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Peter Crabb: Americans' financial literacy is lousy — but the government's is worse

As Garrison Keillor says, all the children in Lake Wobegon are above average. When it comes to financial literacy, Idahoans are also above average.

The U.S. Department of Treasury describes financial literacy as the ability of an individual to make smart financial choices in such things as saving and investing, using credit, and avoiding fraud. Compared with the rest of the nation, Idahoans are better at understanding these choices.

The ability to successfully navigate the many financial choices we must make over our lifetime is becoming more and more important. The financial crisis of the last two years points to the risks we face not only individually, but also as a society, if we fail to make good financial decisions.

The subprime mortgage problem that first surfaced in 2007 can be attributed to mistakes at many levels. Financial institutions sold inappropriate financial products, government-sponsored entities excessively subsidized the industry, and individuals overextended themselves.

An important policy directive designed to address these mistakes is an increase in the financial literacy of the nation. Towards this end the Financial Industry Regulatory Authority recently studied the financial capability of Americans. The study found that Americans on average would get a D (60 percent) on a financial literacy exam.

We did better than the class. Respondents from Idaho scored on average 3.2 on the 5-point quiz. The national average score was only 3.

The FINRA study, however, goes beyond just our knowledge of financial decisions. The study looks at four other areas FINRA suggests should be included in any measure of an individual’s “financial capability:” whether or not we spend less than our income, how much we save for a rainy day, how much we borrow from nonbank lenders, and how often we comparison shop when signing up for a credit card.

The first category appears to be Idaho’s weakness. Only one other state (Montana) has fewer people reporting they live within their means. Only 34.6 percent of Idahoans say they spend less then their monthly income.

Perhaps not surprisingly, the nation as a whole is bad about making ends meet. The national average of people who report spending less than their monthly income is only 42 percent. That is, the majority of U.S. households spend more than they make.

What may be missing in this analysis is the extent to which Idahoans, or U.S. households in general, are paying down debt. Paying down debt is a form a savings. By reducing future obligations we increase the amount we can save over our lifetime.

According to Federal Reserve data reported this week, revolving credit, such as credit cards, decreased at an annual rate of 8.5 percent in October. From its peak in 2008, total revolving credit owed is down nearly 17 percent. If this trend continues the number of households that can report they are making ends meet is certain to go up.

The only organization in the U.S. that appears less concerned about making ends meet right now is the federal government. President Obama announced this week a deal with Congress for the extension of lower tax rates and additional tax and unemployment benefits.

By most estimates, the deal amounts to about $200 billion in additional economic stimulus from the government that will have to be borrowed.

The bond market responded accordingly. Prices for the U.S. Treasury’s benchmark 10-year note fell dramatically this week. The interest rate is now about 3.25 percent from a low of just 2.5 percent in October. With higher interest rates, the costs of this deal are sure to be felt for a long time.

The financial markets may be saying the U.S. Government needs a test of its financial literacy.

Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.