Financial literacy for politicians

I have argued in my blog postings that individuals need financial literacy because we are increasingly asked to make financial decisions that have important consequences. But there is a group for whom financial literacy is even more important, since their decisions are going to affect the whole population. These are our politicians.

As a case in point, the consequences of the standoff about the debt ceiling are severe. For the first time in history, the US debt has been downgraded from AAA to AA. This could mean higher interest rates, for example, on mortgages or car loans, and thus higher costs for many consumers. The stock market gyrated last week, dropping sharply, and it dropped more than 600 points on Monday, destroying in less than a week most of the gains that had been made slowly over many months. These are serious problems that affect real people!

When politicians make decisions with such consequential economic implications, they must be financially literate. Consumers learned about the costs of financial illiteracy during the financial crisis; politicians will likely get their lessons soon, if what they want to see is what happens to an economy in which basic economic principles are ignored.

There have been a number of statements by politicians that reveal their financial illiteracy. One example: the argument that it does not matter (or we should not care) if the world is watching or what the world thinks of how the US handles the debt ceiling. This is unfortunately wrong. A large portion of US debt is held by the Chinese, and so it does matter what other countries think of the discussion about the debt ceiling, and politicians should care—in fact, they should care a lot. Another example: the suggestion that we should let the government default to demonstrate how important it is to reign in the deficit. This is strange financial decision-making. It is the equivalent of a household wanting to burn down the house to discipline its members. I would recommend trying that strategy on a desert island but not in a country inhabited by 300 million people.

I doubt financial illiteracy is concentrated in one political party only. We have witnessed poor economic decisions a lot in the past few years. Having public debt on an unsustainable path is not only problematic, but it provides a bad example to citizens as well. Not just the federal government but also state and local governments have done a poor job in keeping their finances in order.

The decisions that politicians make have enormous implications for the economy and for all of us. We are the ones paying the cost of the decisions that are made. We should demand that the politicians we sent to represent us and who are bound to make these important decisions be financially literate and explain their decisions to us in economic terms. A fragile economy that has survived a very severe crisis and is trying to recover from a great recession needs politicians who understand basic economic principles, now more than ever.