, Greece and Spain) is ludicrous. Much of the PIIGS sovereign debt is held in German and French banks. Merkel and Sarcozy think no one knows this, I suppose.

But, in fact, the world markets know everything. Just watch bond yields on European sovereign debt. The are beginning the slow, inevitable surge toward infinity. (You reach infinity when the bonds are completely worthless.

Europe has no real shot other than defaulting and the sooner the better. Ireland will probably be the first. They will renounce their guarantee of bank bondholders and that will begin a tide of defaults and partial defaults (and workouts) that will begin to crush the holders of sovereign debt. That is as it should be. Those who make bad investments should suffer the consequences.

Anxious eyes watch California, New York, New Jersey, Illinois and host of small American cities that will default, at least partially, on their debt within the next 24 to 36 months. The idea of a federal bailout died on November 2nd. All appropriations, according to the US Constitution, must originate in the House of Representatives. Good luck with that. There will be no bailouts for the profligate states. That is as it should be. Those who make bad investments should suffer the consequences.

You can't repeal the laws of economics by pretending to backstop folks who make bad decisions. That just leads to more bad decisions.

Real economic recovery and growth cannot begin until the wave of defaults begins.

Post mega conference

The first conference of the Financial Literacy Research Consortium was held last Thursday and Friday, November 18 and 19, in Washington, DC. The Financial Literacy Center was in charge of organizing it, and I just want to say how happy I am about the outcome. There are as many as five things I want to highlight about the conference.

David Rust, the Deputy Commissioner for the Office of Retirement and Disability Policy at the Social Security Administration (SSA), opened the conference. As he described the work that SSA is doing to promote financial literacy, the image of a family doctor came to my mind. In the same way that a family doctor attends to his patients over time, caring for them at each stage of the life cycle, treating illness when necessary and preserving health when possible, so Social Security has been taking care of individuals, supporting them when they face problems such as disability. And with the financial literacy initiative, SSA is aiming to preserve and promote future financial stability by making sure that people are accumulating enough for retirement and are well equipped to make savvy financial decisions. SSA is ideally situated to promote financial literacy: it is an institution that is focused on the long term and that has the patience to wait for results in the long run. And investments in financial literacy will bear fruit in the long term, in line with the horizon of SSA.

Michael Barr, the Assistant Secretary for Financial Institutions at the U.S. Department of Treasury, delivered the keynote address at lunch. Michael is also a top law scholar and a faculty member at the University of Michigan Law School. He gave one of the most articulate descriptions of the role of financial literacy and financial regulation that I have heard. He generously interacted with the audience after his talk, and the many questions that were asked are a testament to the importance of the work he is doing. The Treasury Department is playing a significant leadership role in the field of financial literacy, and I am proud that Michael Barr is at the helm of many initiatives, including the important work of building the new Consumer Financial Protection Bureau.

Punam Keller, the Charles Henry Jones Professor of Management at the Tuck School of Business, delivered the closing talk. Punam is an expert on marketing strategy and social marketing and she is also the Marketing Director for the Financial Literacy Center. She described why financial literacy needs a marketing strategy and gave many tips on how social marketing can be of help in designing programs that are effective in influencing behavior. Punam is one of the most engaging, energetic, and brilliant speakers I have heard, and I am very happy to have been able to collaborate with her on so many projects.

The conference was large, with over 500 people registered. We designed the conference for interaction, and I believe we succeeded in engaging the audience. There were a lot of questions at the end of each session, and in the sessions I was able to attend, I learned as much from the questions that were asked as from the presentations. The agenda included an hour dedicated to visiting exhibit booths at which our team members displayed the products and projects they have been working on in the past year and interacted with conference attendees. I walked through the conference foyer during breaks and took stock of the many conversations generated by the topics presented at the conference sessions. A number of people approached me to say how much they enjoyed being involved in the conference. A sense of involvement and engagement is not a given at all conferences and one lesson I took away from this event is the value of creating a dialogue between the presenters and attendees. There is much to be gained from a conference at which everyone feels part of the conversation and everyone feels they have a chance for their voice to be heard.

Some of the programs that were presented speak of the creativity and ingenuity that is being used in designing financial literacy programs. One of the most popular presentations and exhibit booths was that of Doorways to Dreams (D2D). D2D has developed a casual video game, called Bite Club, to teach financial literacy. Bite Club, which is inspired by one of the most popular casual games of all time, Diner Dash, offers players a simulated experience in which they face the real-world tension between managing debt payments and current spending needs on the one hand, and saving for the long-term goal of retirement on the other. Players must manage a “day club” for vampires which demands they successfully pay off debt, meet current consumption needs, and save effectively for retirement. The core instructional design teaches the value of three important real world behaviors: (1) saving for retirement, (2) paying down debt, and (3) managing current consumption. In case you did not think there is a relationship between vampires and financial literacy, think again!

Let me turn now to the topic of food. As I have mentioned in previous posts, I believe food contributes to the success of any event. The food at the Ronald Reagan Center was as expected: breakfast was hearty, with plenty of bagels, muffins, juices, and strong coffee (much needed!). For lunch, we had to go for popular choices: salad as the appetizer and chicken as entrée. But the chocolate dessert was delicious, a tart with fresh raspberries on top of a good layer of melted chocolate. I gulped mine down and, since Michael Barr had to rush off at the end of his presentation, I ate part of his, too!

Presentations, keynote speeches, and photos of conference participants will be posted soon on our new web site http://www.financialliteracyfocus.org/

Relitigating the Last Two Years

When the election was over, President Obama said that voters "do not want to relitigate the last two years." Wrong.

The voters voted to encourage those who were opposed to Obama policies to reverse them. That's what relitigating the last two years is all about.

The White House says it is time to move forward constructively. That is not what the voters seemed to favor in exit polls. They favored rolling back government, repealing Obamacare, and extending the Bush tax cuts for everyone. In short, they were completely anti-Obama.

Let the relitigation begin this week with the convening of the "lame duck" Congress!

Embarassment in Asia

President Obama's Asian trips is a catastrophe. Obama has managed to reduce America's role to whining, finger pointing, ineffective posturing. Not a single world leader agreed with any of the President's agenda, so, in that sense, Obama forged a consensus -- of opposition to Obama. Looks like world leaders hare the same view as average American voters -- Obama's policies are the problem, not the solution.

You wonder if this President is ever going to figure out why Americans have lost faith in his presidency and why world leaders no longer have any respect for him and his sidekick Tim Geithner.

This is truly an embarassing moment in history for a once great economic power.

Obama is Confused

Obama's comments leading up to the G20 meetings this week show a serious confusion about why America is stuggling. As usual, Obama blames someone else. This time Obama's targets are other countries with high levels of exports to the US and substantial positive trade balances with the US. He thinks they should stop doing this. Why? Americans are buying, so why should they stop selling to them.

What Obama does not understand is the reason why Americans buy and do not save. The reason is simple. Americans assume that government will take care of them in their old age through social security and medicare, so why save? Why not live for today and let future generations fund your old age? That's the Obama way.

The result is Americans borrow from abroad, don't save and consume like crazy. The only way to stop this is to dismantle social security and medicare.

China doesn't have social security or medicare nor do any important countries that are currently experiencing economic growth. Only Europe has an elaborate welfare structure like the US and it is now beginning to dismantle it piece by piece.

Obama just doesn't understand simple economics. Fortunately, the rest of the world does.

Maybe "No" is the Right Answer

Paul Krugman, one of many NY Times partisan Democrats masquerading as a columnist, has once more asked: "What would they have done different?" How about doing nothing?

When recessions begin, politicians look for quick fixes, sometimes called "stimulus plans." Republicans look for quick fixes; Democrats look for quick fixes. In Economics, we have a subject called "Macroeconomics," which is supposed to provide guidance to the correct macroeconomic policy. What Macroeconomics is, in truth, is a collection of random fairy tales and simplistic equations, that bear little resemblance to hard science. When you ask someone, "do you favor spending increases or tax cuts," the answer you get tells you the political party of the person doing the answering. Some science!

The cold hard truth is there is no specific government policy known to be helpful in moving the economy from recession to recovery. Doing nothing may well have been the right answer in 2008 and 2009. Sometimes, time alone heals and no amount of well-intentioned policies will help. Indeed, in Obama's case, it seems pretty clear that the legislative activity by Obama-Pelosi-Reid has inhibited the economy's ability to recover.

The economy will recover, regardless of the foolishness of the Obama regime. But, had they done nothing, we might be looking at 8 percent GDP growth (like much of the rest of the world) instead of limping along at 2 percent GDP growth. Maybe, just saying "no" is the right answer.

Bernanke Has Lost It

QE2 is a disastrous mistake and will only inflate asset and commodity prices and provide a major impetus to future inflation. Bernanke is misreading his mentor, Milton Friedman. Today's Wall Street Journal has an excellent article by Alan Meltzer, one of Friedman's most famous disciples, laying out exactly why Friedman would not have agreed with Bernanke's current path.

