Math is Hard For Liberals

Over the years I have often noted the air of unreality that surrounds most liberal policy proposals.  They often boil down to government action surrounded by wishful thinking with not a clue as to what the consequences will be.  Obamacare is a culmination of this mentality.  John Hinderaker at Powerblog gives us another prime example:

I have written that on the Left, a “wonk” is any liberal who can multiply and divide. But liberals often trip over even that low threshold. Take, for example, this piece by Norman Ornstein in National Journal. Ornstein–a friend, former colleague at AEI and occasional debating opponent of Steve Hayward–proposes a modest solution to the problem of economic inequality and the declining fortunes of America’s middle class:

The first iteration of KidSave, in simple terms, was this: Each year, for every one of the 4 million newborns in America, the federal government would put $1,000 in a designated savings account. The payment would be financed by using 1 percent of annual payroll-tax revenues. Then, for the first five years of a child’s life, the $500 child tax credit would be added to that account, with a subsidy for poor people who pay no income [tax]. The accounts would be administered the same way as the federal employees’ Thrift Savings Plan, with three options—low-, medium-, and high-risk—using broad-based stock and bond funds. Under the initial KidSave proposal, the funds could not be withdrawn until age 65, when, through the miracle of compound interest, they would represent a hefty nest egg. At 5 percent annual growth, an individual would have almost $700,000. …

Imagine if we adjusted the KidSave rules so that at certain pivot points in life, individuals could withdraw a portion of their nest egg to pay for college expenses or a down payment on a house or a medical or other emergency, or even the creation of a small business, while still making sure that a substantial share of the funds would stay in a retirement account. We could ameliorate many of the problems facing hard-pressed middle-class and working-class families and encourage entrepreneurship, while protecting a major nest egg for retirement years.

So let’s get this straight: you give a kid $3,500, and in 60 years, at 5%, he has $700,000? Ornstein refers to “the miracle of compound interest,” but this would be a miracle more akin to that of the loaves and fishes. A reader who is an expert in finance corrects the math:

Ornstein states that inequality can be alleviated through this mechanism because “…through the miracle of compound interest, they would represent a hefty nest egg. At 5 percent annual growth [sic], an individual would have almost $700,000.” [emphasis added]

Now this struck me as highly implausible for a very simple reason. It was immediately and intuitively apparent to me that the numbers were — not slightly, not somewhat, not arguably — but wildly inaccurate. Anyone who has ever done even a bit of bond or loan math would, without any calculation, also immediately know that $1000+$500*5 (about $4,200 at 5%) over 60 years could not possibly accumulate to “almost $700,000” at “5% annual growth [sic]”. I calculated that with a 5% annual rate of return, even compounded continuously, the funds accumulate to only about $84,000, not even close: off by a factor of more than 8 times! In fact, it would require a 9% annual rate of return, 80% greater than assumed, compounded continuously, to accumulate $700,000. (It took about 30 seconds to run these numbers.)

This is not a trivial mistake like a proofreading oversight, or a quibble about arcane calculations or analysis. It is a major error, a fundamental misconception, and not incidental to the main point: it has the effect of completely undermining the entire proposal! An average freshman majoring in business at a middling university after about 5 weeks wouldn’t make such an obvious and fundamental error! And yet not only did Ornstein base his proposal on such an embarrassing mistake but apparently NO ONE at the National Journal in an editorial role had the wit to see such a laughably obvious problem with the argument.

I don’t mean to single out Ornstein. I think the point is more about the MSM incompetence and New Class pretensions of intellectual and moral entitlement to rule. We should keep this (admittedly egregious) example in mind whenever we read the standard MSM formulation, as parodied by Mickey Kaus, purporting to support a liberal proposal on supposedly objective, rational well-informed opinion: “growing numbers of experts say that studies show that…blah, blah, blah…”

Note, too, that for Ornstein’s proposal to mean what he thinks it means, the 5% has to be a real rate of return. I am no finance guy, but it was immediately obvious to me that Ornstein’s numbers are ridiculous. If you could turn $3,500 into $700,000 in 60 years at 5%, I wouldn’t be practicing law these days. As Rocky said to his two goldfish, “If you guys could sing and dance, I wouldn’t be doin’ this.” Money, unfortunately, does not sing and dance as hypothesized by Ornstein.

Go here to read the rest.  The proposal of Ornstein also ignores inflation.  I see this all the time in my practice regarding estates.  People who took out life insurance policies a half century ago with death benefits of a thousand.  Back then that was enough for burial costs with something left over.  People will come to me and say that their Mom and Dad have life insurance and that is what usually turns up.  In central Illinois a modest funeral with a headstone today will be at least $10,000.00.

By the time that Ornstein’s kids under his proposal were set to retire, their 84 K might, if they are lucky, be good for rent for a few months.  The simple truth is that there are rarely easy solutions to complex policy problems.  Short cuts, gimmicks and ignoring such problems have been the order of business in this country for far too long, and the bills to be paid are piling up, our true legacy to the generations that have the misfortune to immediately follow our grasshopper era.