The Economics of Babysitting vs. the Mechanics of the Federal Reserve

Jacob Sullum | August 9, 2007

The New York Times reports that high school seniors did surprisingly well on the first nationwide economics test, with 79 percent having at least "basic" knowledge and 42 percent qualifying as "proficient" or "advanced." That's a lot better than students have done recently in the National Assessment of Educational Progress (NAEP) tests for history (47 percent basic or better, 13 percent proficient or better) and science (54 percent basic or better, 18 percent proficient or better). But it sounds like the bar was not set very high:

Bruce L. Damasio, a high school economics teacher in Towson, Md., who is president of the Global Association of Teachers of Economics, said the economics results showed that "many of our 12th-grade students have a pretty good grasp of the logic of economics."

"But when we look at the questions they can answer and the ones most of them get wrong," Mr. Damasio said, "we see that many students are pretty shaky on the terminology of economics and on the actual ways that government and financial systems work."

Mr. Damasio cited a question that asked students to identify the most likely effect of an increase in the hourly wage of baby sitters. Eighty percent of students answered correctly that the time spent by teenagers on baby sitting would likely go up, whereas time they spent on other activities would decrease, he said.

But on a multiple-choice question that asked students to identify one of the policy tools of the Federal Reserve, only 21 percent chose the correct answer, "buying and selling government securities." Thirty-seven percent incorrectly chose "increasing or decreasing government spending," and 31 percent chose "raising or lowering income taxes," he said.

"This means that students haven't learned that Congress and the president determine federal spending," Mr. Damasio said.

Similarly, according to NAEP website, while "seventy-two percent of students could describe a benefit and a risk of leaving a job to further one's education" and "sixty percent of students could identify factors that lead to an increase in the national debt," most did not understand that "investment in education can boost economic growth" and could not "interpret a supply and demand graph to determine the effect of a price control,"  "use marginal analysis to show how a business could maximize profits," "identify the federal government's primary source of revenue," or "explain how a change in the unemployment rate affects income, spending, and production." About half "recognized that banks use money deposited in checking accounts to fund loans to customers" and that "when trading countries removed trade barriers, prices would probably decrease rather than the quality or quantity of traded goods." While students who had taken A.P., honors, or International Baacalaureate courses in economics did slightly better than those who had taken no economics courses, those who had taken "consumer economics" or business courses did worse.

Speaking of economic ignorance, look for Bryan Caplan's article about widely held economic misconceptions, based on his book The Myth of the Rational Voter, in the October issue of reason. 

Comments

JF|8.9.07 @ 12:11PM|#

Crap, I live in Towson, Maryland!

They should have interviewed Gilbert Stange instead of this Diamismo guy.

|8.9.07 @ 12:15PM|#

Now, let's give Congress this test and see how they do.

|8.9.07 @ 12:27PM|#

"could not "interpret a supply and demand graph to determine the effect of a price control," "

These kids are more than qualified to work in government.

|8.9.07 @ 12:33PM|#

Given the recent discussion over minimum wage, I'd say most adults, including a number of economists, don't understand these things either.

Sal Paradise|8.9.07 @ 12:37PM|#

Don't worry, kids. Not knowing anything about economics is a great qualification to have if you want to write in the NYT's Op-Ed section.

|8.9.07 @ 12:39PM|#

Everything I know about the demand curve, I learned from Hit & Run.

Timothy|8.9.07 @ 12:45PM|#

could not "interpret a supply and demand graph to determine the effect of a price control," "use marginal analysis to show how a business could maximize profits," "identify the federal government's primary source of revenue," or "explain how a change in the unemployment rate affects income, spending, and production." About half "recognized that banks use money deposited in checking accounts to fund loans to customers" and that "when trading countries removed trade barriers, prices would probably decrease rather than the quality or quantity of traded goods."

Half the kids in my intermediate micro and macro courses couldn't do this. Hell, a lot of kids in my 400-level electives were completely devoid of this kind of knowledge. GUH.

|8.9.07 @ 1:10PM|#

Timothy,

Are you serious? Do you at least fail these incompetent students? Or are you suggesting that this knowledge is so advanced and specialized that only post graduate economists should be expected to know it.

|8.9.07 @ 1:20PM|#

I would have guessed that the Federal Reserve's job was to set the loan of last resort rates, guaranteed by the government at X amount to the large lenders and I don't know what they mean by selling "securities", but probably by elimination I could have figure that out.

|8.9.07 @ 2:20PM|#

"identify the federal government's primary source of revenue,"

I wonder if theft would be an acceptable answer. Extortion perhaps?

"sixty percent of students could identify factors that lead to an increase in the national debt,"

Not stealing enough money to pay for the welfare state.

"investment in education can boost economic growth"

Depends on what form the investment takes. Throwing more money at public school probably will not boost economic growth.

|8.9.07 @ 4:11PM|#

The lack of economics education is a problem.

It leaves a lot of people vulnerable to charlatans who pretend to be knowledgeable on the subject.

DEMAND KURV!

bob r|8.9.07 @ 5:14PM|#

My econ_101 professor had an "interesting" method of assigning grades: the grade was based on your score relative to the highest score in the class. A 91% (of the highest score) got you an A. Being a 35 year old engineering student with a decade plus interest in reading philosophy and economics, I found the class to be rather simple. I also got the only A -- a 100% score on every assignment and test.

In as much as I never did any studying other than to read (once) the text, I did not develop a very high opinion of my fellow students abilities. In the subsequent 15 years I have not seen any reason to think the general population's understanding of the subject is any better than that displayed by my classmates.

|8.9.07 @ 8:01PM|#

joe,
when I blur my eyes, your post looks like this:

Lou dobb sL oudobbslou dobbsloud ob b sloudobbs.

Lo udobbs l oud ob bsloud obbsloudob bs loudobbslo udo bbsloud ob bs loudobbsloudo bb slo udobbsl.

LOUDOB BSLO!

I wonder why that is.

|8.9.07 @ 9:00PM|#

joe: "It leaves a lot of people vulnerable to charlatans who pretend to be knowledgeable on the subject."

Also a lot of charlatans who think they're knowledgeable ...

|8.9.07 @ 9:02PM|#

Ummm, should be: "Also a lot of charlatans who think they're knowledgeable ..."

|8.9.07 @ 10:09PM|#

jh,

I agree, the Demand Kurv people actually think they're experts.

Dogzilla,

I wonder why that is. Because you're an imbecile?

megs|8.10.07 @ 9:54AM|#

"...those who had taken "consumer economics" or business courses did worse."

Having taken a short economics class in high school and then also having seen the results of kids who had taken these in college, I can understand how kids would do worse. These classes are TERRIBLE. They're fostered off on whatever teacher has free time and they're often just stock picking and probably the best case for proving "evil liberal indoctrination" in public schools. At first I just sat in the back and made up rap lyrics because I was the only white kid in the class and I knew I'd be exiled and miserable if I tried to learn, but then we noticed that the guy who was selling candy knew more about economics than the teacher. There were quite a few people who would buy wholesale candy and bring it in to sell. They'd undercut the vending machine prices, but they'd profit big time, as well as delivering a much more useful service. From there we bullied the teacher into making it a discussion class and we brought in relatives who owned small businesses to talk and I taught everyone how to do personal taxes, since my grandmother used to work for the IRS.

Lesson learned - kids are really good at economics and quickly realize how important it is once they see how it affects them and how much money they can make. But everyone teaches it like Binns teaches history of magic.