You should need a license to take out a mortgage

In The Atlantic, Moisés Naím points to a recent study that poses three simple questions on personal finance:

1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow? A) more than $102; B) exactly $102; C) less than $102; D) do not know; refuse to answer.

2. Imagine that the interest rate on your savings account is 1 percent per year and inflation is 2 percent per year. After one year, would you be able to buy A) more than, B) exactly the same as, or C) less than today with the money in this account?; D) do not know; refuse to answer.

3. Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.” A) true; B) false; C) do not know; refuse to answer. [The Atlantic]

These questions were asked to people around the world, and the correct answers are A, C, and B. Did you get them all right? If you did — congratulations, you understand the basics of how interest ratesinflation, and portfolio diversification work. Most people surveyed around the world didn’t.

In Russia, 96 percent of those surveyed failed to answer the three questions correctly. In the U.S., 70 percent failed. The highest performing countries were Germany where 47 percent failed and Switzerland, where 50 percent did. But this isn’t rocket science. The questions reflected basic financial concepts that are essential for saving for the future, using credit cards, taking on a student loan, purchasing a home, investing, and building up a pension.

Worse than this, Americans also showed overconfidence in their abilities. Asked to rank their financial knowledge on a scale of 1 (very low) to 7 (very high), 70 percent of Americans surveyed ranked themselves at level 4 or higher. Yet only 30 percent answered the questions correctly.

These surveys provide some pretty scary food for thought, because uninformed, overconfident people are more prone to make bad decisions that endanger their own financial health and the wider economy. As this paper from the World Bank shows, individuals who are financially literate have better financial situations.

Read More At TheWeek.com

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In defense of economic thinking

My colleague Damon Linker recently wrote a piece entitled “How economic thinking is ruining America,” arguing that political considerations such as community, loyalty, citizenship, and the common good have been “sacrificed on the altar of economic profit-seeking.”

As an economic thinker myself, I was bound to find some disagreement with Linker’s view. But there is also a fair amount of common ground. As Linker argues, the years since the 2008 recession have been rough: “Inequality is up, while growth, job creation, and middle class wages are running far below historic norms. That’s enough to drive even the cheeriest American to despair.”

One economic measure, of course, that is not down is corporate profits, which are at all-time highs relative to the size of the economy. The same thing is true for the incomes of the top 1 percent. So Linker is absolutely correct to argue that corporate profit-seeking has been allowed to override political and cultural loyalties and restraints. The middle class has been trampled into the dirt.

But is that really a product of economic thinking? Or is it a product of a broken political system that funnels insider access, tax cuts, and bailouts to the well-connected, while largely ignoring the concerns of the middle class?

Read More At TheWeek.com

Are teen pregnancies good for the economy?

At Pew Research Center, Eileen Patten points out that “[t]he teen birth rate in the U.S. is at a record low, dropping below 30 births per 1,000 teen females for the first time since the government began collecting consistent data on births to teens ages 15-19″:

[Pew]

What’s changed? “The short answer is that it is a combination of less sex and more contraception. Teenagers have a greater number of methods of contraceptives to choose from,” Bill Albert, the chief program officer of The National Campaign to Prevent Teen and Unplanned Pregnancy, told TIME. He added, “The menu of contraceptive methods has never been longer.”

Reducing teenage pregnancy has long been a matter of policy for the federal government, and the latest trends represent a policy victory for successive administrations who have tried to achieve that goal. While liberals and conservatives manage to find ways to disagree on issue after issue, teen pregnancy is one point on which they largely agree. Though they diverge on the means — many conservatives advocate abstinence while liberals tend to favor contraception — both sides happily shake hands on the common goal of reducing teen pregnancy.

Read More At TheWeek.com

Is the economy really twice as large as we thought?

Since the mid-20th century, economists, governments, businesses, and just about everyone else has used gross domestic product (GDP) to measure the size of the economy. But is it thebest metric for the job? Some economists are saying no.