QE2 is the announced future purchases of $ 600 billion of treasuries by the Federal Reserve. This would be a major expansion in the money supply. The dollar, of course, will collapse with this kind of money creation and economic policy makers around the world are looking toward imposing capital controls to try to offset Bernanke's policies. They view this as a trade war of epic proportions.

Ironically, Bernanke is too worried about the economy. Economies recover on their own when government gets out of the way, witness the 19th century in American. The period from the civil war until 1914 was the fastest economic growth in American history. It was characterized by deflation, not inflation; financial panics every ten years on average, but no government bail outs. The end result: a massive increase in the standard of living of the average American.

A healthy economy has ups and downs. Obama and Bernanke should get out of the way and let this economy recover.

Finally

It looks like the business community may finally begin to get some relief from the oppressive taxes, regulations, and rhetoric that has flowed constantly from the first two years of the Obama regime. The historic repudiation of the Obama program sets the stage for possible progress on reducing the obstructions to economic recovery that have been put in place by the Democratic Congress and President Obama.

Watching Obama's press conference yesterday, I was struck by how little Obama understands about the economy and how little he understands about the average American. His view that voters "don't want to relitigate the past two years" completely misreads the November 2nd landslide for the Republicans. In fact, the voters do want to relitigate the past two years. They are demanding it. That's what the tea party movement is all about.

If Obama continues to misread the electorate and stand in the way of economic recovery, then we must wait until the Fall of 2012 for free markets to really begin to power us out of this economic slump. That would mean slow growth and high unemployment until at least 2013. That doesn't seem to bother the President, but, as we found on Tuesday, it bothers lots average folks and they vote.

Mega conference

I am writing this blog to make sure all my readers are aware of the First Annual Conference of the Financial Literacy Research Consortium. The conference, titled “New Insights and Advances in Financial Literacy: Translation, Dissemination, Change,” will be held on November 18 and 19, 2010, in Washington, D.C., at the Ronald Reagan Building and International Trade Center.

For those of you who do not know it, the Financial Literacy Research Consortium (FLRC) consists of three centers: (1) the Financial Literacy Center, which is a consortium of three institutions under the coordination of the RAND Corporation, (2) the Center for Financial Literacy at Boston College, and (3) the Center for Financial Security at the University of Wisconsin-Madison. The FLRC was established in October 2009 and is supported by the Social Security Administration.

We (the Financial Literacy Center) are hosting this conference and have been very busy preparing for this day-and-a-half event, which will bring together scholars from the Consortium to present their research and discuss how programs, educational products, and policies can best promote financial planning and financial security.

The conference is designed for interaction. For example, it include a series of workshops on innovative products, small seminars that focus on different stages of the life cycle, and a product fair at which participants can try out new educational products and interact with the developers. We are expecting as many as 400 attendees and the agenda features topics that span from video games that teach the perils of debt to building an effective web site for financial literacy to discussions of effective financial education programs. You can find the program and the link to the conference registration at http://www.rand.org/events/2010/11/18/.

A short description of the projects that our center has done in our first year and that will be presented at the conference is posted at http://www.rand.org/labor/centers/financial-literacy/projects/ .

I was attending the Pension Research Council’s Board meeting two weeks ago at the Wharton School, and one of the Board members asked Olivia and me: “So, what are the dates of your mega conference?” I was caught by surprise, but “mega conference” is a pretty good description of our upcoming event, and that’s how we’ve been referring to it ever since!

You are invited to attend the conference, or better, the mega conference! We hope to see you there.

The Deficit Commission Offers Little

The President's "Deficit Commission" is composed of members of both political parties, who are expected to make recommendations to deal with the burgeoning national debt. Fat chance! The entitlements are off the table.

Instead, the commission is exploring various ways to raise tax revenues through the mantra of "tax reform." No effort is being made to curb spending, other than military spending. This is a complete waste of time and taxpayer money.

Without a plan to phase out the entitlements, medicare, medicaid and social security, there is no hope of dealing with America's long term public indebtedness.

The Commission reports its findings on December first. At that point there will be an effort, no doubt, to ram through the commission's so-called bi-partisan suggestions that all amount to higher taxes and a weakened military. Even that won't help.

The Daunting Task Ahead

Krugman and other Democratic loyalists are forever pointing out that the national debt was a much higher percentage of GDP at the end of World War II and therefore we should not be concerned about the high debt levels of the present day. These arguments are completely disingenuous.

During World War II, America mobilized a huge effort to produce guns, tanks, aircraft and other war-related goods. When the war ended, there was no longer a need for all of this spending and spending levels were dramatically reduced almost overnight. There were no "hard decisions" about reducing spending. The war was over.

Today, spending is driven by entitlement programs that large parts of the American public depend upon and expect to see continued. Spending, long run, can only be reduced by essentially eliminating these entitlement programs -- restraining them won't work for the same reasons that they have never been restrained.

Both federal and state spending is mostly driven by entitlements. It isn't fraud and "wasteful" spending. It is the entitlements. It is not the war in Iraq and the war in Afghanistan. It is the entitlements.

So, unless Krugman and his loyalist band of the Democratic faithful are proposing massive cuts in entitlement spending, which last I checked they weren't, America faces a massive debt crisis that will, in the end, require the same solution that Europe is now moving toward -- eliminate the entitlements.

QE2, The Yuan, and The Beat Goes On

Stock markets around the world have rallied by double digit percentages since early September. The financial news, of course, must explain this. (Explain the unexplainable -- that is their mission).

Enter "QE2:" QE2 means the Federal Reserve buys huge (think Trillions of dollars) amounts of treasury securities. This is the equivalent of printing money. QE2 is thought to be the great solution to our current malaise. The fear is that we may be collapsing into a deflationary spiral and only QE2 can save us. This is ridiculous of course. Printing money is never an intelligent monetary policy and there is certainly no evidence of deflation in the US economy.

Another non-issue is the Yuan. Tim Geithner simply cannot let a day go by without blasting Chinese authorities for not raising the value of the Yuan (and thereby further crushing the value of the dollar). This is no solution to our woes either. It is time to send Geithner back to to school to sit through a few economics classes. Geithner has no clue.

No one knows why markets go up except that when folks are especially negative on the future that typically leads to good markets. That's probably why we are where we are. The average shareholder has no particular interest in QE2, the Yuan, or any other irrelevancies.

Asset building or debt management?

At the risk of making my blog look dangerously like a travel diary, I write this having returned from Oxford University where I spoke about financial capability at a conference composed of academics, the insurance industry (mostly Allianz), and policy makers. Oxford has a magnificent campus, and I could devote many paragraphs describing the beautiful Corpus Christi college, where the conference was held, but I will instead write about financial capability.

As you may know from previous posts, FINRA Investor Education Foundation supported the National Financial Capability Study, a project done in collaboration with the U.S. Treasury. The National Financial Capability Study consists of three linked surveys: (1) the National Survey, a nationally projectable telephone survey of 1,488 American adults; (2) the State-by-State Survey, a state-by-state online survey of approximately 25,000 American adults (roughly 500 per state, plus the District of Columbia; and (3) the Military Survey, an online survey of 800 military service members and spouses. At my visit to Oxford, I presented the data from the National Survey, administered to respondents between May and July 2009.

The National Survey shows that financial capability is low in the United States, and this lack of financial capability has important implications not only for policy but for the economic system in general. As I discussed at the conference, when people talk about financial security, they tend to focus on asset building. With the shift that occurred in the past twenty years from Defined Benefit (DB) to Defined Contribution (DC) pension plans, individuals have been put in charge of deciding how much to save for retirement and how to allocate their pension wealth. They have to make those choices in the face of financial markets and financial products that are increasingly more complex. As documented in the National Survey, people do not seem well equipped to make the necessary financial decisions. Only 30% of Americans can correctly answer three basic questions related to calculating interest payments and to inflation or risk diversification, concepts that are at the basis of most financial decisions. Several studies have argued that many workers are poorly managing their retirement accounts and pensions funds. We had a glimpse of this with the failure of Enron, which revealed that many Enron employees were heavily invested in company stock; not an ideal way to diversify risk. But DC pensions have not matured yet, and it will be another twenty years before we see how individuals have fared in mostly independent management of retirement savings and investments. Current pensions are mostly paid out by DB schemes, and even the baby boomers who are starting to retire will rely mostly on savings that were part of a DB plan or a mix of DB and DC plans.

