The Need for Economic Literacy
The economy touches everything we do. The great British economist Alfred Marshall described economics as "the study of mankind in the ordinary business of life." We are all amateur economists at work or at the neighborhood barbecue, talking about jobs, wages, the stock market, gas prices at the pump, and trade with the Japanese.

But how good are those discussions? How well-informed are they? Many groups, including educators, policymakers, and business people - as well as economists - believe most Americans should know more economics. Hence, this national symposium on economic literacy.

Among the most important questions we will talk about today are: First, why do we care about economic literacy? Second, what do we mean by economic literacy? Third, what kind of economic knowledge is most useful to regular folk as opposed to professional economists? After all, I think most of us would agree that economic literacy does not mean a facility at calculating multipliers or an eagerness to measure service sector productivity.

	Chris Farrell delivers his symposium overview.

Of course, to many people the term "economic literacy" is an oxymoron. Read any academic working papers recently? Did you stay awake? Could you figure out what the writer meant?

Economists have fallen far in the pantheon of respected experts, too, at least to the public. In the early post World War II era, economists were seen as society's saviors, thanks to the Keynesian revolution and the progressive movement's trust in experts to solve social ills. Advances in data gathering would allow specialists to decipher the economy's course with uncanny accuracy. The very visible hand of economists would manipulate the levers of fiscal and monetary policy to assure full employment.

We all know that confidence was misplaced. Prediction proved notoriously difficult and the power of the market was vastly underestimated. True, economists remain remarkably powerful today, and Alan Greenspan, the nation's chief economist, has done much to restore the profession's tattered reputation. Economists dominate central banks, the single most powerful economic institution in most major industrial nations. They are writing the trading and financial rules of the world economy from their powerful positions in the U.S. Treasury, the International Monetary Fund, the World Bank, and other major global institutions.

Nevertheless, the public seems to treats economists as the Rodney Dangerfields of experts - they get no respect. Who hasn't heard these quips, or something like them?

"Ask five economists, and you'll get five different answers."

"An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen."

"Economics is extremely useful as a form of employment for economists."

Yet there is a growing effort to teach economic literacy in school and among the general public - witness this conference. With good reason, too.

Every so often the established order is overthrown at a rapid pace. Within a span of decades, technological advances, organizational innovations, and new ways of thinking transform economies. It's a tumultuous process memorably called "creative destruction" by economist Joseph Schumpeter. From the 1760s to the 1830s, steam engines, textile mills, and the enlightenment produced the Industrial Revolution. The years 1880 to 1930 were shaped by the spread of electric power, mass production, and mass democracy.

On the eve of the 21st century, the signs are all around us of another accelerating process of creative destruction driven by the most powerful economic forces of our age, globalization, rapid technological innovation, and the democratization of finance. Chinese capitalists. Russian entrepreneurs. The Internet. Investing globally through mutual funds.

I wonder how many of us would have even bothered attending a conference on economic literacy in the 1970s or 1980s? Would we have been far more concerned about "geopolitical literacy" during the Cold War? Back then, many elite's in government, business, and academia worried that the public didn't know enough about international power politics and defense strategies to grasp the difficult policy making decisions in a bipolar world. We would have been talking about the meaning of "détente" and "throwweights" - and you certainly wouldn't be listening to me. Today, one of the defining images of our economy is the crumbling of the Berlin Wall. Communism's collapse and the embrace of freer markets by much of the world is behind huge increases in global commerce and international investment. The information revolution is forging strong links between nations, companies, and peoples. The mass movement toward investing is fueling the entrepreneurship, the risk-taking, and the innovation that is propelling the economy forward during the longest peacetime expansion in U.S. history.

The case for economic literacy is compelling to the extent that it helps people navigate better through this world. Economics offers offered insights into the issues that affect us as workers, consumers, savers, investors, and voters. For example, economists have something to say about the forces behind inflation and recessions, the direction of interest rates and stock prices, and the benefits and costs of international commerce. Gary Stern, president of the Minneapolis Fed, put it this way: "Economic literacy is crucial because it is a measure of whether people can understand the forces that significantly affect the quality of their lives."

I also think the need for economic literacy is greater than before since individuals are increasingly expected to prepare themselves for rapid change and bear much of the risk from the upheavals in our economy. In our highly competitive economy, the traditional paternalism of society's major institutions is waning. Employers insist on their workers taking more responsibility for their retirement arrangements and funding. Colleges and universities count on parents and their children coming up with more tuition dollars on their own. What we are seeing in all walks of life is a powerful push toward individual risk-taking and individual responsibility.

The case for economic literacy, our first question, is strong. What does economic literacy mean in this context, our second question? Personally, I'm skeptical that people should become conversant in what amounts to a dumbed-down version of academic economics. Nor is economic literacy synonymous with Chamber of Commerce boosterism or such silly slogans as "markets are good and government is bad."

I do like the idea of a "media" benchmark when it comes to thinking about economic literacy. Whether it's listening to the radio, watching television, reading a newspaper or magazine, economic literacy means that people have a reasonable grasp of the money, business, and economic issues being discussed. This is an underlying standard in many of the essays I've read on economic literacy, and it's a utilitarian benchmark in ambition.

