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Why American consumers can't add

When I published Gotcha Capitalism two years ago, I was in for a big surprise.  As I talked about systemic hidden fee fraud all around the country, many, many friends (and even co-workers) found me and asked in hushed tones, "What's a mutual fund?" "What's comprehensive and collision?" "What's a mortgage point?" 

It was obvious from these conversations that millions of Americans are severely lacking in financial basics, and this shortcoming played a major role in the housing bubble and the resulting economic collapse. I wanted to know why.

I'm the hidden fee guy, the “Gotcha” guy.  People like me usually rant about dreadful banks are and how unfair big companies are, about how corporate greed caused our economic collapse and about how rampant unfairness built the house of cards that just collapsed all around us and sent the world into a global recession.

But it's impossible to ignore the fact that individual consumers made a lot of really bad choices in the past decade. They bought homes with $2,000 mortgages when they only earned $3,000 a month. They borrowed money at 30 percent interest to buy granite countertops.  Aren't they to blame for their own demise?  To be an honest journalist, I had to ask: Why are American consumers so gullible, so seemingly out of control? Is there something wrong with us?

Yes, several things. But most important is this: Americans are terrible at math.

I know you know that. But my research shows we are far worse at math than you think.

Exhibit A: Think about the last time you had lunch with four or more friends. What happened when the bill came?  Everyone pulled out calculators, there was a lot of murmuring and head scratching and still some of your friends just ended up throwing down a $20 bill and hoping for the best.  Now, imagine that crowd in a car dealership or with a mortgage broker. They wouldn't stand a chance.

Turns out, there's an entire field of study -- albeit a small one -- devoted to this subject. It's called “innumeracy” -- or mathematical illiteracy. It’s a hidden epidemic in our society. And the consequences are dire.

Just as there is a hidden epidemic of people who are functionally illiterate in our country, there is big problem (bigger, by my reckoning) with people who can't do basic math. There's no way to function in our society without understanding money, percentages, interest calculation and so on. Yet in a recent government study, less than one in seven American adults ranked "proficient" at math.  

Here are a few examples of innumeracy in action:

According to the Department of Education's National Assessment of Adult Literacy, U.S. adults are terrible at solving real-world math problems, like calculating tips or comparing prices in grocery stores.  Some dismal results:

  • Only 42 percent were able to pick out two items on a menu, add them, and calculate a tip.
  • Only 1 in 5 could reliably calculate mortgage interest.
  • 1 in 5 could not calculate weekly salary when told an hourly pay rate.
  • Only 13 percent were deemed "proficient."  Worse yet, only 1 in 10 women, 1 in 25 Hispanics and 1 in 50 African Americans made the grade.
  • Americans are terrified of numbers when it counts most: 20 million Americans pay someone to file their 1040EZ, a one-page tax form with around 10 blanks to fill out.

Also, these numbers show up in U.S. student math scores, which are abysmal:

  • The U.S. ranks 25th among 30 industrialized nations in math scores, down near Serbia and Uruguay. U.S. students thought they had the highest grades of any nation in the study, however.
  • Half of 17 year olds couldn't do enough math to work in an auto plant, according to President's National Mathematics Advisory Panel.

Study after study shows U.S. achievement falls off the cliff during middle school, when subjects like fractions and percentages are introduced -- exactly the skills you need as a consumer or, for that matter, to move on to algebra, calculus and advanced sciences.

But here's another essential point. How can Johnny learn to add if Johnny's teachers can't?

  • In 18 U.S. states, not even one elementary math class is required for certification.
  • Some teaching colleges allow admittance as long as students have math skills equal to their future students -- that is, as long as they could pass a 5th grade math test.
  • It's possible in some states to pass the teacher certification exam (Praxis) without answering a single math question correctly.
  • In Massachusetts, there's a special program to reacquaint teachers with math. The man who runs the program says half of teachers can't answer basic questions involving fractions and has concluded that many elementary teachers are "phobic" about math.
  • Teachers seem to be math-averse from the start. College bound seniors headed for elementary education have math SAT scores significantly lower than the national average (483 vs. 515).

There are many, many other reasons why U.S. consumers tripped and fell down a mine shaft during the past two years.  In my new book, "Stop Getting Ripped Off," I lay out a series of other explanations: Greed, laziness, lack of government regulation and magical thinking. And I offer up my own handy guide to solving today’s consumer puzzles, from buying a home to saving for retirement.  But innumeracy is the biggest culprit.

Two years ago, I would have had to lay out a doomsday scenario to draw attention to this ticking time bomb. Well, the bomb's gone off.  People who were bad at math could hardly have been expected to see through the consequences of an adjustable-rate mortgage, or to make a sound bet on their future earnings potential. These consumers didn't stand a chance against mortgage brokers, real estate agent and an overheated market. They can't fight with financial planners over fees that are swallowing one-third of their retirement savings. Heck, they can't even stop taking out 250 percent APR payday loans, 1,000 percent overdraft protection loans or paying tax preparation firms $100 for three minutes work to fill out simple tax forms.  Now, millions of individuals are losing their homes and are on pace to become destitute in old age.

If I only shine a light on only one topic with this book, I hope it will be the hidden epidemic of innumeracy in America. Because if we can't add, if we continue suffer from an extreme lack of mathematical self-confidence, any recovery we begin is surely doomed.

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