If we want to talk about financial security and witness the impact of lack of financial literacy on financial behavior, we have to turn to debt. One other important recent change in the economy has been an increase in opportunities to borrow. Consumer credit, like DC pensions, was rare in the past but has now become available to a large share of individuals, and decisions about how much to borrow have shifted onto individuals. Consider credit cards. Credit card offers arrive in the mail and one can borrow a large amount of money by simply using more and more cards. No one is checking to see whether individuals are borrowing an amount that they can realistically repay. With sub-prime mortgages, almost anyone who wanted a mortgage could get one; banks were not checking to see whether borrowers could afford the loan contract they were getting into. I have used before the analogy of a water faucet: with plentiful and readily available credit, the faucet was fully open and one could draw as much water as was desired; it was up to the consumer alone to decide when to turn off the tap.

What are the consequences of these changes to the economy, and how well are consumers doing on debt behavior? Unlike poor asset building and asset management, the consequences of poor debt behavior can be seen in the short run. Personal bankruptcy rates have skyrocketed, tripling in a matter of ten years. Most sub-prime mortgages went bust, sinking both the banks and the consumers who engaged in them. I hardly think I have to tell you the statistics that have resulted from the National Survey (although being an academic, I will, so bear with me), because American’s problems with debt have been so widely apparent in the last few years. But the findings from the National Survey clearly document just how widespread debt is in the U.S. population. For example, 23% of Americans have engaged in high-cost methods of borrowing in the past five years (payday loans, pawn shops, and the like). In other words, more than one in five Americans has borrowed at interest rates that can be as high as 1000%. Fewer than half of those who have credit cards pay their bill in full each month, and a sizable share of those who borrow on credit cards engage in behavior that generates not only interest payments but also fees. One disturbing result is that many of those who use credit cards in ways that generate interest payments and fees are close to retirement—the people who should be at the peak of their wealth accumulation are instead borrowing at rates that are much higher than those earned on their assets. Another equally disturbing feature is that many of those who carry credit card balances do not know the interest they are paying on their balance. Similarly, many mortgage borrowers do not know some crucial terms of their mortgages. And while about half of the population have retirement accounts, many have been borrowing on those accounts, in effect borrowing on themselves.

These finding bring me to three thoughts. First, it is very limiting to assess financial security by looking at asset building only. One of the ways to help people achieve financial security may be to help them manage their debt. In any case, one cannot look at one side of a household balance sheet (assets), without focusing on the liability (debt) side. Second, we have clearly seen how poorly individuals manage debt when they are put in charge of it without any consideration of what they know and how they make financial decisions. Third, there may be another crisis brewing around DC pensions. In twenty years, when workers with DC-only pensions start retiring and are confronted with the decision of whether to take their pension payments (however small or large) in a lump sum or to annuitize, we will fully understand the consequences of the shift in pension plans. We can act now and prevent a potential crisis by empowering workers with both financial knowledge and help.

Walking through the beautiful gardens of Corpus Christi and the New College in Oxford it was difficult to think of financial crises and their devastating consequences. But mistakes can build up silently and explode without much warning. We all need to be better prepared to live in today’s world of individual financial responsibility.

Krugman is a Broken Record; Hooray for Mortenson

In his column this morning, Paul Krugman continues to beat the dead horse of "too little stimulus." Not satisfied with a $ 13 Trillion national debt, is apparently in favoring of moving the US totals toward Greece numbers. It would just take another $ 3 Trillion to get there. Perhaps, Krugman wishes to squeeze Greece out of the headlines. This is Krugman's plan to make American number one (in debt).

It should be noted that Krugman did not receive a Nobel Prize for his work on macroeconomics. This doesn't stop him from holding forth as if he is the high priest of macroecnomics Fortunately, few outside the Obama White House, share Krugman's views and the public has long since jumped off the Krugman train.

Three economists shared the Nobel Prize, announced this morning. One of them, Dale Mortenson, is my old professor and a member of my Ph.d dissertation committee. Mortenson is a great economist and a marvelous human being. Three cheers for Dale Mortenson!

Obama Adopts the "Big Lie" Strategy

Desperate for something to say on the campaign trail, President Obama is now simply telling baldfaced lies. Worse, hundreds of millions of dollars are being spent on television and on radio to bring those lies to the public.

What lies? That foreign money is being washed through the Chamber of Commerce and is financing campaign adds across the country.

If the lies are truth, not lies, the Chamber is subject to criminal prosecution, since such money be a violation federal law. Obama does not object to George Soros, not an American citizen by the way, spending literally billions to help elect Obama president, but he now libels the Chamber of Commerce.

This man, Obama, has no shame and no sense of decency. If the Chamber is using foreign money, then give Eric Holder, your Attorney General a ring and begin the prosecutions. Otherwise, quit lying.

Incidentally, Mr. Obama, you might let Eric Holder look into MoveOn.Org and countless other Democratic organizations who have never publicly revealed their donors. Why has this only become of recent interest to the White House? November 2nd cannot come too soon. Congress should hold hearings on Mr. Obama's lies regarding campaign finance. This man, Obama, has no shame.

9.6 % and Counting

No good news for the President. Unemployment remains historically high and nothing in the foreseeable future will change things. The hardest hit are the "legally protected groups" -- minorities, high school graduates and older workers. This is not unusual.

Congress has mandated all sorts of special rights for these "protected" groups and as a result they will be the last to be hired and will only be hired when the economy is truly frothy. All of the "unprotected" groups, mainly white males between 18 and 40 years of age, will do much better. They are cheaper to hire, easier to fire, and less likely to sue for a workplace grievance. It's as if we designed our labor laws to favor white males and to penalize minorities and others. Whether by design or not, that is certainly the end result.

Obama's dream was to expand government and have the government hire those who support him politically. To some extent, Obama's dream was fulfilled by the Stimulus Act of 2009. But, alas, the public woke up and have called for the expansion of government to end. Bereft of ideas, Obama is now complaining that ordinary Americans simply are not smart enough to understand his policies!

The Obama Administration is now granting waivers to companies who plan to drop health care insurance for their employees. More than 120 large companies, including McDonald's, have now received government-granted waivers from the onerous requirement of Obamacare. What this means is that Obama decides who must obey the new law and who gets away with ignoring it. So much for the rule of law.

The bankruptcy (literal and figurative) of the Obama Administration is on display daily as key Administration figures desert the sinking ship. The tsunami is coming. 24 more days until November 2nd.

Leave China Alone

The level of the Yuan (the Chinese currency) is not even remotely a cause of the economic problems that the US faces. Appreciating the Yuan (and devaluing the dollar), a program advocated by Tim Geithner, is silly policy. The US has a miniscule savings rate and as long that is the case, we will have a huge trade imbalance (almost by definition, since whatever investment activity occurs in the US must have the savings provided from some external source).

It is becoming a bedrock of American economic polical life to blame someone else for our own foolish policies. By blaming others, you never face up to reality.

The cold, hard truth is that Obama's policies have damaged the prospects for a US economic recovery. It is not clear that Obama cares one way or another. He seems focused on other matters. But, Americans care. We will eventually have an economic recovery with permanently higher levels of unemployment. This will be the Obama economic legacy -- economic stagnation and slow economic growth.

Hopefully, after November 2nd, we can begin to remove some of the roadblocks to economic growth that the Obama team has put in the way of the economy. Most of the country would like to return to the bad old days of prosperity, even if Obama prefers not to.

Advice to Parents

Having offered advice to students in a recent blog post, I want to turn now to parents to talk about how they can be advocates for their children’s financial education. As I have mentioned in previous posts, financial literacy is a necessary skill in the modern world, akin to the skills of reading and writing. Just as, with modernization, written literacy became a critical skill, the realities of today’s economies have made financial literacy a critical skill.

What changes have made this a reality? Today’s young people are very aware of and widely exposed to money, and there are many transactions that require an understanding of basic financial concepts, from deciding what to do with allowance or gift money to managing a mobile phone account to allocating earnings from an after-school or a summer job. As they finish high school, young people confront one of their most important financial decisions: whether and how much to invest in education. The wage difference between college- and non-college-educated workers has been increasing, with individuals without a college degree seeing their wages stagnate or even decrease. Lack of a college degree may mean a lifetime of low wages. On the other hand, the cost of education has been increasing rapidly, requiring astute decisions about which college to attend, in which state, and at what cost.

And when they enter the world of work and young adulthood, today’s young people will have to make many other important financial decisions. With the shift in retirement-planning responsibility from employers and government to individual workers, young people will be in charge of deciding not only how much to save but also how to allocate their retirement wealth, and they will have to do so confronting financial markets that are increasingly complex in terms of products offered and management and understanding of those products. Not only asset building but also debt and debt management will be increasingly important. Opportunities to borrow have expanded and, in addition to financing education, young people will have to learn how to manage credit cards and other, often more expensive, methods of borrowing. In such an environment, mistakes are easy to make and, as the financial crisis has indicated, can be very expensive, and costly mistakes may ultimately mean that you—the parent—are supporting your child far beyond the time you had expected to (I know, a scary thought).

