Math is Hard For Liberals

Tuesday, February 18, AD 2014

OBAMA-MATH-IS-HARD-HOPE-IS-EASY

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 Under the initial KidSave proposal, the funds could not be withdrawn until age 65, when, through the miracle of compound interest, they would represent a hefty nest egg.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.

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7 Responses to Math is Hard For Liberals

  • From page 168 of the 5th edition (1966) of Karl Popper’s 1945 study, The Open Society and Its Enemies:

    “Aestheticism and radicalism must lead us to jettison reason, and to replace it by a desperate hope for political miracles. This irrational attitude which springs from intoxication with dreams of a beautiful world is what I call Romanticism. It may seek its heavenly city in the past or in the future; it may preach ‘back to nature’ or ‘forward to a world of love and beauty’; but its appeal is always to our emotions rather than to reason. Even with the best intentions of making heaven on earth it only succeeds in making it a hell – that hell which man alone prepares for his fellow-men.”

  • It’s been a long time since I studied this sort of investment table, but my guess is that if you put aside $3500 every year you’d reach that result in 60 years. Ornstein looked at the wrong table.

  • Often when doing these types of analysis it is standard to assume a particular real interest rate. Until five years or so ago 5% real interest would have been a typical assumption. It may not be valid any more.

    Not to defend the rest of this but I think that part is ok except that he should have been more explicit. Hopefully it is not a case of not knowing the difference or simply ignoring inflation.

  • Well, the government COULD wave some magic wands and make that account “grow” to $700,000, but at the cost of inflating the currency. Our retiree would be paying, oh, perhaps $100,000 / year on his cheap (i.e. squalid) apartment. Retire at 67 and it’s all gone at 74 (or earlier), and then it’s to the homeless shelter for you.

  • Math is hard.

    I calculate that after five years ($1,000 birth gift, and $500 annnualy for five years) the child has $4,039 at age five years.

    Then, assuming 5% p.a., compounded annually for 60 years (to age 65) the child of state would have $75,445.23.

    At 5%, money doubles every 14.4 years (simple formula: 72/int. rate).

    My above calcs were for the future value (FV) of the $1,000 over five years at 5%; a FV of the $500 annuity over five years at 5%; and only the FV of that fixed amount, $4,039, at a fixed rate, 5%, over 60 years (compunding periods).
    ;

    Liberals are so cute!
    :

    Liberal accomplishments:
    Erosion of the Constitution
    Disastrous nationalization of medical insurance
    Sharply reducing the percentage of Americans in the workforce
    Malignant national debt
    Impending hyperinflation
    Diminished world status
    Degradation of the military
    Disintegration of education
    A horrid, insolent punk who pokes his finger in your eye every time you turn on the TV. He is the of the USA.

  • I sometimes participate in the comments of a blog called Atomic Insights. it is run by a pro-nuclear blogmeister who ironically is proudly a liberal progressive unionist Democrat (most such people are rabidly and reflexively anti-nuclear). When it comes to nuclear energy this man’s ability at mathematics would put most of us to shame. When it comes to economics, the free market and liberal progressivism, this man is incapable of comprehending the basics of what it takes to have a stable and prosperous society. That said, I have nothing but respect for his nuclear acumen, and I applaud his pro-nuclear activism. Yet I have nothing but disgust for godless damnable liberal progressivism, all the destruction it has wreaked on our economy, and all the erosion of our Constitutional freedoms it has caused. How someone so brilliant in one field can be so ignorant in another is astounding. He voted for hope and change twice, leaving all his mathematics behind him.

    🙁

    Liberalism is a sin:

    https://www.ewtn.com/library/theology/libsin.HTM

  • It might be able to be made to work… if it was to replace social security and folks kept putting money in.

    Oh, wait, I thought that was evil throw-granny-off-the-cliff stuff? Did things switch again?