Thursday, August 6, 2009

Indiana Now Requires Financial Literacy Education for Kids

Effective July 1, 2009, Indiana became the latest state to require that each public school and accredited non-public school incorporate financial literacy education into its curriculum. The law was entitled "Dollars and Sense for Hoosier Children." Section 20-30-5-19 of the Indiana code now mandates that instruction concerning financial responsibility be given in grades six through twelve.

This is a good thing. It is widely understood that the 2008-2009 financial crisis was mainly caused by the subprime mortgage crisis, and many believe that the root cause of the subprime crisis was financial illiteracy. Kids need to learn at a young age how business, economics and finance works. Any steps taken to increase the financial wisdom of the next generation will help ensure that we don't experience a repeat situation of millions of borrowers taking out loans that they had no chance of repaying.

Hopefully, the financial literacy training adopted by schools in Indiana will be a program like the excellent one provided by Junior Achievement (JA). JA has age appropriate financial literacy classroom seminars for the entire grade span mandated by this new law. What I like about JA's program is that it is largely based on a small-business / free enterprise approach, with a lot of hands-on reinforcement of basic financial concepts.

There are other financial literacy curricula out there from other non-profit organizations that are also excellent and age-appropriate. Whatever the state and local school boards decide, it will likely be a step in the right direction to ensure a healthy financial future for our children.

Craig Everett is a financial researcher, an advocate for financial literacy, and a board member of Junior Achievement of Greater Lafayette.

Monday, August 3, 2009

More Good News for Ford

Ford Motor Company announced today that new car sales for July increased 2.3%. Most analysts attribute this jump in sales to the Cash For Clunkers program.

This assumption is somewhat dubious. The Cash For Clunkers is the government program that allows consumers to trade in a used car bad fuel efficiency for a new car with better miles-per-gallon and receive a rebate up to $4,500.

It is certainly true that this program has resulted in a binge of new car buying, but it is also reasonable to expect that the program should affect all auto companies in a similar way. It hasn't. While Ford posted a sales increase of 2.3%, rivals GM and Chrysler experienced decreases in sales of 19% and 9.4%, respectively. Even Honda, otherwise considered a healthy company, had its sales drop by 17% during the month in question. Here is a summary of July sales results:

  • Ford +2.3% (the ONLY one with an increase!)
  • Chrysler -9.4%
  • Toyota -11%
  • Honda -17%
  • GM -19%
  • Nissan -25%

So why is Ford benefiting so much, while the others aren't? At first blush, there are four possible explanations:

  1. American consumers are rewarding Ford for refusing to take bailout money. By taking the high road, Ford has established itself as the last truly American car company, a family business that relies on its customers for its success, not handouts from taxpayers.
  2. New car buyers just randomly picked Fords last month, signifying nothing.
  3. New car buyers avoided GM and Chrysler because of the "stink of death" surrounding their bankruptcies. If this is the case, then we should see their sales improve as their survival grows more and more likely. Of course, this explanation is contradicted by Honda's poor performance.
  4. Some other unobserved factor.
My humble opinion is that #1 played a significant role. Keep up the good work, Ford.

Saturday, August 1, 2009

A Remedy for Rising Health Care Costs

Health care reform is slightly off-topic here, but since the President has claimed that reforming health care is the key to economic prosperity, he has brought the subject into play here in the World of Finance.

The idea that increased government involvement in something will help reduce costs is somewhat humorous. Our government is very good at doing a small handful of things, like national defense, for example. Our military is clearly the best in the world, but achieves its results at tremendous financial expense. Our military is renowned for its skill, but not its cost efficiency.

Most of the other activities of the federal government fail to achieve their intended results, yet still manage to incur mind-boggling waste and expense.

How can anybody seriously think that government-run healthcare will be better and cheaper? When has anything run by our government ever met those standards?

Unfortunately, the proposed health care reform legislation does not even address the primary causes of rising costs of medical care in recent years. The primary cure for rising medical costs is tort reform, but this is mysteriously missing from the legislation. The direct costs of the lawsuit-friendliness of our medical system are not overwhelming. Most estimates of the cost of lawsuits and malpractice insurance range between 2% and 4% of overall medical costs.

What these estimates do not consider, however, are the indirect costs created by the culture of "defensive medicine." When doctors practice their art in constant fear of frivolous lawsuits, they may have a tendency to request unnecessary tests and do other activities that go beyond their best medical judgment. Otherwise, a bad outcome could result in a lawsuit.

My simple idea for medical tort reform has two parts. First, raise the bar for crimes of omission. Malpractice should be mainly about doing something wrong, not failure to do something right. The exception would be gross negligence in not doing something completely obvious. Second, completely eliminate punitive damages. Civil lawsuits should be only about recovering actual financial damages (past, present and future) as a result of a medical mistake. Punitive damages don't belong in a civil lawsuit, since punishment is a concept that appropriately belongs to the criminal law system, not the civil law system.

If a doctor intentionally harms someone, or harms someone because of gross negligence, he/she should be prosecuted in a criminal court and then pay fines and/or go to jail if convicted. Again, it should not be the job of civil courts to punish people.

So, instead of replacing a working medical system with a risky social experiment, let's try a little tort reform first and see how it goes. It is reasonable to believe that health care costs would quickly come under control. If they don't, then we can try something more ambitious (and expensive) later.

Am I saying that tort reform will solve all health care cost problems. No, I am not saying that. But it's an easy place to start, so why not try it first before spending trillions of dollars replacing a system that already works for most people.

The next simple step after tort reform would be to allow private insurers to sell policies across state lines. I just visited my mom in Maine, where competition among insurers is pretty much non-existent. She was complaining about being forced to insure through Anthem. Allowing interstate competition would help a great deal in bringing health insurance premiums down. But this is an entirely new subject that should be addressed in another blog post.