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

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.