Economic Illiteracy Can Be Very Costly!

I'VE ALWAYS ARGUED THAT ECONOMIC ILLITERACY IS VERY COSTLY.

This is true with respect to credit card rates or broader economic principles in government policy. Our education system should emphasize healthy economic thinking. But, considering the education system, it's just as well that they don't address these important issues. The only thing worse than lack of education, is mis-education.

On a local scale, economic illiteracy about personal finance may cause temporary hardship for a household. On a national scale, economic illiteracy about policy can cause dramatic hardship for a nation or even the world. An adept, however, can sometimes protect his or her household from the worst of the devastation, by insulating their savings and investments from harm.

Historically, many foolish economic ideas have been proposed, creating much unnecessary poverty and hardship. Most harmful plans are rooted in perverse incentives that reward behaviors which cause broader societal harm. A couple of examples stand out. First and foremost are the dramatic horrors of communism, which has caused more starvation in the last century than any "act of God" ever could. No one had any incentive to work or create anything of value. Despite all the empirical evidence, some university-based economists still seem to believe that this wildly irrational structure can work, if only we can find "good people" to run it. These days, "communism" has fallen out of favor, but we still hear people advocating socialism or centrally-planned economy (essentially the same failed system) under softer names.

Another dramatic failure was the inflation-based economy. Under Keynesian economics, nations were given free reign to tinker with money supplies and skim off the value of currencies. From Germany between the wars (a devastation so harsh that people voted in Hitler out of desperation) to Latin America in the 1960's-1980's (a period that earned many nations in the region the moniker "Banana Republic"), results were devastating everywhere?and always will be. No one had any incentive to save; this system washed away enormous value and brought most of those nations to their economic knees. Similarly, the U.S., while more conservative in its misuse, still was flailing in the late 1970's under inflationist regimes, untilReagan and Greenspan rode in to save the day.

Despite all this history, we still end up with voters and political leaders that are content to guess at what will keep our economy strong. In the last presidential election, we were left with two wrong choices, as neither major party candidate put forward an economic plan that even made any sense. It's hard to say that we made the wrong choice, given the alternative, but we clearly didn't make the right one from an economist's point of view. I know this is an unpopular statement among many readers, but it is important to understand where we are headed in order to properly order our finances. Let's examine some of the policies we have to look forward to, and then consider what the implications are for our investments.

The most recent story that caught my attention was a piece on the Bush policy with regard to third-world debt, which well illustrates the shortsightedness of the agenda. This administration has taken the position that the World Bank should forgive existing debts and then reduce the amount it loans out in the future. Also, it is advocating switching to grants instead of loans in the future, so that countries no longer will find themselves with unmanageable debt positions. On its face, this appears to be thoughtful and considerate. However, it appears that little thought has been given to the sustainability of this model. First, in many ways, it resembles the widespread gift-based foreign aid regime that existed in pre-Reagan days. Bad debts were prevalent then, but much more emphasis was placed on direct gifts from governments. The problem? These gifts were among the most mismanaged and corruption-plagued portions of our foreign aid budget.

Furthermore, Bush clearly has not thought through what impact this will all have on the stability of the World Bank itself. Of course, there are those who would be happy to see this institution to die a slow death, but if we're going to continue to fund it, we should insist on responsible management of the funds we invest. To turn it into a gift bucket will destabilize the institution, reduce its ability to borrow at reasonable rates, and boost our cost for its support by billions. This is one example of the carelessness with which this administration handles most economic issues.

A second case is the rampant protectionism that emanates from Washington's trade authorities. We regularly hear of proposals to restrict imports that "cost too little". Anyone with a basic economics education knows this type of policy can only do long-term harm to our economy. Meanwhile, citizens are forced, with no good reason, to pay more for food and other goods. The Great Depression was largely caused by such trade mismanagement, and our own economy is greatly weakened by these administrative manipulations.

These are only two examples of the economic illiteracy that is rampant in this administration.

Scott Pearson can be reached directly at Scott@valueview.net or by visiting http://www.valueview.net

Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As President and Chief Investment Officer of Value View Financial Corp., he offers investment management services to a wide variety of clients. His own newsletter, Investor's Value View, is distributed worldwide and provides general money tips and investment advice to readers both internationally, and in the U.S.