Inattention and bank overdrafts

It happens to everyone: you are not careful and despite having sufficient funds, your checking account is drying up at the wrong moment and you incur an overdraft fee from the bank. Oh well, you say, the penalty is somewhat stiff, but bad planning has consequences. But for those who have genuine liquidity problems or those that are really bad at planning, those fees can add up quickly and become substantial. Even on an aggregate level, it is important. Apparently, US banks earn $35 billion a year from overdraft fees, or a staggering $100 per capita.

Victor Stango and Jonathan Zinman study what can make that people avoid those fees. A lot has of course to do with education and self-discipline, thus reminders become an important tool. Indeed, they notice that people who were exposed to information about overdraft fees in surveys are less likely to incur such fees in the next month, by 12%, and this effect builds up over multiple exposures. This works best with those who need it the most: low education and low financial literacy. And as people avoid overdrafts by making fewer transactions, not increasing balances, it indicates they lower their expenses as a reaction to realizing that they may not afford that much spending. In other words, financial and economic literacy are important and should be favored.

Economic education and opinions about free markets

Public opinion about economic policy in France and the United States are very contrasted. In France, free markets are viewed very suspiciously and government intervention is required left and right. In the US, it is about the opposite, the government should stay out of any business and no tax can be justified. I find it very frustrating to talk to people (not economists) from both countries as they seem conditioned to believe steadfastly in their view. In the case of France, I was nice shocked to hear an elected politician claim that social security could easily be fixed by taking the money that "lies" in the banks.

Radu Vranceanu and Jerome Barthelemy try to relate beliefs in economic paradigms and economic education. Through a survey, they asked French Internet users about their knowledge of basic economic principles, their views on pro-market reforms, along with various demographic and education indicators. The survey was linked from a business school's website, so answers come from a population likely to be more interested than average in economic issue, and probably more likely to be open to pro-business reforms than the average French citizen. Still, it is clear that economic literacy is a god predictor of open-mindedness towards free markets. I bet it is just the opposite in the US.

Neoliberalism and the Church

When I talk to representatives of some churches, or to anti-globalisation advocates, they constantly blames all the evils in the world on neoliberalism, and us economists are the ones who have imposed neoliberalism on the world. Yet, I do not know what neoliberalism is.

I just read through Stan Duplessis' dissection of the Accra Declaration and I take this opportunity to highlight the disconnect between the Church and Economics. The Accra Declaration was adopted in 2004 at a meeting of the World Alliance of Reformed Churches. The Declaration first lists all the ills of the current world: poverty, famine, wars, limited access to drugs, environmental degradation, and pandemic disease. Then it argues without transition that they are "directly related to the development of neoliberal economic globalisation... an ideology that claims to be without alternative, demanding an endless flow of sacrifices from the poor and creation", and then argues that Neoliberalism "...makes false promises that it can save the world through the creation of wealth and prosperity, claiming sovereignty over life and demanding total allegiance, which amounts to idolatry". Wow. Neoliberalism appears thus to be a powerful cult, that could be thus be competing against established religions.

What are the tenets of Neoliberalism? Again, I need to refer to the Declaration, through the quotes in Duplessis' piece to get a definition:

1. Unrestrained competition, consumerism and the unlimited economic growth and accumulation of wealth are the best for the whole world;
   
2. The ownership of private property has no social obligation;
   
3. Capital speculation, liberalization and deregulation of the market, privatization of public utilities and national resources, unrestricted access for foreign investments and imports, lower taxes and the unrestricted movement of capital will achieve wealth for all;
   
4. Social obligations, protection of the poor and the weak, trade unions, and relationships between people are subordinate to the processes of economic growth and capital accumulation.
   

What this defines is complete anarchy, with no role whatsoever for the government. I cannot think of a single economist who would argue for such an agenda. Even, I would say that economists continuously grapple with many forms of market imperfections or failures and how to define policies (implemented by a government) that deal with these issues. It is true that economists point out that governments have weaknesses, and that markets and prices are powerful allocation mechanisms, but they have recognized limits. Liberalization has its place in some situations, and the resistance to it comes usually from some parties that lose rents from regulation. No one advocates liberalization at any cost, and transition costs are recognized to be often large.

