Monday, July 2, 2012

The High Price of Bad Education

In June, Slate came out with a crusade to get more people to aspire to be scientists and engineers. The original article was not written by a scientist or engineer. It was written by a person who graduated from Harvard with a degree in Social Studies. This is yet another example of misguided sermonizing by people who think they know better. This works out well when they're actually right, but America's problem is not that it lacks for scientists and engineers.

America's problem is that the economy changed and our K-12 public education system failed to change with it. This is not exactly surprising. As a rule, widespread government programs are always the last to respond to changing circumstances. But the issue isn't about trying to foster greater interest in the sciences. It's all about a failure to educate our kids about the incredible importance of financial matters.

I can recall exactly 2 instances in my K-12 education where I was taught about a real financial matter. One was learning how to balance a checkbook in second grade. The other was investing in the stock market in 11th grade in my AP economics class. And the investing lesson was pretty terrible, because it gave the impression that investing is a short term endeavor. It's not.

If you asked Americans between the age of 51-56 to solve a simple problem about compound interest, over 82% of them will get it wrong. The very people who need to worry most about retirement and the state of their portfolio get one of the simplest concepts of finance wrong. But the thing is, 30 years ago, that wouldn't have mattered.

What changed? The answer is the shift from defined benefit pensions to defined contribution investment accounts. Pensions are a gigantic financial liability on a corporation, and the huge legacy costs associated with them drove many companies into bankruptcy. Newer companies and companies with the foresight and flexibility to change thus began eliminating pensions for their employees in favor of 401k investment accounts.

If a person didn't understand compound interest and he was going to retire in the 80s, chances are he would have retired with a pension. You don't need to understand exponential growth because you understood you would receive X amount of dollars every year until you died.

 That world doesn't exist anymore. Cost cutting and eliminating future liabilities have led to the individual retirement account. Each person would be responsible for managing their own finances and retirement, and the company they worked for would contribute a small amount each year to help them. But the company would never again be directly responsible for providing for their retirement.

Is it getting clearer now? The pensions are gone, but the financial ignorance remained. The truth is, Americans have always been ignorant about money matters. But things like home mortgages built up equity while Social Security and pensions gave them the income to live comfortably in retirement.

With the extraordinary economic growth in the 80s and 90s, nobody really cared about the elimination of the corporate pension, because jobs were plentiful, pay was good, and markets were booming for those who had the foresight (or sheer luck) to invest in them. But when the 2000s came around and the markets corrected, Americans' portfolios crashed back to reality and it was a shock to most people.

That's fine, though. Because as long as they kept building equity in their house, everything would be fine right? Wrong. Once the financial crisis hit and real estate values plummeted, people literally lost everything because they had invested everything in stocks and their homes.

After all that, is it any surprise why the current recession is so brutal? The median balance sheet has to undergo massive repair and restructuring, and that takes time and a lot of money. And it also takes knowledge. Knowledge that most Americans don't have.

This brings me back to education. We need financial education to be a vastly larger part of the curriculum than it currently is, which is miniscule. But since most teachers are still stuck in pension utopia (thanks to the fact that they still have pensions courtesy of their state and local governments), we have to retrain the teachers.

Wall Street needs to get the message out. What they do is incredibly important and people need to have a proper appreciation of finance. And once they get that appreciation, they'll realize that everything has to change, from the way we save our money, to our purchasing decisions of both cyclical and durable goods, and our views on housing and retirement.

Because the truth is you only need a few incredibly bright scientists and engineers to push the boundaries of technology and science while everybody else just follows in their wake. America doesn't need more scientist and engineers (although they are still welcome). America needs more financial education. That starts at home and in the school. So get to it.

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