There are several reasons why financial education should be offered in school. First, the level of financial literacy is very low; in my view, too low for young adults to be able to make savvy decisions. Moreover, current studies show that financial literacy is unequally distributed in the young population. According to studies from the Jump$tart Coalition for Personal Financial Literacy, only about 9 percent of high school students can be deemed financially literate. And this small proportion of students is disproportionately comprised of white males who have financially sophisticated parents. Thus, students are going to start out on very unequal footing, and differences can only grow larger over time. And even for those belonging to the more financially literate group, it is not clear that reliance on parental know-how and guidance is an effective way of learning; parents’ experience may not apply in a rapidly changing economic environment, in particular one in which young people will be competing in global financial markets filled with people from other nations, who have been exposed to formal financial education in school.

So, what can be done to promote financial education in school? One good start is to request that your child’s high school participate in the Financial Capability Challenge. The Challenge is a voluntary online exam and classroom toolkit that helps educators teach high school students about saving, budgeting, investing, use of credit, and other important skills critical to developing strong financial knowledge and capability. The next online exam will take place between March 7 and April 8, 2011. Educators and students who score in the top 20 percent nationally and who are among the top scorers in their school will receive official award certificates.

The Financial Capability Challenge is an excellent initiative, and it provides a good incentive to both students and teachers for gaining financial education. More than 76,000 students and 2,500 educators in all 50 states participated in the 2009–2010 school year Challenge. I participated in one of the award ceremonies last spring and saw what a rewarding experience it was for the students, teachers, and parents, and I was proud to be able to be part of it.

Become an ambassador for financial literacy by asking your school to participate in this program. Make sure your children will be prepared for the new world they will be facing: for the decisions they’ll need to make about their own education and for the financial markets they’ll have to participate in if they are to provide themselves with a financially sound adulthood.

Educators can begin registering for the Challenge today at http://www.challenge.treas.gov/.

Help spread the word!

The End of the Obama Agenda

Whatever the outcome on November 2nd, the Obama agenda is finished and cannot be resuscitated. Most of the economic agenda was aimed at pumping up the income of union and public sector employees. The health care system has been trashed and the financial sector lies under the most burdensome regulatory environment in history. Meanwhile ordinary Americans are still losing their jobs, their homes, their credit cards and their health care insurance. No wonder life is tough for Democrats.

The Obama answer to the enormous backlash to his first twenty one months in office is that the public doesn't understand his program. Unfortunately, for Obama the public does understand his program and has been opposed to it from the beginning.

Having nothing to run on but an incredibly unpopular legislative record, the Democrats, actively encouraged by President Obama, are resorting to mud slinging and personal attacks. That's about all they have left. This is the new politics that will be Obama's legacy to the American system.

Obama says that Americans don't understand. Yes, they do. The two biggest lies in the past two years are: 1) No one will lose their health insurance; and 2) We are bending the (health care) cost curve down. It's hard to imagine anyone in America, including folks in the White House, believe those lies anymore.

It is an Administration in shambles. The rats are leaving the sinking ship. The dream is over. Interviewed on public radio, students who lead the charge for Obama in 2008, were unanimous in their view that "Congressional elections aren't cool...I don't even know who my Congressman is...." So the students will sit this one out, but the adults will not sit this one out.

The Republicans will gain 65-70 seats in the House and 8-10 seats in the Senate. The era of Obama is over.

Romer First, Now Summers....Gone

The two chief economic advisors to Obama will not be around in 2011. Summers announced today that he is returning to his secured, tenured professorship at Harvard (which he cannot do if he lingers in Obamaland past January the 1st). Romer has already returned to her protected sanctuary at Berkeley. Neither of these two need worry about the plight of the millions of unemployed Americans. Romer and Summers have safe jobs. They work for the government, i.e. they are professors.

Now, all eyes turn to what kind of Keynesian will replace Romer and Summers. It is unlikely that Obama will change stripes. He likes big government and despises the private sector, so that if he goes after a corporate type, you can be sure that the "new corporate type" will be someone whose sympathies rest with big government, higher taxes, and more regulation.

Only a new Congress can reverse the disastrous course of this presidency. Shifting the deck chairs won't help as long as the Captain Queeg is in command.

The Unemployed Over 50 -- Never Work Again?

Why can't the 50 and over population find jobs? The New York Times has a lengthy article today spelling out the cold hard facts...no one wants to hire anyone over 50 years of age. Why? The article gives no reasons and laments the problem.

The answer is obvious.

If you are an employer and you hire someone over 50 years of age, that person can sue you for age discrimination if you every decide to let them go. In fact, a large number of such folks do sue for age discrimination when laid off. They are part of the protected class along with minorities, women, etc. Who wants to hire people who can sue you if you lay them off later? The answer: no one.

Over 50s will not get hired until the absurd "age discrimination" laws are repealed or until over 50s gain the right to waive their rights to sue. As things stand now, only a fool would hire someone over 50 years of age.

You might say: well isn't that illegal...to not hire someone because they are over 50 years of age. The answer is yes. But illegal immigration is also illegal.

Advice to freshmen

As I walk through college campuses this fall, I can easily spot the freshmen. They are identifiable not so much by age (although they look younger every year) but by the look on their faces: that unique mixture of surprise, excitement, and fear that accompanies the start of the first year of college. There is so much to do and to learn and there’s no shortage of advice being directed at college freshmen, but I am going to add my piece anyway, and it is not only a suggestion about what students should do but who most needs to do it.

My recommendation is simple: if your school offers a financial education course, take it. If it does not, take a basic economics course (Economics 101 or Principles of Economics). Financial knowledge has become an essential life skill; just as it is necessary to be able to read and write (and use Twitter and Facebook), it is essential to have basic financial knowledge. Financial decisions are made every day, from how much to borrow on a credit card to how to manage a checking account to whether to pay for dinner on a disappointing date. And the responsibility of making good decisions has been shifted onto individuals. Both government and employers are increasingly asking citizens and workers to take care of their own financial security. Like it or not, the benefits and risks associated with financial decisions are now yours. And you have just embarked on one of the biggest investments of your life: the investment in education (in case you are not aware of just how big an investment it is, ask your parents, but only after they recover from the shock of paying the first round of bills for tuition, room, and board). In my view, education is one of your best investments, with returns in higher lifetime wages and likely entry into more stable sectors of the job market. (There tends to be lower unemployment among jobs requiring a college education.) And there are many intangibles, too, that command a value, from gaining a network of smart and educated friends to having the opportunity to experiment and gain knowledge in many fields, under the guidance of experts.

In the same way that low educational attainment may mean a lifetime of low and erratic wages, so low financial knowledge has been found to be associated with poor financial decisions, from excessive borrowing to lack of participation in financial markets to inadequate wealth accumulation for retirement. The costs of poor decisions can be high, particularly when dealing with debt: choosing the wrong mortgage can push people into poverty or bankruptcy, and according to the research I did with Peter Tufano from Harvard Business School, those who display low levels of financial literacy are likely to pay 50% more in credit card interest and fees than those with higher levels of financial literacy.

While a course in financial literacy or in basic economics can benefit all students, based on my years of research, I recommend it most strongly to the following students:

Women: According to my research, women are much less financially literate than men. I do not know why this is the case, but one worrisome finding is that there is a gap in financial knowledge between women and men not only among young people but also later in life. This likely means that women face fewer opportunities to become financially knowledgeable than men do, for example by interacting with groups (perhaps other women) who are less likely to talk about finance. Enrolling in a college-level economics or financial literacy offers a chance to counteract that tendency.

African Americans and Hispanics: There is a wide gap in financial knowledge between whites and African-Americans and Hispanics, even after accounting for the many demographic differences in these groups, including income and wealth. Again, this may be the result of fewer learning opportunities over the lifetime. A college course in economics or finance can start to make up for this gap.

Students whose parents are not financially sophisticated: According to my research, as well as research from the Jump$tart Coalition for Personal Financial Literacy, the (small) percentage of students who are financially knowledgeable are disproportionately white males with college-educated parents (in particular, college educated mothers) who had stocks and retirement savings when their children were teenagers. This means that a lot of financial knowledge is learned at home. If you are among the first generation in your family to go to college and your parents have never invested in stocks, you start at a disadvantage in terms of financial knowledge with respect to your peers. Take the opportunity now to make up for that gap.

Students who hate economics and finance: If you think that the study of economics and finance is for uncreative people, and is evil and will only teach you to work on Wall Street and exploit poor people and poor countries, then you, too, should sign up for a basic economics or financial literacy course. In my experience, people who express disdain for economics tend to make poor and costly financial decisions. Take advantage of a chance to offset that tendency.

Let me finish by adding that there is a risk in taking a course on financial literacy and economics: You may actually find that you like it!