GDP is a measure of the level of spending on finished goods in the economy. It is a measure of final production. If a pencil sells for 50 cents, it increases GDP by 50 cents. But a good deal more spending tends to occur in the process of making a pencil. At the very least, the manufacturer has to acquire resources to make the pencil — someone must harvest the wood, someone must harvest the rubber, someone must mine the graphite. Under GDP, that spending is not directly included. It is only counted implicitly when the finished pencil is produced and purchased by a consumer or business.

Some economists, such as Chapman University’s Mark Skousen, argue that the intermediate stages of production lower down the production chain should also be included in measurements of output. While they recognize that including them again explicitly can mean double counting or triple counting, they argue that there are “several reasons why double counting should not be ignored and is actually a necessary feature to understanding the overall economy.” After all, lots of businesses deal solely in intermediate goods. Intermediate producers buy partial products, add a “bell and a whistle,” and pass them on. At Forbes, Skousen argues that “no company can operate or expand on the basis of value added or profits only. They must raise the capital necessary to cover the gross expenses of the company — wages and salaries, rents, interest, capital tools and equipment, supplies, and goods-in-process.” To Skousen that means that a measurement of output should take all this spending into account.

Perhaps taking heed of some of these arguments, the Bureau of Economic Analysis starting on April 25 will release each quarter a measure called gross output that includes total sales from the production of raw materials through intermediate producers to final wholesale and retail trade. 

Read More At TheWeek.com

Rich people prefer productive companies while the poor prefer shiny lumps of metal.

Gallup’s poll on Americans’ favorite investments always makes fascinating reading.

Every year, Gallup asks Americans to choose the best investment from the following choices: Real estate, stocks and mutual funds, gold, savings accounts and certificates of deposit, or bonds.In the years since the 2008 financial crisis and housing bust — after which Americans as a group briefly ranked gold as their favorite investment — real estate has once again swung back into favor:

[Gallup]

But as Barry Ritholtz notes over at Bloomberg View, the most interesting thing is that there are some serious differences between the investment styles of the poor and the rich.

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General Mills backed down from its controversial lawsuit policy. But the problem isn’t over.

Class action lawsuits are an efficient way for wronged individuals — who may lack funds and legal expertise — to fight back against the powerful legal muscle of big business. One very famous example is the case of Erin Brockovich, who built a class action lawsuit that successfully sued Pacific Gas and Electric over contamination of drinking water.

A lone consumer wronged by a large corporation might struggle to foot the bill to hire the legal firepower necessary to win their case in court. But hundreds or thousands of consumers claiming similar injuries or damages from the same company or organization can, by banding together in a class action lawsuit.

It isn’t surprising, then, that some firms are taking measures to limit their customers’ abilities to join class action lawsuits.

General Mills, the manufacturer of Cheerios, Betty Crocker, Green Giant, and various other grocery products has reversed a recent change to its online legal policy that would have barred customers who “liked” General Mills’ social media pages, downloaded money-saving coupons from its website, or entered any company-sponsored contests from joining class action lawsuits against the firm.

Read More At TheWeek.com

The world’s dumbest idea: Taxing solar energy

We shouldn't be taxing these guys.	 (AP Photo/Shannon Dininny)

In a setback for the renewable energy movement, the state House in Oklahoma this week passed a bill that would levy a new fee on those who generate their own energy through solar equipment or wind turbines on their property. The measure, which sailed to passage on a near unanimous vote after no debate, is likely to be signed into law by Republican Gov. Mary Fallin.

The bill, known as S.B. 1456, will specifically target those who install power generation systems on their property and sell the excess energy back to the grid. However, those who already have such renewable systems installed will not be affected.

Still, it’s the new customers who will rapidly make up the majority, even in a traditional oil-and-gas powerhouse like Oklahoma. That’s because the cost of solar power systems has beendrastically falling for the last five years. Solar installations nationwide are going to shoot up to an estimated 45 gigawatts in 2014, a new record, and are projected to grow even more in coming years as solar prices fall further and fossil fuel extraction gets harder and more expensive.

Read More At TheWeek.com