For example, the trade deficit is in the news a lot these days since it's at a record $262 billion in the year to February. Well, what does that figure mean when it shows up as an evening news graphic or a banner newspaper headline. Hooray, we've hit a new high? Why should we even care that the amount of goods and services purchased by the U.S. is greater than the amount of goods and services purchased by people abroad? The trade deficit is fueling demands for greater protection from foreign predators. Yet most economists, even as they acknowledge the victims, ardently support open borders and oppose trade barriers. Why is that?

I'm fairly optimistic that this level of economic literacy is achievable. The reason: Life is a good teacher, and everyday we are confronted with some aspect of the global economy on our lives as workers, consumers, and savers.

Let me illustrate this approach to economic literacy by reviewing two questions from the Minneapolis Fed's National Economic Literacy Survey.

How would you answers these questions:

If your annual income rises by 5% while prices of the things you buy rise by 10% ...

1) You are better off
2) You are worse off
3) You are unaffected"

Here's the second question: "When a country's people and its other resources are fully employed, which of the following must be true before more of any one item can be produced?

1) Private enterprise has to produce it rather than the government
2) There has to be less production of other products
3) There has to be a general decrease in prices

In both cases, the correct answer is two. I picked these questions out of the Fed's survey because the largest percentage of respondents got the inflation query right and the smallest number got the resources one correct. 90% versus 19%.

I'm not sure that the small number of correct answers to the second question tells us anything. It's a very abstract question, not all that clear, and reflects an issue that would only intrigue someone attracted to theoretical economics in the first place. After all, the unemployment rate is still 4.3% - low by the standards of the past three decades but far from a world where all our resources are fully utilized - whatever that means. It's a philosophically engaging question, but not the kind of economic knowledge that is useful for living a better life as worker, consumer, or citizen.

In sharp contrast, inflation has touched all of us. For some four decades the specter of inflation haunted America. The energy crisis. Soaring food bills. Mortgage rates in the high teens. Gerald Ford and his "Whip-Inflation-Now" buttons. In the 1970s, inflation rose in the 5% to 10% per year range, a terrible period of sustained inflation. Over the past two decades, an arsenal of domestic and global forces have been unleashed against inflation, from the money policies of the Fed to brutal domestic and international competition. Inflation is now at its lowest level in three decades, and price stability may well be within reach. By necessity we've learned much about price trends. 90% sounds just about right.

Discussion of Trade-Offs in Economics
The type of economic understanding I'm describing, of course, faces a lot of competition in the knowledge marketplace. It's an open debate for this conference and elsewhere just how far this approach can and should be pushed before we start reaching diminishing returns. For instance, health providers are increasingly bypassing doctors and other specialists and marketing directly to the consumer. A little health and medical literacy is far more important today compared to two decades ago. The same goes with computer literacy.

The competition for people's limited time and learning capacity affects the teaching of economics in our schools. What do we eliminate to make room for economics and the related field of personal finance - reading, social studies, music, health or sex education? There are trade-offs.

And that leads me to another meaning to economic literacy that can be immensely powerful, and it deserves a great deal of attention. It's the kind of economic literacy that addresses the question of what kind of economic knowledge is most useful to people in their everyday lives as workers and voters. Economists are fond of saying that economics is all about trade-offs. You know the cliches: "You can't have it all." Or "there is no free lunch." The idea of trade-offs underlies such most basic economic ideas.

Indeed, economics is often called the "imperial" social science. The systematic study of trade-offs has swept other disciplines, from political science to sociology to law. The "science of choice" is so powerful and widespread that it has the potential to become the fifth major category of knowledge in the university, in addition to the current physical sciences, the natural sciences, human sciences, and social sciences, according to Charles Lindblom, professor emeritus at Yale University.

Teaching high-chool students - or anyone else for that matter - about the fundamentals of thinking through choices logically would be extremely useful. Paul Romer, economist at Stanford University, views the fundamental task of teaching economics as helping students "set aside their immediate emotional reactions and to reason carefully about the question at hand." Again, it's that trade-off thing.

For example, whenever there is a tragic accident at a railroad crossing, some group will suggest that the imperative of saving lives demands getting rid of all the railroad crossings. Instead, cars should travel under a railroad bridge. Sounds reasonable. But this kind of rerouting and rebuilding costs a lot of money, and you quickly get to the point where the money might be better used elsewhere. The same is true for other "tragic choices," from airplane accidents to environmental improvements.

Like civic associations at the turn of the century and homeownership following the Second World War, investing now has all the characteristics of a powerful mass social movement.

A deeper understanding of trade-offs can contribute to a better economic life, especially in the area of personal finance. Take the widespread embrace of investing in stocks, bonds, and other financial assets. These days, it's almost impossible to get away from the markets. Like civic associations at the turn of the century and homeownership following the Second World War, investing now has all the characteristics of a powerful mass social movement. Millions of people are flocking to Wall Street to save for their retirement, for their children's college education, and for a financial safety net against a corporate restructuring. Wall Street has gone middle class and mass market.

