People”s financial literacy – how well they understand the basics about inflation, interest rates and risk diversification – has a considerable impact on their political attitudes, according to research by Dr George Panos and Professor Robert Wright to be presented at the Royal Economic Society”s 2015 annual conference.
Their study analyses measures of people”s financial literacy and their attitudes to Scottish independence and the UK”s membership of the European Union (EU) collected by the British Election Study. Among the findings:
• The percentage share reporting that Scotland should stay in the UK increases as financial literacy increases.
• The figure for individuals who are uncertain about whether Scotland should be independent decreases as financial literacy rises.
• For those expressing the view that Scotland should become independent, the share remains relatively stable across different levels of financial literacy.
• There is a positive relationship between financial literacy and attitudes in favour of EU membership.
• The percentage of respondents expressing uncertain views or being unwilling to vote sharply decreases as financial literacy rises.
• There is an inverse U-shaped relationship between financial literacy and attitudes against EU membership, with individuals who are most financially literate being less likely to vote in favour of leaving the EU.
• Financially literate individuals are less satisfied with the way that democracy works in the EU, but are still more likely to agree that in times of crisis, the UK should give financial help to another member state facing severe economic and financial difficulties.
Financial literacy is the ability to use knowledge and skills to manage financial resources effectively at a personal level. It is more than numeracy – ”being good with numbers” – although numeracy is important in its own right. It includes, for example, the understanding of compound interest rates, nominal and real interest rates and financial risk diversification. People who are more financial literate have been shown to make savvier decisions pertaining to real estate purchases, insurance purchases, investing, saving, tax planning, retirement planning and pension planning.
Financial literacy – like education, training and work experience – is a form of ”human capital”. As a consequence, you would expect to find differences in financial literacy being systematically related to differences in attitudes toward issues that have at their core economic and/or financial considerations.
In the post-crisis era, with resulting tight government budgets and public debates over the allocation of funds, informed citizens are often asked to express opinions in polls concerning the optimal allocation of government funds and resulting expansionary or contractionary fiscal policies. Never before was the expression of public opinion over political and economic affairs requiring the sound understanding of the basics, rules and operation of financial markets, both domestic and international.
One such issue is the political debate on devolution. Last year”s Scottish independence referendum resulted in a majority vote in favour of staying in the union with the UK. Before the end of 2017, or even earlier, the Conservatives would like a referendum on retaining or abandoning the UK”s European Union membership. Much of the debate on EU membership revolves around the issues of UK”s contribution to the budget and the related EU support packages to member countries facing troubled public finances.
Understanding the fiscal consequences of being independent or a member of a union requires a considerable understanding of economics and finance, particularly on the economics of monetary and fiscal unions in the case of the Scottish referendum and the political economy and international finance of public deficit and debt in the case of the EU referendum.
If this is true, one would expect more financially literate individuals to have stronger attitudes in favour or against devolution in the relevant referendums. At the request of the authors, three measures of financial literacy were included on a wave of the British Election Study (BES).
The survey also collected information about attitudes towards the Scottish independence referendum and the EU referendum. Information on the attitudes towards Scottish referendum was obtained from a representative sample excluding Scotland and Wales, while the questions related to the EU referendum were obtained from a representative sample of Great Britain.
Choice is mainly a matter of the amount of time available on the survey. Research suggests that there are three key dimensions of financial literacy: understanding interest rates (especially compounding), inflation and risk diversification.
The BES included several questions about political attitudes in Great Britain. Five questions captured respondents” views on Scottish independence and the EU referendum:
Question 1: ”As you may know, a referendum on independence will be held in Scotland on 18th September 2014. Voters will be asked, ”Should Scotland be an independent country?” Do you think you would vote ”Yes” or ”No”?
Answer: (1) Yes, (2) No, (3) Don”t know
Question 2: ”In general, how good or bad do you think it would be for England if Scotland became an independent country? ”
Answer: 5-point scale: 1 = Very bad] … 5 = Very good
Question 3: ”If there was a referendum on Britain”s membership of the European Union, how do you think you would vote?”
Answer: Leave, Stay, Not vote, Don”t know
Question 4: ”On the whole, how satisfied or dissatisfied are you with the way that democracy works in the European Union?”
Answer: 1 =Very dissatisfied … 5 = Very satisfied
Question 5: ”Do you agree or disagree that in times of crisis, the United Kingdom should give financial help to another EU Member State facing severe economic and financial difficulties?”
Answer: 1 = Strongly disagree … 5 = Strongly agree
The results of the study show that the percentage share reporting that Scotland should stay in the UK increase as the number of correct financial literacy questions increases. The figure for individuals who are uncertain about whether Scotland should be independent decreases as financial literacy rises, while the figure for those expressing the view that Scotland should become independent remains relatively stable across different levels of financial literacy.
The figures on the EU referendum show that there is a positive relationship between financial literacy and attitudes in favour of EU membership. The percentage of respondents expressing uncertain views or being unwilling to vote sharply decreases as financial literacy rises. Finally, there is an inverse U-shaped relationship between financial literacy and attitudes against EU membership, with individuals getting all three questions correct being less likely to vote in favour of leaving the European Union.
To explore the statistical association between financial literacy and attitudes towards devolution, multiple-regression was used to examine relationship between financial literacy and attitudes towards devolution ”holding constant” a large number of other factors that are potentially correlated with attitudes towards devolution.
After controlling for these factors, financial literacy is statistically significant all five (ordered probit) regressions. Further insights suggest that financially literate individuals are less satisfied with the way that democracy works in the European Union, but are still more likely to agree that in times of crisis, the United Kingdom should give financial help to another EU Member State facing severe economic and financial difficulties.
Overall, the results suggest that there is a large and independent effect of financial literacy on attitudes towards devolution even after controlling for a wide range of possible determinants including education – a variable that has been shown to be a key factor in understanding variation in a wide range of political attitudes.
There is also some concern that financial literacy may be endogenous. To explore this further, an instrumental variables approach (IV) was adopted. This analysis provides no evidence that the simple regressions are in some way over-estimating the relationship between financial literacy and attitudes towards devolution (i.e. the effect is zero). If anything, IV estimation supports an even stronger relationship. In short, this more detailed analysis suggests that financial literacy matters.
Financial Literacy and Political Attitudes in Great Britain – George Panos and Robert E. Wright