The economy is omnipresent in our world, and yet very few people possess more than a basic understanding of it. Worse yet, few people have an interest in knowing more.
This became apparent to me last week when a class discussion turned to the subject of economic literacy. The question was: Should you possess at least a basic understanding of economics? As an economics major I felt the answer to the question was an easy affirmative, but instead it sparked a debate in which some classmates vehemently argued against it. Their belief was that economics is too complicated, making it too difficult to learn, resulting in what they learned either being misunderstood or inconsequential. I don’t agree.
As an undergraduate economics major, I don’t suppose myself to be an expert. Yet, I still find what I do know very valuable. Take another subject: The Constitution. As citizens or residents of the United States, people should have a basic understanding of what rights the Constitution provides. You’d be hard pressed to find someone who disagrees with this. But, the constitution and constitutional law are incredibly complicated. Should we not make an attempt to understand it because we cannot become experts? I think not.
I’ll extend my angle by saying that I believe that every person should (and has a right to) possess basic knowledge about the economy and finance. These two very different topics are often conflated, which is not to say they are not related. I think they are conflated for most people because they are two subjects people do not know a lot about.
This knowledge deficit, a lack of financial and economic literacy, has serious sociopolitical consequences. Across the globe, we are inextricably linked through a global economy and markets that know no time zone, work day or leader. This means that the micro and macroeconomic policy of the United States has global economic repercussions. For voters and residents, there is a lot more at stake.
With regard to the markets, capital is flowing around the globe more than ever. Whether through work, an investment portfolio, an IRA, 401(k) or countless other ways, the livelihood of most Americans is connected to the markets. Smart consumers should have at least a basic knowledge of the product they are buying.
The consequences of such a knowledge deficit manifest themselves in countless ways, but none are more apparent or obvious than in the political machine. Whether it is a party platform, public policy or proposed legislation, politicians continue to exploit this deficit. Instead of providing rational solutions grounded in academic work, on either side of the aisle politicians score cheap points with buzzwords like American jobs, the middle class, taxing the rich, manufacturing and crony capitalism. These largely abstract concepts are never defined or utilized in a way that would be acceptable in academic work, so why do we accept them from our lawmakers?
Ignorance. Because most people don’t know any better. Politicians have, for lack of a better phrase, dumbed down and repurposed important ideas and concepts worthy of bipartisan debate, then utilized them in important policy proposals and laws. This is an epidemic that knows no ideology or party.
This was apparent to me this past July when Hillary Clinton released her tax plan, should she become president. Among other things, she sought to crack down on “activist investors” by extending the period in which capital gains are taxed as income (plus an additional 3.8 percent) from one year to two. At the end of two years, instead of revert to a capital gains tax; she would incrementally reduce the statutory rate. There is a lot of jargon here, but that is my point: people should know what is being talked about.
Concerning her proposal, I’ll avoid an ideological fight and instead provide some simple facts: about half of all stock is held for about a year, and it is estimated that only 30-40 percent of corporate stock is taxable (non-profits, pension-funds, institutional investors, 401(k)s, IRAs and other financial instruments and institutions do not pay taxes). Her attempts to curb short-term trading of assets may have good motives (it has been proven that long-term holds accrue more value), but many people have said it could have the opposite or no affect. Short-term investors will no longer have an incentive to hold assets for at least a year, and most investors are not hugely concerned with taxes.
Furthermore, it is quite possible that her target misses the mark. Activist investors and other frequent traders might be good for the market: they react to companies’ performance and encourage positive change within corporations. As the author of the above article notes, it is the passive investors, who allow boards of companies to approve massive execute compensation packages for subpar performance who are doing real damage to the economy and the markets.
Semantics aside, Clinton's proposal is a direct result of the economic and financial knowledge deficit. Her proposal, to liberals, will make sense: it targets the wealthiest members of society and taxes them, and seems to curb what people view to be a reckless financial environment that hurts the average American. The validity of those views is certainly debatable, but what is clear is that in her attempts to use clever rhetoric and buzzwords, her policy misses the mark.
Clinton is only one example among many, and I am not looking to present an ideology solution, nor argue that one party is right or wrong. Neither do I claim to be an expert in finance nor economics, but merely someone who is interested in both and sees a value in possessing at least a basic understanding. I would urge all Americans (and all people around the globe) to take classes in finance and economics in order to be more knowledgeable about policies and mechanisms that have a massive impact on their lives.
The importance of this knowledge isn’t relegated to the “real world.” Most obviously, it might boost your grades in applicable courses. But, more importantly, it allows you to be a better and more informed member of Boston College. CJBC’s fight for divestment has certainly garnered a lot of attention, but wouldn’t your support or dissent be more valuable if you understood what the process entailed? The ways that economic principles tie back to campus are endless, and range from minutia to major decisions about how the University operates.
Economic and financial literacy are important. To some, this may be imposing, and to others easy. Regardless, it is important information that will make you a better and more informed member of the BC community and of the world.