Here are the first two pictures. Back when it didn’t seem scary to be out in public, I would cheerfully wander into grocery stores — often while hungry and ready to make bad choices — and would be amazed by the richness of offerings. “Look how many kinds of peanut butter, ice cream, fruit, candy, and even hamburger buns there are!” Milk without lactose, soda without sugar, cookies without fat, pasta without gluten. And on and on. The average American grocery store carries over 33,000 different items.³ Each store is a marvel of complexity, requiring a lot of new (and often small) entrepreneur-savvy, old business scaling power, and i-pencil-coordination to deliver. When you add to it what you might call “reliable ubiquity,” we get the small business in a remote place selling the big business products we love. And so much is cheap, relative to the value of our time. How do we see this? The share of food costs in U.S. household’s overall budgets is less than 10 percent on average.⁴ That’s lower than what most other people on earth pay.  And the average share of income going to clothing and shelter is relatively small as well. Of course, these averages miss entirely the burden that feeding a family and keeping a roof over that family’s heads place on those with low incomes. I’ll come back to that, but for now, let’s agree that averages matter too.

So maybe we can start getting triumphal: A key part of the market economy flat out (and nowadays literally!) delivers the goods — it gets people what they want, where they are, without interruption, and more affordably than almost anywhere else. In particular, it is almost never true in places that have turned their backs on letting productivity-chasing, competition-disciplined entrepreneurs and businesses learn, produce, and distribute what people want in the here and now.

For perspective, the almost-constant 2 percent per capita income growth we’ve seen in the United States for a century or more has left us with per capita income around four times that of China, which, after dropping central planning and autarky, has grown at 8 percent or more per capita for 40 years. But our head start means that even now we add about as much to gross domestic product per capita when we grow at 2 percent as China does when it grows at 8 percent. So much for everyone catching up with us.

Now notice that the modern American retail sector (which includes the grocery store I showed you) accounts reliably for over a third of all consumer spending. So we need to be very reluctant to mess with this goose, which, quite unlike the gifts left by the ones that often invade my neighborhood, lays golden eggs. Many proposals for changing economic outcomes do not show any clear recognition of this machine, and ill-conceived interventions in markets abound. Economic educators are a bulwark. And this is very much a part of economic education that I see you tackling head on. Thanks to you, our students tend to come away appropriately impressed by this aspect of the visible bounty of the invisible hand.

Indeed, even just the “reliable ubiquity” I talked about needs reinforcing. As the greatest economist of the 20th century, Ken Arrow, pointed out, “This experience of balance [between supply and demand] is indeed so widespread that it raises no intellectual disquiet among laymen; they take it so much for granted that they are not disposed to understand the mechanism by which it occurs. The paradoxical result is that they have no idea of the system’s strength and are unwilling to trust it in any considerable departure from normal conditions.” ⁵ Sound familiar?

Let’s now look at three new pictures.

Taken as a whole, they convey aspects of markets that I think may most concern our students, and many of us, today. We need ways to help them think about these issues, whether remedies are available, and if so, if those remedies are worth it.

Let me start with the first one. The wrong interpretation of this picture is that “We are a can-do nation that relies not on a distant government but on each other!” Instead, it is bluntly suggestive of a gap in insurance. For illnesses that are rare, verifiable, and severe, collecting donations from strangers through social media, just like saving for a rainy day, is indicative of missed opportunities for all of us. Adequate solo preparation would require a level of personal austerity that is both unduly severe and unequal to the task. Insurance, i.e., sharing the risk though small premiums, is the only sensible way to cope.

But for a variety of reasons, this does not work anywhere close to perfectly. In the COVID-19 era, household financial distress and fragility and the inability to buffer risks well is visible all around us.

I won’t get into details here, but a clear consensus among economists is that insurance markets do not cover many risks, and further, that absent alternative efforts — including those of the public sector — people will bear the full force of many risks that ideally they would share with others. So singing paeans for a market system to students who see pandemic-related job loss and families who can’t pay for cancer treatment will lose us the attention of kids.

This picture connects to something much larger: inequality. We are talking nationally much more about inequality and especially that which exists along racial lines. The “missing insurance” perspective is helpful here too. Namely, it asks us to imagine how likely success can be for two otherwise identical people when one faces many uninsurable risks, while the other does not. Our recent national discussion has highlighted some of these risks. They can be broad and should, in my view, include the risk of being physically predated upon; the risk of being incarcerated or entangled with the legal system, including wrongfully; the risk of not getting a job simply due to not having connections or getting the breaks. And all this is on top of the ongoing risks we just talked about: What if you get sick but have poor coverage? What if your child gets sick and you can’t arrange flexible work? What if a hurricane destroys your home or your business?

In essence, what if life is more chutes than ladders? Pervasive uninsured risk can effectively shorten one’s planning horizon, and that alone dims life prospects. Would you start a business that ties up a lot of your wealth in one place? Would you invest in expensive college when familial tragedy could lead you to drop out? Would you accumulate assets that could be wiped out in a heartbeat? Would you network in the hopes of landing a job at some later date?