That We Know

Larry Summers, the main economic advisor, said on CNBC this morning that "a failure of regulation caused an economic crisis.....that we know" He could not be more wrong. A housing bubble induced by favorable tax treatment of housing combined with Fannie Mae and Freddie caused the economic crisis. Regulation actually made matters worse. The previous Basel accords encouraged banks to substitute riskier assets for safe assets (the new ones are likely to do the same).

Government regulation has never prevented a crisis and never will. Most economic crises are government induced. The government needs to get out of the way.

If Summers doesn't understand what caused the financial collapse of 2008, then it's no surprise that his policy recommendations to Obama have been as misguided as they have been. Summers should head back to academia, where he can continue to pretend that his policies work. People in the real world know better. "That we know."

The Role of the Tea Party

Yesterday's Republican primary results shocked the "official" Republican establishment and showed the power of the Tea Party. Why the Tea Party?

The truth is that Republicans share equal blame with Democrats for the colossal mismanagement of the American economy and the massive national debt. Republican moderates have lined up with Democrats time and time again over the past fifty years to produce the margins required to spend our way to our current plight.

The role of the Tea Party is to say: "no more." The Tea Party is not about electing Republicans or Democrats, but about electing people who will begin to tackle the project of rolling back big government. This is an important mission. More power to them.

Who cares which party controls the US Senate? The issue is who will begin to restrain the growth of government and move the country back toward free markets. Supporters of "cap and trade" like Mike Castle are no help in this great endeavor.

Long live the Tea Party!

The Basel Capital Requirements

This week international central bankers are forging a new set of rules for banks that would move capital requirements from 4 percent currently to 7 percent (of outstanding loans). This absurd new policy comes just as the world economy is teetering on the brink, especially in the US and Western Europe, where the new Basel rules will have the most impact.

Why is it that no one wants the world economy to have credit? By every measure bank lending has shrunk, not only in the US but throughout Europe? How is a recovery supposed to take place when every "reform" measures reduces the available amount of credit?

The time to reduce or slow credit availability is during a boom, not during a recession. The Basel rules will only make things worse and could plant the seeds of a lengthy US-Western Europe slowdown in economic activity. Combined with the wrong-headed policies of the Obama Administration -- credit card reform, debit card reform, consumer protections in the FinReg bill -- the net effect of all of this is to dramatically reduce the available credit necessary to fuel a recovery.

Policy makers and politicians should take a holiday. The more they do, the harder it is for free markets to produce an economic recovery.

Maybe, just maybe, more regulation and more government is not the answer.

Comparing financial literacy of young people across countries

One of the new tasks I have taken on is to chair the Financial Literacy Experts Group at the OECD, which has been put in charge of designing a module on financial literacy for the Programme for International Student Assessment (PISA). The Programme is a worldwide evaluation of 15-year-old students’ scholastic performance, evaluated first in 2000 and repeated every three years. A new module will be proposed for the 2012 survey to measure financial literacy among 15-year-olds in 19 countries (the countries which so far have agreed to participate are Albania, Australia, Belgium, Brazil, China, Colombia, Croatia, Czech Republic, Estonia, France, Hungary, Israel, Italy, Latvia, New Zealand, Slovack Republic, Slovenia, Spain, and the United States).

This is an important initiative that shows the leadership role that the OECD has undertaken in the field of financial literacy at the international level and that will provide much needed data to improve educational policies across countries. There is a lot to be learned from these data. First, we will be able to assess the level of financial knowledge of young students, before they take on related decisions such as choosing whether to pursue a college education, in my view one of the most important decisions in a person’s lifetime. Second, we will be able to assess which students know the most and which know the least, not only across economic strata and demographic groups but also across countries. Third, we will be able to assess the link between financial literacy and mathematical ability as well as the link between financial knowledge and knowledge in other fields, such as the sciences.

The comparison across countries is particularly valuable. Not only are financial markets becoming increasingly integrated but many countries are shifting to pension systems that require increased individual responsibility. Moreover, the availability of consumer credit and the instruments associated with that credit (credit cards, short-term loans, payday loans, and so on) require that consumers have the ability to understand the terms of the contracts and their consequences. Countries in which consumer credit has expanded rapidly have also witnessed an increase in personal bankruptcy. How do countries handle the increase in individual responsibility, how much are young people prepared for the new financial systems which are becoming more global and more complex, and who are the leaders in terms of financial literacy? These are very important questions and the objective of the data is to provide countries with evidence that can guide policies toward improving financial education.

PISA data has been used in many policy assessments. Just last Sunday the New York Times had an article about the strength of Brazil’s economic expansion. While Brazil has been growing fast, the low level of education of the population (as measured by the math scores in PISA studies) is seen as a potential stumbling block both in terms of ability to produce a qualified labor force and to promote innovation. And interestingly, it is the Nordic countries (Norway, Finland, Sweden) whose students do very well in terms of mathematical ability, and perhaps it is not by accident that these countries host some of the most innovative firms, products, and ideas—Nokia, Ikea, Santa Klaus (if you believe, as I firmly do, that he lives in the North Pole).

This is clearly no small task and the Financial Literacy Experts Group is hard at work to design questions that are comparable across countries. We have representatives who come from different countries and who also bring a variety of experiences. We have not only educators but also representatives from government institutions (Treasury and Finance departments), central banks, and retirement commissions. Moreover, we have representatives from countries in which financial education in high school has been or is in the process of being implemented and countries in which financial education in school has yet to be adopted. This will allow us to examine whether the countries whose young people are exposed to financial education programs in school do better than countries in which young people learn on their own.

One other thing I’ve learned is that among Italians, one has to be careful in discussing PISA. I had hastily mentioned my new role to my father during our weekly calls, telling him that one of the benefits of the project would be a lot of travel close to my family’s home in Italy. I realized the discussion had gone astray when my sister sent me an e-mail congratulating me for joining the expert group on the Leaning Tower of Pisa and asking what, exactly, I had to do in there. We had a good laugh; this added new meaning to my father’s conviction that his daughters can do anything!

The Party of "No"

We constantly hear the comment that Republicans must put forth new ideas to get the economy going. Nope. That would be a big mistake. What the Republicans need to do is make the case that had the Democrats done nothing, the US economy would, today, be in a better place. And, it would be.

What Obama and the Democrats have done is create roadblocks to recovery. What the Republicans need to do is remove the roadblocks. The party of "no" is the way to go.

Free markets will bring recovery. Government intervention will simply impede recovery and prolong stagnation. That's what happened from 1929-1940 and that is what is happening now.

No new stimulus plans...please!

Targeted Stimulus Ala Obama

Now, with 15 million Americans out of work, the Obama folks are preparing a new "stimulus" package to be unveiled next week. As usual, the Obama plan is "targeted." Targeted plans never work, because they are very easy to "game." You simply hire a good tax attorney and shoehorn yourself into the "target."

Nothing good can come from the Obama packages. Even suspending the payroll tax temporarily won't work, because it is temporary (as well as "targeted").

The only thing that works is for government to get out of the way and let free enterprise provide the economic recovery. Reduce the size of government and reduce the role of government into free markets.

Those who thinks the 1980s and 1990s was a bad economic period(which Obama seems to think), should support Obama. The rest of us would love to return to the economy of the 1980s and 1990s, when free markets reigned and unemployment reached a low of 4 percent.

Going It Alone

You might think that the whole world is plunged into a depression. If so, you could not be more wrong. Parts of Europe are booming, China growth is still well above 6 percent, India clocked in at over eight percent in the most recent quarter. Even Russia has growth exceeding four percent in this past quarter.

The US is the world's laggard. We have very high unemployment and anemic growth in a world that is recovering....just not us. This parallels a similar episode in the 1930s when the Roosevelt led recovery of the 30s faltered as the rest of the world sprinted to an economic recovery. In both the current episode and the experience of the 1930s, the heavy hand of government is the culprit.

The Obama/Pelosi/Reid agenda has stifled the US economy, while the rest of the world is recovering quite nicely. Most countries in the world have chosen to expand capitalism and free enterprise, including China interestingly, while the US has moved dramatically toward a government planned economy. Even Europe has owned up to its inability to afford the welfare state, while the US has spent the past two years dramatically expanding the welfare state. US government spending rose 16 percent in 2009, a rise not matched anywhere in the civilized world.

Obama and his cohorts are on a lonely path to economic stagnation that the rest of the world wants no part of. Come November 2nd, the American public finally has an opportunity to change this disastrous course.

Same 'Ole, Same 'Ole

President Obama talked about the economy yesterday, punctuating the end of "recovery summer." According to the President, the weakening economy is all the fault of stubborn Republicans who refuse to endorse the so-called "small business tax break" bill. This bill is another "targeted" tax break bill that is easily gamed and will contribute nothing to economic recovery. Republicans are correct to oppose this wasteful bill.

