Week of March 8, 2021
Editor's Note: I didn't start writing this faiV as an extended rant about financial literacy. It just sort of happened.
–Tim Ogden
1. Gender Gaps: Last week I hosted a faiVLive on Accounting for the Gender Gap with Nava Ashraf, Morgan Hardy, Rachael Pierotti (thanks to Rachael for joining in at the last moment) and Tatiana Rincón, with a special guest appearance from Emma Riley. It was a fascinating conversation, that easily could have gone on for another hour. If you're not the type to think listening to a group of economists talk about their research is your cup of tea (well, you wouldn't be reading the faiV, would you?), fear not! Rachael did do some translation of economist-speak into sociological terms. So if you missed it, you can watch the recording here. There'll be more follow up on the FAI blog this week, including some extended Q&A with the panelists.
But speaking of female economists discussing their research, there's a new paper that you may have heard of that looks at the way female economists are treated when they present their research. The headlines are pretty stark, if unsurprising: women economists face more questions, and more hostile and condescending questions than their male counterparts. But there is more to the story than just the headlines. Berk Özler takes a deep dive into the paper to better understand what's happening below the headlines and his post is well-worth the read.
The webinar was focused on the profit gap in women's businesses, so we could only give very short shrift to the gender gap in wages. There are a couple of papers on that topic that came through during my hiatus, and I didn't want to let them slip by without notice, especially since they have some relevance to the profit gap as well. First, Valentin Bolotnyy and Natalia Emanuel look at why women earn lower wages in a pretty ideal setting: a unionized workplace where tasks, wages and promotions are equalized by design. Still women earn .89 on the dollar. Why? Women work less overtime on weekends, and take more unpaid time off--and that is driven by the women with dependents for whom schedule predictability and control matter more. In another paper, Emanuel with Emma Harrington, looks at how men and women in warehouse and call center jobs respond differently to higher wages. Men are more likely to change jobs to seek higher wages--which likely corresponds again to a greater ability to take "worse" shifts or change routines--but women deliver more productivity when wages rise than men do. I love this closing sentence of the abstract: "Together, the gender-specific elasticities suggest firms have an implicit incentive to set female wages above male wages."
2. Financial Literacy: If only the women in these studies were more financially literate. *Record Scratch* I start there because the idea that financial literacy is a factor in the wage gap is so patently ridiculous, so obviously blaming the victim, so inadequate a tool for addressing the issues, that no one would ever say it. But here's Annamaria Lusardi saying that the economic challenges that people are facing because of the pandemic means that people should stop saying that financial literacy is a wholly inadequate response to inequality and poverty. And honestly, I'm floored.
Because pointing to financial literacy as a factor in people's financial outcomes right now makes as much sense as blaming financial illiteracy for the wage gap. What matters is whether people had jobs that continued during the shutdowns or not. Those that did are doing really well--as a whole, American household balance sheets are in great shape with a massive reduction of debt and increase in saving. That is unless you're one of the women who has had to leave the workforce because of caregiving responsibilities. Or one of the workers whose job couldn't be done remotely, and very well may not be coming back. Or one of the workers who was designated "essential" and had to work through the pandemic with inadequate PPE, got COVID and ended up stuck with massive medical bills. Or one of the workers whose unemployment benefits were delayed or frozen because of fraud or state government incompetence.
Well, there is another group of people who have suffered financially because of the pandemic. The relatively high financial literacy people who were bored at home and enjoyed playing casino games with Hertz and GameStop stock. And the Citi bankers who accidentally lost $500 million. And eventually, the people pouring billions into SPACs. Seriously, I challenge you to read through this edition of Matt Levine's newsletter where he so obviously despairs of anything actually "literate" happening in the world of finance, and then tell me how much financial literacy matters.
If you want to take a more research-centric view, consider this chapter from the recent Aspen Institute Economic Strategy Group on "Walking the Tightrope". It's not what you might think in terms of the standard narrative of economic fragility in the bottom of the wage distribution. In fact, Silverman makes a compelling case that a huge swath of Americans are walking the tightrope and have been for a long time--it's not a recent phenomenon. According to Silverman, fewer than 30% of American households with a wage earner have enough in liquid savings to cover 10 days of expenses when their paycheck arrives. The only people actually doing the kind of precautionary savings that financial literacy advises are the people who are earning so much money they can't spend it all. What does that mean? It means that the people who are coping with the tightrope and not falling off are the ones who have tools to weather those shocks, and not the ones that are in the standard financial literacy curricula. Here's Silverman: "interventions intended to increase liquid savings buffers will have limited success... policy should focus on limiting the uninsured risks families face, rather than try to promote self-insurance through the accumulation of liquid savings." This isn't just confirmation bias, by the way. I know about this chapter because Jonathan and I (and Rachel and Jonathan) are cited in it to criticize the US Financial Diaries perspective.
Or try this paper on savings behavior and financial literacy interventions in Uganda. Five years after a savings promotion program, financial "knowledge effects disappear" and the people who just got access to an account are saving just as much as those who got the financial literacy training (and both are saving more than people who didn't get access to an account). You know what matters more than sex ed? Giving people condoms. You know what matters more than teaching people that they should save and how to calculate compound interest? Giving them easy access to a cheap and useful savings account.
Let's just consider the basics of human cognition. People are wildly over-responsive to events--both the most recent thing that happened to them, and to major events in their personal lives. The pandemic is almost certainly going to have long-term consequences on people's financial decision making. Financial literacy might mediate that a minor amount, but it's not what matters.
