Being financially illiterate will impede future successes
Recently, the current socio-political climate in the United States has cast an increasingly important light on an alarming issue: that is, the lack of financial knowledge an average person possesses. By financial knowledge, I do not necessarily mean in terms of being able to determine and discern the complexities involved in the operations of a country or firm, but rather in terms of having a certain amount of fundamental knowledge on a broad basis of how the economy works, its main functions and drivers, and especially what the main obstacles which hamper growth.
This deficiency in our common knowledge has been put to the test, especially with the legislative economic agenda of the current government administration. Even though this has been a well-known issue in the past, it regained national attention with the advent of the Tax Cuts and Jobs Act passed into law by Congress in January, even though one can easily argue its merits from both sides of the aisles such as the bill’s effects on the national debt or how the bill has encouraged higher consumer spending, at least in the short-term.
The more pertinent discussion, however, is President Donald Trump’s recent claims and plan to impose tariffs on steel and aluminum imports, which has brought up this conversation regarding our national lack of financial awareness. Certainly, credit, investments, loans, and mutual funds can be an intimidating and challenging concept to grasp, with its intricacies being seemingly impossible to understand. This is one of the main reasons wherein economists can make thoroughly researched, evidence-backed claims which the public at large seemingly ignores.
Furthermore, this is evident in President Trump's tweet that “When a country (U.S.) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore — we win big. It’s easy!” However, trade wars are definitely not a good thing and certainly not easy to win.
Essentially, the President wants to impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports. Historically speaking, trade wars almost always devolve into tit-for-tat protectionist rules and regulations which usually tend to hurt all involved parties. In this scenario, however, the brunt of the increased cost is going to be borne by the average American consumer. Secretary of Commerce Wilbur Ross went on air and defended the President’s plan by arguing that it costs approximately $700 for a ton of steel in the American market, which is then used to make a car. Therefore, a 25 percent increased cost for the car is merely an extra $175 price, approximately. He dismissed the $175 as a trivial amount for the average consumer, whereas the administration and House of Representatives Speaker Paul Ryan in early February touted a $1.50 increase in a weekly paycheck for a Pennsylvania schoolteacher. This extra $1.50 amounts to an approximately $80 increase in annual wage which was lauded by many as proof and conviction of the current administration’s promise to help stimulate and grow the economy. If $80 is a huge windfall, how can $175, more than double its amount, be a “trivial” sum?
It has become increasingly apparent that the reason such claims can be made with impunity is simply that most people don’t have the basic understanding to question or understand such claims. Financial literacy is important for more reasons than just being able to comprehend the national discourse, it directly affects in numerable tangible ways. From paying different rates of tax on capital gains compared to labor and interest income to understanding the factors affecting one’s credit scores, being financially literate can often act as a catalyst for future success.