financial literacy education: an economist’s perspective alan b. krueger princeton university...
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Financial Literacy Education: An Economist’s Perspective
Alan B. KruegerPrinceton University & NBER
October 10, 2014
ExplorationsinEconomics.comTwitter: @Alan_Krueger
Outline
• Summary of Causes of Slow Recovery • Viewing the Great Recession and Modest
Recovery Through the Lens of Lost Wealth • Connection to Financial and Economic Literacy -- Teaching Good Habits
GDP Growth Has Not Kept Pace With Previous Recoveries
80
85
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135
-24 -16 -8 Trough 8 16 24
Real GDP During RecoveriesNBER-Defined Cycle Trough = 100
Current (2009:Q2 Trough)
1982
19751991
2001
Average 8 Recessions
Number of Quarters Before or After Trough
Why is Economic Growth So Slow? • Consumption (69% of GDP in 2013) – Reaction to
Lost Wealth, Job Loss and Economic Insecurity• Government Spending (19% of GDP in 2013) –
Premature Austerity after Recovery Act. Private components of GDP growing as strongly as in 2001-07 recovery.
• Home Construction (3% of GDP in 2013) – Housing bust following overbuilding in boom years
Weak Recovery of Consumer Spending, Especially Services
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110
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135
-24 -16 -8 Trough 8 16 24
Real Consumer Spending During RecoveriesNBER-Defined Cycle Trough = 100
Current (2009:Q2 Trough)
1982
1975
1991 2001
Average 8 Recessions
Government Spending Became a Drag on the Economy, in Contrast with Previous Recoveries
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100
110
120
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150
-24 -16 -8 Trough 8 16 24
Real Federal Government Defense PurchasesDuring Recoveries
NBER-Defined Cycle Trough = 100
Current (2009:Q2 Trough)
1982
1975
1991
2001
Average 8 Recessions
7580859095
100105110115120125130135140
-24 -16 -8 Trough 8 16 24
Real Federal Government Nondefense PurchasesDuring Recoveries
NBER-Defined Cycle Trough = 100
Current (2009:Q2 Trough)
1982
1975
1991
2001
Average 8 Recessions
75
80
85
90
95
100
105
110
115
120
125
130
-24 -16 -8 Trough 8 16 24
Real State & Local Government PurchasesDuring Recoveries
NBER-Defined Cycle Trough = 100
Current (2009:Q2 Trough)
1982
1975
1991
2001
Average 8 Recessions
Source: Robert Shiller. Home and building price indices are adjusted for inflation.
1880 1900 1920 1940 1960 1980 2000 20200
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0
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Year
Inde
x or
Int
eres
t Rat
e
Pop
ulat
ion
in M
illi
ons
Home Prices
Building CostsPopulation
Interest Rates
Housing Bubble
Fall in Home Prices Led to Foreclosures, Financial Crisis and Housing Bust
9
Working off the Excess Homes That Were Built
• In the 1998 Economic Report of the President, the Council of Economic Advisers estimated that house construction would have to average 1.6 million units per year from 1996 through 2006 to keep pace with increased demand from population growth and household formation.
• Residential construction substantially exceeded this level through 2006. As a result, overbuilding led to a cumulative excess supply of new housing that reached 2.6 million units in 2007.
• Historically low levels of new construction since the implosion of the housing bubble allowed demand to catch up to the supply of new housing by 2011. In fact, there may have been some “overshooting,” with new housing supply below the pace needed to keep up with household formation.