The President has no new ideas. His agenda is mostly a redistributive agenda with job-killing rules, regulations, taxes. The lack of job creation and the stultifying impact of Obama policies are a big surprise only to the President and his Congressional allies.

I wonder if this President will ever understand how jobs get created in the private sector? So far, Obama just keeps whistling the same discredited message of tax and spend. Fortunately, the Congress will have no more of this and November 2nd is fast approaching.

Out of Bullets?

How do you restart the economy? At this point, every government policy prescription has been tried. The net result: zero. The economy is struggling and some even expect the economy to show negative growth in the second half. That's unlikely, but certainly possible.

Maybe, just maybe, government policy is the problem, not the solution. The economy, had there been no TARP, no bailouts, no credit and debit card reform, no Obamacare, no demonizing rhetoric from the President, may have been well on the road to recovery by now. The government could well be the problem.

Macroeconomics is no science. When you ask an economist whether he favors spending or tax cuts, his answer tells you whether he is a Republican or Democrat? What kind of science is that? The cold, hard truth is that economists don't know what to do. Obama is now learning that truth to his chagrin.

Obama thought this would all be easy. With folks like Larry Summers, Tim Geithner, and Christina Romer telling him to use the usual Keynesian tactics and to declare personal war on the insurance industry and the financial sector, it was assumed that by the Fall of 2010, the economy would be on the mend. Such nonsense.

Government is the enemy. Banks won't lend because government regulators are forcing them not to lend by raising capital requirements and discouraging loans to anyone but the best credits. Absent this kind of ridiculous government policy, banks would be lending and credit would be available. But, government is blocking that.

There is a similar impact from debit and credit card reforms. These so-called "reforms" have the effect of eliminating credit for middle income Americans and small businesses. Credit card limits have been drastically reduced for many Americans as a result of the Obama debit and credit card reforms. The law of unintended consequences is bearing a bitter fruit.

It is government policy, not the free market, that is denying much-needed credit to the American economy and without that credit, true recovery is not possible.

Meanwhile, the so-called stimulus and other government give-aways to political friends, have ballooned the deficit to unimagined levels. America is now considered one of the most irresponsible countries in the world from a fiscal standpoint.

Just to square the circle, the Obama crowd and their allies in Congress, jammed through Obamacare which not only imposes huge additional future spending at the federal and state levels, but threatens to destroy the best health care system in the world. Quite an accomplishment!

As bad as all of this is, it is reversible. The naivete of Obama, Pelosi, and Reid is now obvious to the public. Nothing they have done has worked and virtually every program they have pushed has been trumpeted with misleading, if not outright false, rhetoric. The economy is staggering, housing is struggling, businesses are frightened of the future (and of Obama) and not hiring.

Fortunately, the public is now wise to the absurd and destructive policies of the Obama Administration and the Democratic Congress. There is hope of changing policies if things go well in November.

Then, hopefully, Congress can begin to reduce the barriers to economic recovery that have been thrown up by the Administration. The economy, if left alone and unhampered with undue regulation and taxation, can recover on its own. It doesn't need stimulus programs or anything else. It needs government to get out of the way and let the natural juices flow.

Reasons for Optimism

Don't let the national political scene get you down. Things are actually beginning to look up. November 2nd is the big day and no matter the result, there is an almost certain feeling that the political environment will get better for business.

Post November 2nd, Obama might change course. Not likely, though, as he seems to have his playbook memorized and can live with declining public approval. More likely, Republicans will block any new anti-jobs legislation that Obama and the Democrats can dream up. Moreover, there seems to real hope of gutting ObamaCare and shifting the health care discussion to a more rational plane. Progress can be made on repealing much of the finreg fiasco. Congresional committees can expose the enormous graft and corruption of the Obama Administration and their Congressional allies.

So, things will be changing for the better by late Fall and I would expect a very different public dialogue in 2011. All in all, I expect a better political environment for business as we approach the new year.

Good things lie ahead.

Forget the "Hindenburg Omen"

The latest craze among stock market pessimists is the "Hindenburg Omen.". If you subscribe to this view, you will sell everything you own and retreat to a cave somewhere....immediately. According to "HO," the stock market will get crushed in September and October -- maybe to 5,000 on the Dow, maybe to 1,000!

Don't listen to this silliness. The stock market is cheap and serious Investors should be fully invested. There will soon be an "end-of-Obama" rally, as the enormous political sea-change that will take place on November 2nd gets factored in. There is a real chance of sweeping political change that will bring capitalism back to the US. There are good signs in Europe that even Europe realizes the welfare state must be dismantled.

Things can turn around and it looks more and more like that is where we are headed. So, put on your optimist hat, buy stocks, and enjoy the coming rally.

New Unemployment Claims Surge Once More

More bad news -- unemployment claims on the rise. Hovering just below 500,000, new unemployment claims is a window into what employers are doing at the moment. They are beginning to add to layoffs again.

For reasons laid out over and over again in earlier blogs, this is a perfectly rational response by private employers to actions taken by the Obama Administration and the Congress in 2009-2010. Commercial banks have, as a predictable response to Obama and the Congress, dramatically curtailed business lending. Can't be pilloried for making bad loans, if you don't make loans.

So, in some sense the Obama plan is working: the private sector has been brought to it's knees: way to go, Barrack! You paid those guys back. A little collateral damage, but so what if the unemployed ranks continue to grow.

Blogging

I was informed recently that my blog has been listed as one of the must-read blogs in the field of economics. While I don’t know much about how this ranking was done, it did boost my ego quite a bit and I thought I would post the link:

http://master-degree-online.com/top-100-graduate-blogs-by-university-personnel/

When I started blogging some time ago, I did not know how much I would enjoy it. While my schedule has become quite busy, particularly since taking on the role of director of the Financial Literacy Center, I am trying to keep up and write as much and as often as I can. Both the financial crisis and the financial reforms have offered a lot of material to reflect upon and to write about, so I am not short on topics, even though I write exclusively on subjects related to financial literacy.

But I am posting this short blog to thank my readers for their support and also to encourage them to continue reading. Have a good rest of the summer to all. I am getting ready to go to Italy, one of my favorite vacation places, and I will write more from there.

Financial education: What works?

I am just back from Denver, where I attended a conference titled “Implications of a Quarter Century of Research in Personal Finance,” organized by the National Endowment for Financial Education and Tahira Hira from Iowa State University. A group of researchers met over three days to discuss what we have learned so far on this important topic. I headed a team that addressed the question, “What learning strategies, interventions, and delivery methods hold the most promise for effective financial education outcomes?”

As we reviewed the many papers that have been written on this topic, we faced the difficulties commonly encountered when looking at the existing work. Navigating the bulk of existing literature and figuring out the common findings is a challenge, but our analysis of that extensive literature led us to what we called a “cautious optimism” about the effects of financial education. Along with this optimism, we are mindful of several difficulties inherent in evaluating financial education interventions. First is the issue of self-selection: i.e., are the people who attend financial education programs those with an existing interest in the subject, and is it their interest or the content of a program that motivates them to make certain financial decisions? Second is the dearth of details regarding program content, frequency, delivery method, and goals (to improve knowledge or change behavior or to satisfy a legal requirement) of the programs that are reviewed in the literature. This lack of information makes it hard to evaluate what makes a program effective (or ineffective). Third, one has to be mindful of the size of the intervention. Small interventions, for example, providing information on a particular issue cannot transform naïve investors into Warren Buffetts.

The team identified places where financial education seems most effective and methods to make financial education more effective. The most effective place for financial education was concluded to be the workplace; important methodology was judged to be that relating to adult education and to informal learning.

There are many (some obvious) reasons why the workplace is an ideal venue in which to provide financial education. First, this is where many adults are and also where many important financial decisions are made, e.g., how much to contribute to a retirement account, how to invest retirement wealth, whether to annuitize retirement wealth, and the list goes on. There are also benefits to employers in making sure that workers save for retirement and avoid financial problems, as financial problems and/or worries can affect worker productivity and morale. One benefit to both employers and employees, which in my view is not discussed enough, is that financial education can make people aware of and able to take advantages of benefits an employer offers (for example, employer matches of retirement contributions) or better understand and take advantage of tax-favored assets.

Financial education has normally been conceived of as being delivered in a classroom, but one has to think more broadly and creatively about adult education. In contrast to young students, adults have a rich set of experiences that shape how they view their financial situation. Additionally, financial education can be made more effective with reference to theories of learning that offer important suggestions and insights. One such theory is Mezirow’s transformative learning theory. This theory has been around for over 30 years and has been used as a framework to help make sense of learning and teaching in numerous disciplines—health and medical education, intercultural relations, psychology, environmental sciences, higher education, instructional technology, archaeology, human resource development, just to mention a few. I mention the importance of theory here because, in my view, one of the reasons why financial education has not been as effective as it could be or has not been given the attention it deserves is because it is not considered within a rigorous and theoretical framework.