Four decades ago, economist Harry Markowitz wrote a seminal paper in the history of modern finance theory. Yet hardly anyone paid attention to his work on diversification and risk management. "Milton Friedman even doubted that Markowitz's work merited the Ph.D. that Markowitz hoped to earn with his thesis on diversification," says Peter Bernstein, an investment advisor and leading market historian. "Risk management in those days meant buying bonds and holding them to maturity," he adds.

Today, the modern portfolio ideas of asset allocation and diversification - all constructed from the fundamental trade-off between risk and return - is taught to investors by mutual fund companies, business magazines, personal finance sites on the Internet, and elsewhere in the personal finance universe.

Sure, we can all tell tales of appalling investor ignorance. But we are also moving up the learning curve.

Economists Tackle Society's Knottiest Issues
Of course, economics isn't the only discipline that thinks carefully about choice. You could just as easily tap into the body of knowledge we call sociology or political science. But economics is exciting because it grapples with the puzzles of everyday life. Why are cable television fees surging higher while the price of using cellular phones is plummeting? Is a college education still a worthwhile investment with students taking on more debt in the 1990s to earn a diploma than they did in the 1960s, 1970s, and 1980s combined?

Economists also struggle with some of society's knottiest issues - questions that go to the very soul of a society. Where does growth come from? Why are some people rich and others poor? Does trade with other nations do more harm or good? Why is it that the economy sometimes slows and people get tossed off the job, and what can be done to bring unemployment down and living standards up?

Here's the rub: If economics is so important and it has such wonderful stories to tell, why is there such a wide gulf between economists and everyone else? Biology. I can understand. Physics. Sure. But economics is about everyday life.

A popular explanation is jargon. Opportunity cost. Endogenous growth theory. I could go on, but you get the point. Yet the jargon divide exists between any profession and the general populace. From journalism to law, professions develop their own shorthand and code words. There's nothing nefarious about this tendency, and it can be overcome with an effort to write and think clearly for a mass audience. However, economists can do more - much more - to bridge the gap.

No, I think there is another reason for the gulf between economists and non-economists - and it has implications for economic literacy. Economists and ordinary folk often disagree about what economics is all about.

Economics, Fairness, and Objectivity
Talk about an economic issue, say free trade, with public radio listeners, public television viewers, union members, and your neighbors. All well-educated, literate people. Pretty soon, the question will come up, "Is that fair?" Or "Is that right?" To most people, "fairness" is an economic concept.

Economics, as I mentioned at the outset, is now the modern language of ethical and political discourse.

Still, economists recoil at concepts like fairness. Economists see themselves as neutral technicians, civil engineers or, as Nobel laureate George Stigler put it, as political arithmeticians. Economists largely clarify the consequences of alternative actions and policy choices, and then step back and let the politicians take over.

At least that's what they say and believe. Here's how Stigler summed up the common wisdom of economists: "He lives in a world of social mistakes, ancient and modern, subtle and simple, and since he is simply pointing out to the society that what it seeks, it is seeking inefficiently, he need not quarrel with what it seeks…. Day in an day out for economists the society's problems are usually problems of inefficiency. We live in a mistake-prone world."

But, Stigler went on to say, this perspective is deeply flawed because there are "vigorous controversies over the goals of policy."

To be sure, the notion of a civil engineer is a useful device. For instance, it's valid when it comes to analyzing the workings of the wheat or foreign exchange market. But in so many areas of economic study a sharp division between the social and the economic simply doesn't exist. That's certainly the case in understanding the workings of the labor market or the trade-off between equality and efficiency.

The minimum wage has been a political battle for decades. Right now, Congress is debating whether to hike the minimum wage from $5.15 to $6.15 an hour. Most economists agree with this statement: Raise the price of labor and the unemployment rate will rise. Most also agree that the job loss will show up among the very low income workers that a hike in the minimum wage is designed to help.

Yet it doesn't appear that the last two hikes in the minimum wage, in 1996 and 1997, lead to higher unemployment. And there were other economic issues at work. The second increase, which raised the real value of the minimum wage by 9% per year over the 1996-1998 period, played a critical role in stabilizing the trend toward widening inequality. The minimum wage increases came during the welfare-to-work reforms. The real value of the minimum wage had fallen by a third during the 1980s. Some economists advocated raising the minimum wage to improve the incentives to work.

Economic literacy also means economists need to take more seriously the issues and concerns of ordinary people.

It lets the profession off the hook to say that it's inappropriate for the public to raise issues such as these. The same goes for notions of fairness or similar concepts. Economists know there are many ways to skin a cat. Moral beliefs and preferences can effect economic outcomes, argue economists Daniel M. Hausman and Michael S. McPherson in Economic Analysis and Moral Philosophy. The public is often right to bring up issues of fairness as part of their economic discussion. Economic literacy also means economists need to take more seriously the issues and concerns of ordinary people.

To bring this talk to a close, I'd like to reiterate my key questions: Why do we care about economic literacy? What do we mean by economic literacy? And what kind of economic knowledge is most useful to the public?

The kind of economic literacy I've discussed is achievable by both non-economists and economists alike. And it's a worthwhile endeavor. But that's my opinion. I'm sure you have your own. That's why we are here. Thank you.