Economic illiteracy a heavy cost to society

While much is being said about the importance of financial literacy, it’s just as important to have some understanding of how economics and politics work.

When your neighbour reads the newspaper, do you think he or she can spot the lies and spin from politicians and lobbyists? What about you? Be honest.

Much is being said about the importance of financial literacy. However, it’s just as important to have some understanding of how economics and (by default) politics work. This knowledge gap hits taxpayers where it really hurts — their wallets. If we as voters had a better knowledge of political economics, it would be harder for politicians and special interest groups — be they unions or employer groups — to trick us.

Early in the 20th century, US Supreme Court Justice Oliver Wendell Holmes Jr. said, "It seems to me that at this time we need education in the obvious more than investigation of the obscure." It therefore follows that schools should be teaching basic microeconomic principles rather than abstract macroeconomic concepts such as the unemployment rate or GDP.

As early as 1946, American economic journalist Henry Hazlitt claimed that economics consists in looking beyond the immediate effects of a policy — and tracing its consequences for the target group and the population as a whole.

An understanding of basic microeconomic principles would prevent us from being fooled by lobbyists, who never miss a chance to publish studies on economic spinoffs to justify the subsidies they demand. Unfortunately, such economic spin is too often what journalists report on without digging deeper.

Let’s consider three basic economic principles outlined by professor Gregory Mankiw, an American economist whose works are taught in most of our universities.

People face tradeoffs. In other words, nothing is free. To get something, you have to give up something in return. Unfortunately, we tend to forget that money doesn’t grow on trees. When a government hands out millions of dollars in subsidies to multinationals and thereby creates a few jobs, we should remember that these jobs come at a cost. The cost is an increase in income and other taxes needed to fund the very same subsidies that, in turn, will eliminate other jobs.

The cost of something is what you give up to get it. This is what’s called opportunity cost. The cost of a choice (be it political or personal consumption) is everything you must give up to obtain it. For example, the cost of going to university is more than just tuition fees and materials. It also means forgoing a full-time income for several years. There’s also a cost of dropping out of school, but even that choice has benefits.

People respond to incentives. This is my favourite principle. People change their behaviour when the benefits and costs of their actions change. The simplest way to understand this is to consider the expression "too much tax kills tax." People who are overtaxed — especially the wealthy, because of their mobility — will put less effort into their job or simply move to another jurisdiction with lower taxes.

Take as another example public service employees, who are no different from private sector workers. Government workers are trapped in a system with counterintuitive incentives, rewards that come from power games, alliances and creative means of expanding the civil service — all at taxpayers’ expense. Few civil servants embrace the idea of smaller government as a way to restore public finances. That would be like asking them to cut off the branch they’re sitting on.

If our politicians, and a majority of the electorate, understood and applied these three principles when making decisions, the next generation would not face such a huge public debt or years of austerity. And it wouldn’t be so easy for politicians to use taxpayers’ money to hand out goodies for political gain.

 

About the Author

David Descôteaux


David Descôteaux is a Montreal-based business columnist.

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