Even within such a framework, it is possible to incorporate different ways of learning, including informal learning. Informal learning is increasingly becoming recognized as significant to workplace education. Instead of having employees participate in traditional workshops or training sessions, employers are creating conditions in which workers can learn from each others. Financial educators, policy makers, and program planners will do well to recognize that financial education efforts can be successful outside of the formal settings that are the traditional venue for financial education.

As I have mentioned in previous blogs, to run a successful conference you need to have good people, good papers, and good food. Having provided, I hope, a little glimpse of the energetic discussion that went on throughout the meetings in Denver (as well as the informal learning that occurred outside of the meeting rooms!), let me turn to the topic of food. Our meals were a blend of French and Italian cuisine. We went to a wonderful French bistro one night where we tried pâté, saucissons, onion soup, and a wonderful pistachio-crusted trout. The Brown Palace hotel, where we stayed, provided us with succulent breakfasts. At a lunch one day we had gourmet pizza. Some were surprised by this lunch choice. Not me. Give me pizza, and I am happy!

The Future of Medical Care in the US

By waving magic wands in the air and declaring (almost) universal health insurance for all Americans, the Obama folks think that they have really accomplished something of significance. Actually, they have, but their main accomplishment is not what they think.

Obamacare, Medicare, Social Security will not succeed as advertised simply because there is no payment mechanism to fund these pipedreams. Instead, generations of Americans will find nothing in the well when their turn comes to receive benefits. The politicians that created this looming nightmare will be long gone, leaving a disillusioned populous with nothing but dark memories.

But beyond this. The assault on the the health care industry, the insurance industry, the medical supplies and technicians industry by the Obama Administration will destroy those various components of the health care industry. It will further erode the necessary supply of doctors and nurses required to service even past levels of American health care. The new Obama world will be health care without doctors and nurses. That should be interesting!

Like everything else in Obama-land, there is a huge disconnect between dreams and reality.

The Hidden Cost of Labor-Friendly Government

Why don't ordinary folks rob banks? That's where the money is, said famed bank robber Willie Sutton. The answer is: "you might get caught." If you a rob a bank, you might end up in prison (but, you might get away with it). This is what economists call a contingent liability. You have to do something first, then sit back and see the consequences.

What if you're a businessman, choosing between hiring an employee and a more expensive machine alternative. What would you do? Normally you would hire the employee. But this assumes that both choices have the same contingent liabilities. But, there are no government laws to protect machines...hence no real contingent liability to acquire the machine.

But, what about hiring an employee? Employees have "rights.". Literally, hundreds of rights. These "rights" enable employees to sue their employer, even for things that occur off the job site! The contingent liability of hiring a single employee can run into the hundreds of thousands of dollars! Even a small workforce, especially if it satisfies modern notions of diversity, can impose millions of dollars of contingent liabilitiies upon a small business.

So,what to do? The only way to avoid these massive contingent liabilities is to not trigger the enabling event: if you want to avoid jail, don't go around robbing banks; if you as a businessman want to avoid crippling litigation costs over presumed "employee rights," hire fewer employees and, almost as important, do not create a diverse workforce.

Employees with "rights" impose huge contingent liabilities on employers. There is a way out -- don't hire!

This seems to be what is happening in today's labor market.

Some comments about "Greater Foools"

I am happy to post on my blog a comment by Nan Morrison, President and CEO of the Council for Economic Education, on the article "Greater Fools" published in the New Yorker.


James Surowieki’s financial page piece “Greater Fools” unfortunately quite accurately diagnoses the depths of America’s struggle with financial literacy and its costs to society. And without significant changes, our children may face an even worse fate than their parents. Nellie Mae reports that on average, incoming freshmen now bring an average of $1,585 in credit card debt to college.
Yet despite the extent of this problem, according to a CEE / State Farm survey, only 21 states require an economics course to be taken in K-12, and only 13 states require a course in personal finance. Even fewer require testing of these concepts. But requirements need trained teachers, and to make matters worse, as a society, we are not preparing teachers to deliver this vital content with confidence. In a recent survey by the National Endowment for Financial Education (NEFE), less than 20 percent of teachers reported feeling competent to teach basic personal finance topics. Furthermore, even many teachers of high school economics have taken two or fewer semesters of economics in college.

In our eyes, the real question is “How, as a society, can we improve our economic and financial literacy and what benefits might we see in future generations as a result?” Our answer at the Council for Economic Education (CEE) – equip and enable teachers to educate our children in basic personal finance and economic concepts in school from kindergarten through 12th grade. Why? Good habits are built early, just like brushing your teeth.

America is about economic opportunity – our kids need to be financially fit and economically literate to grasp that opportunity. As consumers, investors, entrepreneurs, and voters we all make decisions that involve finance and economics every day. If every parent, school and state, made economic and financial education a priority in schools from K-12, perhaps more Americans would be able to ensure their financial well being in a changing and complex world. Improving our collective economic and financial literacy is vital to our economic growth, job creation, and prosperity. Many in government, education, and financial services, across our nation support those goals, as they are good business and good citizenship well as essential ingredients in a stable financial system.

Nan J. Morrison
President & CEO, Council for Economic Education

Greater Fools

James Surowiecki’s recent column in The New Yorker magazine discussed the dangers of financial illiteracy in America. It is great that such a prominent and widely read magazine has featured a piece on the issue of financial illiteracy. I do not know about you, but I love The New Yorker: not only is it great reading, but it makes me dream of all the things I could do if I were living in New York! In this blog, I want to write in more detail about something that I discussed with James Surowiecki and which he reported in his column.

Of the changes that we have witnessed in the financial markets in recent decades, we have seen not only an increased complexity in financial products but also an increased reliance on the expertise (or lack thereof) of consumers. For example, individuals have been bombarded with credit card offers. One could easily sign up for a sizeable collection of credit cards and, in so doing, borrow a large amount of money. While some consumers have been targeted more than others, many are receiving printed checks in the mail. These types of offers make it very easy to borrow; and it is the individual who has to be savvy about how to use the credit cards and checks that come in the mail; the offers will keep coming, and the amount one can borrow will keep increasing, irrespective of how much one can afford.

Subprime mortgages have worked in much the same way. While banks and mortgage lenders would normally do background work in order to assess how much to lend their potential borrowers, subprime mortgages were available to almost anyone who wanted a mortgage, regardless of their ability to afford the loan they were taking on and without much or any look to proper documentation. For some, the offer came in the mail together with the credit card offer!

In other words, we have opened the doors and made credit available to a much larger number of individuals than was the case several decades ago. Moreover, while not infinite, the amount people can borrow is very large. And perhaps most importantly, it is often up to the consumers to decide what and when it is enough.

This is why financial literacy is so important and why, in my view, developments in financial markets should be accompanied with initiatives to provide the knowledge required to make good use of any such developments. One cannot trumpet how great it is to be able to buy a house at age 25 if young workers do not even know what interest compounding means. Similarly, dispensing credit cards to people who have little understanding of how fees work can be counterproductive at best and catastrophic at worst.

I have a similar view toward assets. Some have been lamenting the high proportion of unbanked individuals, in particular among certain segments of the population. I believe financial access is incredibly important, but we cannot simply give everyone a checking account and think we have improved people’s lives! Not knowing how to use a checking account to prevent overdraft fees and returned checks can quickly turn the benefits of this simple asset into a nightmare.

As we pass new legislation about financial reforms, we should keep in mind the many advantages that advanced financial markets can bring to the economy but also be mindful that without financial knowledge, people now have a much greater opportunity not only to increase wealth, but also to destroy it. As I have argued in many previous blogs, it is not enough to regulate supply, we also have to think about demand and how to empower consumers with the knowledge necessary to make proper financial decisions. We should not be talking only about banks, we should also be talking about the borrowers!

On a side note, James Surowiecki’s column was published on July 5, which also happens to be my birthday. Without knowing it, Surowiecki provided me with a very nice birthday gift by writing so proficiently about a topic I care so much about. Only a trip to New York would have made it better!

Read James Surowiecki’s column here: http://www.newyorker.com/talk/financial/2010/07/05/100705ta_talk_surowiecki

Financial Literacy Among the Young

I want to write this time about financial literacy among young people. Olivia Mitchell, from the Wharton School; Vilsa Curto, from the Education Innovation Laboratory at Harvard; and I have just published a paper in the Journal of Consumer Affairs that describes the results from the responses to three questions that we added to the National Longitudinal Survey of Youth in 2007-2008. Respondents to this survey are 23-28 years old.

These young consumers must confront complicated financial decisions in today’s demanding financial environment, and financial mistakes made early in life can be costly. Young people often find themselves carrying large amounts of student loan or credit card debt, and such early entanglements can hinder their ability to accumulate wealth or to choose their desired job. To examine how well equipped young people are to make financial decisions, we assessed knowledge of basic concepts: the ability to do a 2% calculation and the understanding of how inflation and risk diversification work.