Our world is rich, but unevenly so. I am particularly annoyed when people push for limits to the flow of this wealth across the world in order to satisfy entrenched interests. For example, those who have the most to gain from free trade are the poor of this world, because it gives them access to larger markets, allows them to obtain jobs and income that pulls them from their traps. The world economy is not a zero sum game, where whenever someone gains somebody else must be losing. The gains from exchange are substantial. Churches should learn this, instead of offering resistance to any change and accuse a supposed ideology of all the ills, many of which actually could be at least partitially be solved by opening up. Churches should give the poor a chance to participate in this world.

Should Economists be certified?

The Wall Street Journal had yesterday an op-ed on the fact that a college degree often does not constitute proof of competency. As I have argued before, many students have no business being in college, but the latter graduate them anyway. This waters down the quality signal of a college degree. The response to this situation by various trades has been to certify themselves the competences of prospective tradespeople. Examples are the bar exam, CPA, CFA, actuarial exams, etc. Should the same apply to Economics?

In most US colleges, an Economics major has only two years of study in that field, hardly worth claiming to be an economist. To make matters worse, many Economics programs feed on the rejects fom business schools, who typically failed out because of low grades in basic Mathematics and Statistics. Hardly the best clientele for an Economics degree. While Economics programs typically dismiss more students than most other programs, they still graduate many that do not have required competences.

A test like the GRE subject test would have been a good start, but this has been cancelled in 2001. The American Economic Association has been thinking about devising some criteria to be voluntarily applied to college curricula, but I think something much more drastic would be needed.

Economists and frustrating laymen

Reading this article in the Guardian on how some experts in biology just cannot seem to manage to make their point against laymen, I kept wondering whether economists have the same problem. Everyone is a self-proclaimed expert in Economics, both because of the confusion between policy goals (the realm of politicians) and policy means (the realm of economists) and because everyone is part of the "Economy."

Now, let me make sense of this long sentence. What are economists good at? Seeing the big picture, finding in which ways things interact in a general equilibrium sense, figuring out how incentives work. Thus, they are more detached from the nitty-gritty and can see the complexity of things, unintended consequences, and externalities. The layman is generally not equipped for this. This is why you need to be trained as an economist to figure out the consequences of policy, for example.

Yet, too often, economists do not manage to convince public and authorities about policy. Think about rent control, labor market over-regulation in Europe, gas taxation in North America, red tape in developing economies, or the overall lack of understanding about the role of market forces. When I speak with non-economists, I am regularly stunned by their reasoning and their unwillingness to understand the "true" Economics, mostly because it does not suit them, not because there would be a logical flaw. Quite frustrating, especially considering that these people then vote.

I am all for people to vote on policy goals. But when it comes to how those goals are to be reached, leave the methods out of the policy debate and let the experts take care of it. If you want to build a dam, you do not let people vote whether it is going to be made of concrete or earth, you let experts decide. And so it is when it needs to be determined whether a particular medical drug is safe or not. Or whether one should put fluoride in city water.

Set a goal for pollution reduction, then let experts take over. Set a goal for educational outcomes, and let experts figure out whether school vouchers are the way to go. Set a goal for dependence on Middle-East oil, then let experts get us there. Set a goal for school achievements, let experts get us there.

Enough for this rant. I promise to be more academic in the next posts.

Colleges are failing their students in economic literacy

College is supposed to teach some life skills to students apart from their major, like critical thinking, a general understanding of the world they live in, an appreciation of others and how to function like an adult citizen in our society. Part of this is some general understanding of Economics. This includes foreseeing the consequences of economic actions, understanding the role of interest and debt.

Obviously, many Americans are not very good with the concept of debt and savings. But one could think this pertains to uneducated people. Not so apparently, according to an article in the Business Week that even claims that universities team up with credit card companies in trying to lure students into shady contracts. So much for leading by example.

Given that many universities cannot sustain themselves from tuition and state grants, I fully understand that they are looking into alternative sources of funding. One important source is alumni contributions, but screwing alumni like this is no long term solution. Much better would be to actually teach them to understand basic money management skills. They be more successful in life for it, and more grateful.