One of the reasons I get so worked up about financial literacy is that it is a distraction from real issues with the financial choices that lower-income people face, choices that are not tractable through a financial literacy course. The world of finance is changing so fast that I can't keep up writing a newsletter about it. How on earth are you going to deliver a curriculum that teaches you not to answer the phone when your gig work platform calls to help fix an order you're in the process of filling? Honestly if this was the kind of thing being taught in financial literacy maybe I wouldn't have an argument. No. I still would because the scams change so fast that there's no way you could keep up. And if you think things like this are not coming for mobile money users the world over...I can't help you.
3. FinTech: The financial literacy critique could easily extend all the way into this next item, but I worry that that lens will distract from what is truly one of the scariest things I've ever read in financial inclusion. The next frontier for FinTechs is API access to payroll systems.
You might be thinking that doesn't sound so bad. If a personal financial management app could directly import your payroll data it could better help manage a volatile paycheck and find opportunities for saving and ways to avoid costly borrowing. That's not what they are talking about. Here's a recent blog post from A16Z that I have to quote because I couldn't write it in more hair-raising terms even if I tried: "when loan repayments are pulled directly out of a consumer’s paycheck, called payroll-attached lending, it de-risks a loan significantly...This sort of “voluntary garnishment” can reduce losses for lenders...pulling directly from payroll puts the lender in question at the top." I mean, they aren't even pretending that they're doing anything other than garnishing lower income people's wages! Overdraft fees are for suckers! Those dumb banks have to wait for the money to be actually deposited into an account before they can take it!
This isn't an isolated thing. Here's a related post which points out that getting consumers to agree to this voluntary garnishment via signing over access to payroll systems is going to be much easier because people have gotten used to giving Plaid, Venmo and others access to their accounts.
I keep thinking about Matt Levine's line that the fate of FinTech is to relearn all the lessons of modern finance painfully--but of course, this is about regulators relearning how bad private lenders being able to garnish wages is (see the first few chapters of Anne Fleming's City of Debtors on how early American microfinance used wage garnishment). Just so it's clear: "voluntary garnishment" isn't a problem to be fixed with financial literacy; it's a problem to be fixed by regulating it out of existence.
There's another fintech play that I apparently worry about a lot more than other people: early wage access. I've been talking with Mae Watson Grote of Change Machine (nee The Financial Clinic) about our mutual discomfort about what seems to mostly be cheerleading for this particular reaction to income volatility. But there are some others who are concerned--here's the first article I've seen laying out some of the concerns. I think there are other issues as well, which I hope to cover in something Mae and I are planning on writing in April. I continue to believe that the much better option for people is not early access to wages but greater ability to pay bills/rent/etc. on a weekly basis. That gives them more control, in a way that "voluntary garnishment" and early wage access doesn't.
4. Digital Finance: I'm not sure whether I should be calling this item Digital Finance or something else, so just go with it please. And I'm going to keep this relatively short since I've been ranting and raving so much already--and there's a lot in the last item. I've been collecting a few things on an important part of digital finance: digital ID. There is an updated version of the Principles on Identification for Sustainable Development. I am quite pleased that there is some acknowledgment of that digital ID isn't automatically pro-inclusion or pro-development. And the principles seem good. Whether they actually get applied...
Here's someone as angry about ID for development as I am about financial literacy, maybe even more so. And here's a story about Clear and private ownership of digital IDs.
And it just wouldn't be me if I left a digital finance item without highlighting the latest story of massive insecurities, compromised identities and the like: hundreds of thousands of Outlook servers have been hacked, mostly those at organizations who will not have the technical know-how or budget to find and close the backdoors the hackers have left in their systems.
5. Cash: One of the things I really like about cash is that it is the ne plus ultra of The Great Convergence. The issues and concerns apply everywhere.
There are results from an unconditional cash program in Stockton CA. And they line up with the global evidence--cash provides some needed stability and it doesn't discourage work. People use the money well when they get it (they must have all taken a financial literacy class). The movement toward cash aid in the United States has gotten a big boost from the pandemic but the action is really happening at the city level (featuring the inimitable Jonathan Morduch). And giving homeless people in Vancouver $7500 CAD in cash--you'll never guess--dramatically reduces homelessness, saved the government $8100 and the recipients saved $775 of it (definitely the financial literacy training those people got in high school, not the fact that they helped people get a bank account).
But even cash has it's drawbacks. Hey look, in South Africa FinTechs have already learned how to do voluntary garnishment of cash transfer programs (the Great Convergence strikes again). And the growth of cash transfer programs has everything to do with the ability to distribute cash digitally--the massive programs we're seeing that have been hugely effective in combating pandemic hardships are only possible because of digital finance. But digital cash also enables "surveillance humanitarianism" and the ICRC thinks it's high time to have a conversation about when digital cash and humanitarianism are compatible and when they're not. Like the Principles for ID above, I'm glad that a more serious conversation about the risks of these programs seems to be emerging.
Some cash recipients would prefer to go back to the days of in-kind aid, it turns out. I've written before about some of the concerns that cash distribution could cause inflation and harm non-recipients. In this case, it's not inflation caused by the cash that is the concern but that many of the staple goods that matter to poor households are subject to a lot of price volatility. In-kind aid is insurance against price volatility for households that have no other way to manage price shocks (they haven't taken a financial literacy class to help them learn to budget after all).