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1000
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1600
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2000
2200
2400
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Demand for New Residential & Mobile Home UnitsThousands of Units, Annual Rate
"Correction Years": 2007-2012
"Boom Years": 1996-2006
Apr-2014
Apr-2007
Projected Annual Average Demand for New Units Based on Demographic Trends
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014-3000
-2500
-2000
-1500
-1000
-500
0
500
1000
1500
2000
2500
3000
Cumulative Over- and Under-Building of New Residential & Mobile Home Units Since 1996
Thousands of Units, Annual Rate
"Correction Years": 2007-2012
"Boom Years": 1996-2006
Apr-2014
Apr-2007Relative to Projected Annual Average Demand for New Units Based on
Demographic Trends
10
Prices Rose and Home Construction Increased Once the Excess Supply was Worked Off
September XX, 2014
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240
-24 -16 -8 Trough 8 16 24
Real Residential Investment During RecoveriesNBER-Defined Cycle Trough = 100
Current (2009:Q2 Trough)
1982
1975 1991
2001
Average 8 Recessions
Excess Supply of Houses Leads Prices to Drop
Decline in Home Building Leads Prices to Rise
Can Use to Teach Supply and Demand
Understanding the Financial and Economic Crisis Through Wealth Destruction
• $16 trillion of wealth was destroyed (1.5 years of disposable income)
• Drop in home prices and stock market drove wealth destruction
• Took 6+ years to rebuild lost wealth
• People feel poorer and consume less
• Low MPC households regained wealth soonerNote: Net worth adjusted for inflation using the personal consumption expenditures chain price index.
Source: Federal Reserve Board; Bureau of Economic Analysis; Census Bureau.
556065707580859095
100105110115120125
99:Q2 01:Q2 03:Q2 05:Q2 07:Q2 09:Q2 11:Q2 13:Q2 15:Q2
Household Net WorthNominal Pre-Recession Peak = 100
Nominal
14:Q2
Real
Average Real Per Household
Household Net Worth Has Rebounded: Selected Assets
Source: Federal Reserve Board.
trillion
Household Net Worth Has Rebounded: Selected Liabilities
Source: Federal Reserve Board.
trillion
Connection to Economic and Financial Literacy
Source: Gerardi, Goette, Meier (2010).
Find this pattern controlling for age, gender, ethnicity, education, size of the household, time and risk preference parameters, labor market status over previous five years, the household’s income, and measures of income volatility.
Home Foreclosures and Delinquencies More Common Among Financially Illiterate
Widespread Economic Illiteracy PEW RESEARCH CENTER
September 25-28, 2014 OMNIBUS
Confused about Federal Finances As Well as Personal Finances
PEW RESEARCH CENTER September 25-28, 2014 OMNIBUS
U.S. 15-Year Olds Ranked 9th Out Of 18 Participating Countries on the 2012 PISA Financial Literacy Exam
Financial Literacy Education: An Economist’s Perspective
Alan B. KruegerPrinceton University & NBER
October 10, 2014
ExplorationsinEconomics.comTwitter: @Alan_Krueger
• Behavioral Econ• Habits of Mind• Avoid Mistakes• Choice Architecture• Engage Students
Keeping It Simple: Financial Literacy and Rules of Thumb
By Alejandro Drexler, Greg Fischer and Antoinette Schoar
American Economic Journal: Applied Economics, 6(2) 2014, pp. 1-31.
Design of Experiment
• 1,193 small business owners in Dominican Republic randomly assigned to 3 groups
• Control group, standard accounting training course, rule-of-thumb training course
• Accounting training taught basics of double entry accounting, working capital management, investment decisions, etc.
• Rule-of-thumb training taught heuristics/routines without comprehensive explanation of accounting. For example: keep personal and business money in two separate draws, and only transfer with explicit IOU note, and count each drawer at end of month.
“Overall, it appears that the micro-entrepreneurs in our study were more likely to implement what they learned in the rule-of-thumb training.” -- Drexler, et al.
• Rule-of-thumb group had better improvement in financial practices, objective reporting, saving and revenue.
• Greater gains for those in rule-of-thumb group who had lower skills or poor initial financial practices.
50%55%60%65%70%75%80%85%90%
Control Acctng Rule-of-Thumb
Separate Personal and Business Cash
“INCREASING SAVING BEHAVIOR THROUGH AGE-PROGRESSED RENDERINGS OF THE FUTURE SELF”
Hal Hershfield, Daniel Goldstein, William Sharpe, et al.
Journal of Marketing Research, Nov. 2011.
Actual Photo Avatar Aged Avatar
Results
• Participants who were exposed to their future selves in a virtual reality procedure allocated more than twice as much money toward their retirement account than did participants who were only exposed to their current selves; p-value = .035.
Financial Literacy Education: An Economist’s Perspective
Alan B. KruegerPrinceton University & NBER
October 10, 2014
ExplorationsinEconomics.comTwitter: @Alan_Krueger