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Financial Literacy Education:
An Economist’s Perspective
Alan B. Krueger
Princeton University & NBER
October 10, 2014
ExplorationsinEconomics.com
Twitter: @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
Real GDP During Recoveries
NBER-Defined Cycle Trough = 100
135
130
1982
125
Average 8
Recessions
120
1975
1991
115
2001
110
Current
(2009:Q2
Trough)
105
100
95
90
85
80
-24
-16
-8
Trough
8
16
Number of Quarters Before or After Trough
24
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
Real Consumer Spending During Recoveries
NBER-Defined Cycle Trough = 100
135
Average 8
Recessions
130
125
1975
120
115
1991
1982
2001
110
Current
(2009:Q2
Trough)
105
100
95
90
85
80
75
-24
-16
-8
Trough
8
16
24
Government Spending Became a Drag on the
Economy, in Contrast with Previous Recoveries
Real Federal Government Nondefense Purchases
During Recoveries
Real Federal Government Defense Purchases
During Recoveries
NBER-Defined Cycle Trough = 100
140
135
130
125
120
115
110
105
100
95
90
85
80
75
NBER-Defined Cycle Trough = 100
150
140
1982
130
2001
120
110
1975
Average 8
Recessions
100
1991
90
Current (2009:Q2
Trough)
80
70
-24
-16
-8
Trough
8
16
-24
24
-16
-8
Real State & Local Government Purchases
During Recoveries
NBER-Defined Cycle Trough = 100
130
125
1982
Average 8
Recessions
120
115
1991
110
1975
105
2001
100
95
Current
(2009:Q2
Trough)
90
85
80
75
-24
-16
-8
Trough
8
16
24
Trough
Average 8
Recessions
1975
1991
2001
1982
8
Current
(2009:Q2
Trough)
16
24
Housing Bubble
250
1000
900
200
800
150
600
500
Home Prices
100
400
300
Building Costs
Population
50
200
Interest Rates
0
1880
1900
1920
1940
1960
1980
2000
100
0
2020
Year
Source: Robert Shiller. Home and building price indices are adjusted for inflation.
Population in Millions
Index or Interest Rate
700
Fall in Home Prices Led to Foreclosures,
Financial Crisis and Housing Bust
Working off the Excess Homes That
Were Built
Demand for New Residential & Mobile Home Units
Thousands of Units, Annual Rate
2400
Apr-2007
2200
"Boom Years":
1996-2006
2000
1800
"Correction Years":
2007-2012
1600
Projected Annual
Average Demand for
New Units Based on
Demographic Trends
1400
1200
1000
800
Apr-2014
600
400
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Cumulative Over- and Under-Building of New
Residential & Mobile Home Units Since 1996
Thousands of Units, Annual Rate
3000
Apr-2007
Relative to Projected
2500
Annual Average Demand
for New Units Based on
2000
Demographic Trends
1500
1000
500
0
"Boom Years":
-500
1996-2006
-1000
"Correction Years":
-1500
2007-2012
-2000
-2500
Apr-2014
-3000
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
•
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.
9
Prices Rose and Home Construction Increased
Once the Excess Supply was Worked Off
Real Residential Investment During Recoveries
NBER-Defined Cycle Trough = 100
240
220
200
Average 8
Recessions
180
160
1982
1975
1991
140
120
2001
100
Current
(2009:Q2
Trough)
80
60
-24
September XX, 2014
-16
-8
Trough
8
16
24
10
Can Use to Teach Supply and Demand
Excess Supply of Houses
Leads Prices to Drop
Decline in Home Building
Leads Prices to Rise
Understanding the Financial and Economic
Crisis Through Wealth Destruction
Household Net Worth
Nominal Pre-Recession Peak = 100
125
120
115
110
Real
Nominal
105
100
14:Q2
95
90
85
Average Real
80
Per Household
75
70
65
60
55
99:Q2 01:Q2 03:Q2 05:Q2 07:Q2 09:Q2 11:Q2 13:Q2 15:Q2
Note: Net worth adjusted for inflation using the personal consumption expenditures chain price index.
Source: Federal Reserve Board; Bureau of Economic Analysis; Census Bureau.
•
•
•
•
•
$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 sooner
Household Net Worth Has Rebounded:
Selected Assets
trillion
Source: Federal Reserve Board.
Household Net Worth Has Rebounded:
Selected Liabilities
trillion
Source: Federal Reserve Board.
Connection to Economic and
Financial Literacy
Home Foreclosures and Delinquencies
More Common Among Financially Illiterate
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.
Source: Gerardi, Goette, Meier (2010).
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. Krueger
Princeton University & NBER
October 10, 2014
ExplorationsinEconomics.com
Twitter: @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.
Separate Personal and Business Cash
90%
80%
70%
60%
50%
Control Acctng Rule-of-Thumb
“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
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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; pvalue = .035.
Financial Literacy Education:
An Economist’s Perspective
Alan B. Krueger
Princeton University & NBER
October 10, 2014
ExplorationsinEconomics.com
Twitter: @Alan_Krueger