Economic Illiteracy is No Longer an Option

I received a call this week from a General Motors retiree in reference to the automaker’s decision to give its retirees a lump sum pension payment option versus their existing stream of benefits. He said to me, “I am an engineer with no knowledge of markets or economics. I would probably just leave things as they are, but my wife thinks we need to look into this.” I offered assistance in the analysis and cautioned him that just because GM was making the offer did not automatically mean that they should take it. We will run the numbers and decide jointly, I let him know.

After the call, I pondered his comment about his engineering degree, but no knowledge of economics. Of course, in the days of old with most retirees covered by defined benefit pension plans, one really did not have to worry about economics and economic policies because pensions were “guaranteed.” Today, of course, it’s a brave new world of defined contribution plans and 401k’s. Individuals are increasingly responsible for their own financial futures and this requires more in-depth knowledge of economics and policy decisions made by government. In the wake of the Wisconsin recall elections this week, one might conclude that voters are beginning to come to terms with the costs of former policy decisions and taking action to reverse some of these policies. If this is indeed the case, states that recently took difficult actions to improve their economies (Michigan, Wisconsin) and are now seeing the fruits of those actions with rapidly increasing employment and tax revenue, will stand in stark contrast to states that proceeded with a “business as usual” mix of policy choices such as tax rate increases and no real spending reform (California, Illinois). Of course, voters, now required to pay attention, may begin to connect the economic “dots” and draw conclusions about what type of policies work and which do not. This “evidence based” knowledge will inform voting decisions and force those other states to confront their problems with a better, proven mix of policies that will provide a foundation for sustained economic progress. In concert with my colleague Walter Kirchberger’s blog earlier this week about a new “American Century”, this is reason for even more optimism about our country’s future.

All comments and questions are welcomed.

Bob Bilkie, CFA