The answer depends on how well-organized the market place is, and when it is not, how well you are insured — either formally by markets or the public sector, or informally by friends, family, and other networks. Evidence from income in the United States suggests that the net level of coverage may not be so comprehensive: Inequality even among like groups is high. As for a sense of the uncertainty that people face, a well-known paper finds that fully 40 percent of the variation in lifetime earnings we see in U.S. data can be attributed to shocks received over working life — after age 23. Moreover, my read of the best research on the subject suggests that insurance possibilities — in the broad sense of the term — generally diminish as income and wealth fall. A well-functioning economic system would not feature this.

I suspect students, the disadvantaged especially, get this — they face fragility and vulnerability up close and personal. So an economic education effort that doesn’t acknowledge the substantial messiness in the labor market when it comes to allocating “talent to tasks” will not seem relevant. And for those who haven’t yet seen the labor market work (and for any who have seen it not work), this will resonate. I hope economic education can convey the unforgiving, not at all frictionless way that this, the mother of all markets, works.

To be clear, none of this means that a public sector effort would succeed where private markets have not. Does the public sector have some advantage in its ability to verify the situation being insured against, in the ability to prevent late entrants from purchasing insurance after they understand their risk of loss to be high, or both? If not, that too is a lesson for our students that sometimes bad things can’t be fixed, period. But students should know to ask these questions, and economic education can give them a more clear-eyed view of the world in which they live.

What’s my point with the next picture? A blob of plastic waste like this is spinning slowly in the Pacific Ocean right now. It’s bigger than we expected it would be. It’s killing lots of ocean life as we speak. Showing it to our students can vividly drive home the point that self-interest and common property — the places were ownership is hard to define and defend — don’t mix. This picture is important to equip students with nuance in their enthusiasm for letting free enterprise rip, especially if their initiation into economics was the wonder embedded in the humble grocery store. The picture also conveys a diagnostic our students can use. They need to learn to ask: “What is not owned?” The ocean is not meaningfully owned. The climate is not owned. Landfills, by contrast, are. There is no uncontrolled land gyre of garbage around us. Maybe in normal times, we could cover tragic commons in passing, but in our era, I think we need to pay special attention to explaining the perils that lie ahead — for the biggest commons of them all — the atmosphere. Indeed, we should, I think, convey the logic of why those perils are hard to avoid and hard to mitigate. We can serve students by highlighting key risks they face in the long futures they each hopefully have ahead of them.

And what was the last picture? It is a loan contract. This to me illustrates the essentiality of informal knowledge for navigating personal finance. Let me explain what I mean. I own a home. I made a decision to get a mortgage with a particular duration and repayment plan, and I deduct mortgage interest at tax time. None of this, frankly, is because I read and understood the nooks and crannies of the contract. Instead, it’s all because of the pool I was marinating in. It’s parental input. It’s because I knew relatively reputable entities, and those entities wanted, in turn, to do business with me.

And I was doing pretty much what everyone else around me at that age was doing too. So who was around me? People like me. With parents like mine. In other words, I didn’t need formal economic education on this one. Nor did I need it when it came to navigating “the college decision.” Nor for the “saving for retirement” decision. I got it all for free, by osmosis and by parental experience and presence. As for the college decision, recall the paper I mentioned a few moments ago. It still left around 60 percent of lifetime earnings variation coming from variations in conditions of people at age 23. A portion of those conditions no doubt reflects, in part, the differences in early-life circumstances I’ve just described.

But of course this is hardly comforting. Many have none of these connections. They have little such support (parental, economic, or societal) for ensuring their major financial decisions go right. Osmosis isn’t a strategy for them. And I suspect that this is part of the set of forces that create the relatively low — and apparently slowing — intergenerational income and wealth mobility that has been documented by many economists.⁶ In other words, these information gaps may be inequities that really matter. More research is warranted, but it is hardly an unnatural idea. So the big question of who is a trustworthy source of guidance for students facing life’s biggest investments remains unanswered for many. Indeed, this perhaps dimmer view of information transmission has led us at the Richmond Fed to a guiding principle for our personal finance content. We aim to provide resources to help people with decisions that are large, complex, and rare during one’s life.

When it comes to personal finance, my view is that economic education in 2020 and beyond may need to be tailored to fill the now huge gaps that likely exist between those for whom some combination of osmosis plus mimicry works well, and the rest who may have fewer tools or savvy to navigate major personal finance decisions. 

Concluding Thoughts

I’ve tried — in these remarks — to illustrate some facets of economic life that, when taken together, will help keep economic education maximally relevant to students and leave them with the wisdom we think they need.

I started with the important message that decentralized outcomes coming from competitive market interactions work well to deliver many essentials. I went on to address three areas that are almost certainly salient to all young people: insurance market dysfunction, labor market frictions, and climate risks.

These additional messages aren’t happy ones. It’s not fun to tell students that markets can’t simply be assumed to deliver insurance against many relevant risks; that the labor market can be messy and replete with chance and generationally-conferred advantages; and that commons like the climate or ocean are currently not being handled with care, probably can’t be without very difficult-to-achieve collective action, and hence won’t be. But the messages are key for helping the next generation develop a sense of the possible and the realistic, a goal that I see as being at the very heart of your efforts as economic educators.

What I’ve clearly not done today is offer ready-to-use solutions. I’ve said nothing in each instance as to what precise curriculum or pedagogy I’d use to get this done. This is because I am not, unlike you, an economic educator; I’m an amateur talking to a group of pros. And if my dad, a lifelong teacher, were here in the room, he would have made it clear that I should know my place. Well, I do. Thank you for your time, and I’m happy to take your questions and comments.