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The dismal science

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Posted: Sunday, October 16, 2005 6:55 am | Updated: 8:36 am, Fri Oct 7, 2011.

Alan Shumway works inside a monument to capitalism, but ask him about about the American economy and he’s an honest as the man on the penny.

"I can tell you I don’t know very much," the 26-year-old artist who works at Scottsdale Fashion Square said last week.

"I know about credit card debt. I had it. I paid it off."

On a four-question quiz regarding federal spending, Shumway missed three, including the definition of a budget deficit and which federal agency spends the most.

When asked which program will cost the government more over the next 75 years, Shumway chose defense over welfare, social security and the correct answer — medical care.

He has trouble getting his mind around the idea that over the next 75 years, Medicare will cost $27.7 trillion more than the current taxes are able to fund.

"What the hell is $27 trillion and how do you even say that or talk about it?" Shumway said.

He’s unsure about social security reform, as well. "I really don’t know except I’m probably going to get screwed out of it at some point."

Shumway says he’s like many people his age. He ought to know more about economics and personal finance, but they’re complicated, mostly unappealing subjects. And he’s unsure who to trust.

"Everything is so built-up and overpoliticized," he says. "It’s just too tangled."

Experts say Shumway is typical. Economic literacy among people is so low they say it’s difficult to sufficiently debate huge economic issues of the day such as minimum wage, free trade, immigration policies and off-shoring.

YOUNG & UNINFORMED

They say young people are particularly uninformed.

"The fact is it’s essential for every citizen in a democracy to have an elementary understanding of economic and market principles," said Sarah Longwell, a spokeswoman for FirstJobs Institute, a group that promotes economic literacy.

"Democracies ultimately let voters decide what government does and does not do. They can vote even if they have no idea what they’re doing. So, that means even if a person is incapable of calculating the interest rate on their credit card, they still have a say in Social Security reform."

It’s an issue that also worries Dennis Hoffman, a professor of economics and associate dean for research at the W.P. Carey School of Business at Arizona State University. He says an understanding of economics is like going to the dentist — everybody agrees it’s important, but many don’t do anything about it.

At cocktail parties, when Hoffman introduces himself as an economics teacher, he sees the distasteful looks.

"It’s almost as if you said ‘Oh by the way, I’m a proctologist,’ " he says. "It doesn’t happen all the time, but I think we need to work harder at how we deliver the discipline. We do teach the dismal science. We need to make our discipline more open to people, more understandable."

Longwell references several studies that demonstrate a lack of education in money matters.

A FleetBoston survey is 2003 showed 74 percent of parents feel unprepared to teach their kids about personal finance. National Council on Economic Education Harris Poll shows nearly twothirds of those surveyed did not know that in times of inflation, money does not hold its value.

The ignorance can lead to financial disaster at home or in business.

Bankruptcies have increased every fiscal year between 2000 and 2005, according to data released from the Administrative Office of the United States Courts. Quarterly filings for the period from April 1 to June 30 this year rose 11 percent when compared to the same period in fiscal year 2004, the office said.

SCHOOL MATTERS

Only 15 states require high school students to take economics, Longwell said. Just seven states require course work in personal finance.

"Colleges are not much better," she said.

In his 25 years at ASU, Hoffman said he has taught thousands of students the principles of economics. A basic economics class is not required, but it serves as a general elective for many. His classes are comprised of a myriad of majors from engineering and English, to business and journalism.

Hoffman’s goal is to impart basic economic principles so students get a global perspective on the subject. He also works hard to present both sides of any issue.

A good understanding of macroeconomics teaches students the importance of government spending when it comes to economic stimulus, Hoffman said.

"The popular perception out there among some is government is evil and doesn’t do anything that’s productive for the economy," he said. "But think about those . . . that work at Boeing making Apache helicopters or at General Dynamics or at Honeywell producing aircraft engines to support the military. Government spends on products and government tends to spend on domestically produced products."

Hoffman, who describes himself as a centrist, switches gears in class to balance.

"I pause and say ‘You might think I’m a progovernment guy, I’m a leftist. I want to have more and more government. But let’s talk about what happens when government gets out of hand.’ And then I talk about excesses of government spending and when government tries to do too much and when government stifles private sector activity."

An education in basic market determinations would allow many to understand contemporary issues like the record high gas prices this year, Hoffman said.

"One of the the terms I often use in my class, and frankly I poke fun at it, is this issue of price gouging," he said. "It drives me crazy. Prices are largely driven by markets and when there’s excess demand for basic commodities in times of stress, markets tend to force prices higher. That’s not a gouge. That’s what happens. And if government steps in to try to prevent that price mechanism from working, you’re going to have a shortage of that commodity and that’s far worse than any alleged gouge."

FINANCIAL BASICS

Greg Lane, a financial planner and CPA at Lane Financial in Scottsdale and Prescott, said many of his clients don’t understand basic concepts like compound interest.

"A lot of people say ‘A hundred bucks a month, why would I put that in my 401(k), it’s not going to amount to much’, or ‘$25 a week, forget it,’ " Lane said. "A lot of studies have shown small investments, if you understand the compound interest concepts, can yield substantial returns over a long period of time."

Lane says society understands less about economics than in the past because the financial world is getting more complex.

"As soon as you understand something, there are other products out there and other opportunities that are even more complex," he says. "There are all different types of investing. Just going to Vanguard or Fidelity, you think ‘It’s simple. I’ll just put my money with Vanguard.’ But there’s like thousands of things you can do."

Longwell said FirstJobs is trying to increase economic awareness by putting quiz questions on movie screens, beverage napkins, tray liners and at bowling alleys.

"We want to show young people they can go from the mail room to the board room," she said. "Most executives came from modest beginnings and started their careers in entry-level jobs."

Hoffman says the media have a role to play in informing the public about economics.

"Politicians . . . right-wing media, left-wing media understand they can get people whipped up over apparent inequities, apparent government failures, gouging, graft, corruption, all of this kind of stuff," he says. "Having somebody drone on about how Federal Reserve Board policy actually works, having somebody drone on about individual accountability or having one of us drone on about how there really isn’t any gouging, well, that’s no fun. You just can’t get above that populist, political debate."

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