We have three major findings:

1. Financial literacy is low among young adults. Only 27% of people age 23-28 can answer three basic questions about interest rates, inflation, and risk diversification.
2. There are large gender differences in financial literacy. Young women know much less than do young men about basic financial concepts. In another survey, we found large gender gaps in financial literacy among older respondents (51 and older), and this recent work tells us that these differences hold when we look at young people.
3. Financial literacy is influenced by parents. Those who are financially literate are more likely to have college-educated parents (in particular, college-educated mothers) and to have parents who had stocks and retirement savings when these young adults were growing up (when they were 12 to 17 years old).

I want to stress the third finding: family background is found to have a strong impact on financial literacy. A college-educated male whose parents had stocks and retirement savings when he was a teenager was about 45 percentage points more likely to know about risk diversification than a female with less than a high school education whose parents did not own retirement or risky assets. In other words, financial knowledge appears to be much higher for those who grow up with parents who are financially sophisticated.

This research is consistent with the findings from the Financial Capability Survey, the results of which were released last December by Secretary Geithner together with Secretary Duncan. http://www.ustreas.gov/press/releases/tg446.htm. That survey also documents very low levels of financial knowledge, particularly among the young.

These are unpleasant findings. We have put people in charge of many important financial decisions. People must decide how much to save for retirement and how to invest that savings, yet people do not appear to understand how to diversify risk; individuals are bombarded with credit card offers, yet we are learning that many people do not know how compound interest works, so cannot calculate how their debt will grow. Research has shown that financial illiteracy can be linked to problems with debt, lack of participation in the stock market, lack of retirement planning, and lower wealth accumulation. If we do not address financial illiteracy among young people and if we do not equip young people with the tools they need to make sound financial decisions, we may pay the cost down the road.

I am worried about the implications of these findings. If financial literacy is learned at home, many young people will begin their lives at a disadvantage, as not everybody comes from a college educated family or from a family that has stocks and retirement savings. In other words, inequality may start at the very beginning of the economic life if we do not offer everybody an opportunity to learn financial literacy outside of their homes. This is one reason why it is important that our schools incorporate financial literacy into their curricula.

In my work as a college professor, I am surrounded by young people. Last month, as we bid farewell to the Dartmouth class of 2010, I could not help but wonder whether we have provided all that is needed for these students to start on their journey into adulthood. Most of them will start a job, open a new bank account, rent an apartment, get more credit cards, pay down their student loans, donate to their college (ahem . . .), and pay taxes. Are they ready?

Proposals, Pizza Boxes, and Prilosec

I have not written for a while, but now—after a month and a half of grueling work—am able to turn attention to my blog, having just finalized the submission of a multi-project proposal for the second year of funding for the Financial Literacy Center.

Every year at around this time, we have to collect our best projects and ideas and submit them to our funder, Social Security. There are many valuable aspects of this process. First, it forces us to think hard about the many ongoing projects and the new ideas we have been compiling with input from our teams and then evaluate the most promising ones to submit for funding. It makes us think about the future and about the type of work we’d like to engage in over the next year.

Second, it forces us to be specific about what we want to pursue. This is the time when we need to transform ideas, conjectures, even dreams, into concrete plans that have to be described in detail, thinking not just about the outcomes we want but the manner in which we plan to achieve them.

Third, it gives us the opportunity to form new partnerships. Several of our proposed projects have become multi-disciplinary, with psychologists, linguists, and law scholars collaborating with economists. And co-authors from existing projects are brought in to add their experience and insight to newly proposed projects.

But for those of you who have never dealt or submitted a grant, let me tell you that despite all of the good that comes of it, the process is grueling and the work is massive. There are strict procedures to be followed, a vast amount of documentation to be provided, deadlines to be met, and, if more than one team is involved, a lot of people to coordinate. On a scale from 1 to 10 of the unpleasant things one might do, this is probably an 8, right up there with a root canal or training for the Tour de France after major surgery.

As the submission deadline approached last week, I looked dangerously like my students on the day of a final exam: my hair uncombed, coffee cups and empty pizza boxes piling up on my desk, mail unopened, and email clogging up my inbox. Staying late at my desk, I startled more than one security guard patrolling the building to shut off the lights late at night. And, of course, the sure indicator of a grueling grant submittal period: regular doses of Prilosec after week two of the process.

Truth be told, I have gotten much better at writing grants. My first grant submissions, which I wrote with no understanding that I was competing with the giants in my field, I have to say were not received with great enthusiasm. In some cases, my submission did not even merit consideration among the proposals to be funded; in others I received rejections complemented by letters from referees who had a lot of not very friendly things to say about my research ideas. The ones I have the fondest memories of are those in which I was told I was not quite there, and was invited to re-submit. I did that, adding another two or three weeks of work (and medication), and—bingo!—I was rejected after the resubmission!

Grants have became a part of my academic life, as I need support for big projects—to hire assistants, to pay for data, and to do empirical research. Not many institutions had the stomach to fund research on financial literacy when I started working on it many years ago, and I am very happy that Social Security has been a funder and a supporter of my work from the very beginning. I will probably be collecting Social Security benefits by the time I publish this work, so I can say that Social Security has been and will be a constant in my life.

But now the submission is over; I can go back to a healthy diet and to a normal intake of coffee. I will again think positively about the future. And I am very busy catching up on sleep.

Improving Our Financial IQs: Why Managing Money Should Be a Lifetime Skill

At the Wharton conference that I described in my previous blog, I sat down with Michelle Greene for an interview with Knowledge@Wharton. The link to the interview is provided below, but in this blog I wanted to discuss a few topics that have come up many times in this and other discussions.
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2496

In case you do not know Michelle, she is the Deputy Assistant Secretary for Financial Education and Financial Access at the U.S. Treasury Department. The title may look long, and it is for a good reason: she heads the office at Treasury which is in charge of financial literacy and financial education. One of the issues that office has to deal with is that many Americans are unbanked or underbanked and do not participate in traditional financial markets, hence the attention to financial access in addition to financial literacy.

Many people have asked me why financial literacy is so low and why we appear to be getting worse in terms of financial knowledge. In my view, it is not the case that financial knowledge has worsened, rather that the world has changed. Individuals have been put in charge of decisions that were—in the past—the responsibility of employers or the government (such as determining how much to put aside for retirement and how to manage pension wealth). Individuals have to make these decisions while facing much more complex financial markets. For example, ETFs, REITS, and 403(b)s were not in vogue twenty years ago and yet, while the acronyms are not exactly appealing, they have become part of what an average worker has to deal with in their financial planning. In the past, a CFO with an MBA in finance was making decisions about how to allocate investments in order that the company be able to pay a pension to the firms' employees; now workers John and Jane Doe are in charge of making these decisions. This means that every single worker now has to spend time and effort in collecting information and searching for the best conditions.

Given these changes, it may be obvious why the office that Michelle Greene heads is so important: we need to equip people with the tools to make financial decisions and increase financial knowledge if we are asking them to be in charge of their financial well-being after retirement. But, it is not enough to put them in charge. These are difficult decisions—even for a CFO with adequate training—and we cannot expect the average worker to navigate the financial markets if he/she does not know the difference between a bond and a stock or what an annuity is.

As Michelle stated in the interview, if there is a silver lining to the financial crisis, it is that there is a renewed sense among people that they need to understand their own finances. They need to engage in better behaviors and think more about the future. The financial crisis has also taught us the cost of financial mistakes. While we have not yet witnessed what may happen if workers with defined contribution pensions accumulate too little for retirement or make bad decisions on how to draw down the money from their retirement accounts, we have seen that choosing the wrong mortgage can end with the sheriff at the door and the furniture for sale on the lawn.

Michelle also spoke of the importance of starting to learn and to save when young and the need for inserting financial education into our schools. In my view, this is critically important as people need to have a basis on which to build their financial knowledge. Schools cannot teach every concept that will be of importance for making financial decisions in the future. But they can make people appreciate the importance of financial knowledge and the need to build on it over time. I am often asked what we should teach in high school to improve financial knowledge and my short answer is that we should teach people to be curious and to be interested in financial literacy. We do not teach literature expecting students to write the next War and Peace but rather to appreciate a good book. Similarly, we should teach financial literacy so that students appreciate the need to be informed before making financial decisions.

I want to end by saying that I am extremely proud of the work that Michelle is doing. Her work can and is having an impact on the lives of people, on the decisions that John and Jane Doe have to face—decisions that are part of a very different system than the one encountered by previous generations. There is a lot at stake here, and I hope that people will realize that inside the gray and imposing Treasury building alongside the White House, there is an office devoted to improving financial literacy and financial access.