So I hear a lot about "media literacy" thrown around, and people seem to take it quite seriously. But I don't understand what's so important about it.

I'm defining "media literacy" as the ability to read into a fictional work's meaning beyond the superficial events occurring as part of the story. This is different than just reading comprehension. So basically, someone lacking media literacy would read Animal Farm by George Orwell and just view it as a story about talking sentient animals killing each other. Someone with better media literacy would be able to see the underlying allegorical message about the Soviet Union and communism.

I don't think that the underlying message of a work of media is all that important. That's because all messages from fictional works suffer from the argument from fiction fallacy, which states that fiction doesn't serve as evidence because the author can make anything happen in a fictional world.

I also think there are far better ways to convey your message than wrapping it up in a piece of entertainment. George Orwell didn't have to write Animal Farm to display his dislike of the Soviet Union or even communism in general. Even in 1945 when the book was published, he could have pointed out Stalin's system of forced labor camps and the terrible conditions within them. He could have pointed out the man-made famine in Ukraine in 1933. He could have easily found examples of Stalin's dictatorial actions that prioritized his personal power. If he wanted to criticize communism in general, he could have pointed out specific failed predictions from Das Kapital (for example, Marx believed that it would be England where the revolution would start, not Russia). If he wanted to criticize authoritarian regimes in general, he could give many historical examples of dictatorships collapsing due to power-hungry individuals.

The benefit of wrapping up these messages in a palatable story about pigs on a farm is that they can be exposed to a greater audience, who might not be interested in fact-checking the extremely dense, boring, and hard-to-understand Das Kapital. But this method of using entertainment as the sugar that helps the medicine go down is a cheap strategy that can be employed to spread dangerous misconceptions as easily as positive change. Just look at Gone With The Wind's romanticization of the Lost Cause. If people simply ignored media literacy and accepted works purely as entertainment, both these effects would be negated.

In general, a decrease in media literacy just means that we have to view media differently. It means that creators need to adapt to audiences valuing media as pure entertainment, and accept that they are either completely uninterested in or unable to comprehend the extra layer of deeper meaning they're weaving into the work. It also means that people need to be receptive to information being given to them in a non-narrative format. Overall, I don't believe that a decline in media literacy is important so long as people can be taught to get correct information elsewhere, which is likely much easier than retraining everyone in media literacy.