Sloppy math.

[futurebird.livejournal.com]

I hate sloppy mathematics. Sloppy mathematics gives good mathematics a bad name. Some of the time people will try to toss out a whole lot of numbers to impress and confuse other people. And that's just what happened on a thread in this forum last night. (Yes I'm going meta.) At the time, I didn't bother to do a good job of responding to the sloppy math. But I woke up this morning thinking "You need to address this."

When someone links to a website like this one: Grandfather Economic Report series and says "the total US debt, (including the debt for states) is 57 trillion dollars" I just look at the website, see all of those questions marks and estimates, note that I have never heard such a high figure before, and then dismiss it as sloppy mathematics. After all, when I ask "do any real economists add things up in that way?" I get no response.

In fact, instead of a response the person I am talking with insists that debt from pension funds is so much bigger than military expenses that there is no point in even considering cutting military expenses to address the problem. This is a really exciting "fact" it since contradicts what we'd expect.  Isn't the military budget in the USA " sooo huge"? Not so, liberals! Let's think outside of the box. In fact, lets think outside of normal accounting and mathematics! Here is his "reckoning":

He adds up the short fall costs of pensions:

• Un-funded Social Security contingent liabilities estimated looking forward * - $13.6 trillion
• Un-funded federal employee pension contingent liabilities (incl. Postal service) - $4 trillion
• Un-funded state & local government employee pension & medical contingent liabilities - $2.7 trillion

Total unfunded government pension liabilities = 23.3 Trillion

Then he says:
"You could cut the US Military Budget by 80% and not make a dent in the underfunded pension problem in this country. The Military budget for 2010, including the cost of operations in Iraq and Afghanistan as 660 Billion. 80% of 660 Billion ~ 525 Billion 18 trillion/525 Billion = 34 years to close the gap."

That's AWFUL! 34 years to close the gap. These pensions are so even more huge than military spending! Please keep in mind folks, I'm getting this lecture on a post where I suggested that controlled cutting of pension isn't such a bad thing. I know pension funds cost a lot. I think that cost must be considered as we plan a route to solvency.  But what we have here with these claims about defense spending is a serious case of distortion. It is even more annoying when you consider the fact that conservatives make a big deal about programs that cost $10,000 or $15,000 dollars that they find "wasteful". Conservatives denigrate scientific research that costs less than a million as "useless." But, cutting any the $660 billion dollar military budget is 'pointless' since GOVERNMENT PENSIONS are costing so much. (Except, Social Security isn't a "government pension" -- but I'll let that technicality slide.)

So, what are some of the things that are wrong with this argument?

First of all, what is the "Un-funded Social Security contingent liabilities estimated looking forward" ($13.6 trillion) it sounds like money we are projected to need to make payments in the future. So, I looked at the source (given on the sloppy website,) a speech given by Richard W. Fisher, President of the Federal Reserve Bank of Dallas. The number comes from this quote:

Now, fast forward 70 or so years and ask this question: What is the mathematical predicament of Social Security today? Answer: The amount of money the Social Security system would need today to cover all unfunded liabilities from now on—what fiscal economists call the “infinite horizon discounted value” of what has already been promised recipients but has no funding mechanism currently in place—is $13.6 trillion, an amount slightly less than the annual gross domestic product of the United States. (Source.)

So, it's not just "Un-funded Social Security contingent liabilities estimated looking forward" It is literally looking in to infinity. In that case, it would seem that 34 years is not so long after all to pay off a debt that extends in to infinity. That we can pay this off in just over a quarter century with 80% of the defense budget means that defense budget... is...well... pretty friggin huge! Next, I decided to research this “infinite horizon discounted value” it sounded fascinating. I love infinite series! I found this on Factcheck.org:

Does Social Security Really Face an $11 Trillion Deficit? (<---That would be 13.6 if readjusted for inflation, I suspect.)

President Bush and Vice President Cheney have told audiences that Social Security faces an $11 trillion shortfall if nothing is done to fix the current system. But they fail to mention that this is over the course of the “infinite future." Over the next 75 years -- still practically a lifetime -- the shortfall is projected to be $3.7 trillion. (source)

So, wait. If we look at the next 75 years instead of "forever" the shortfall is only $3.7 trillion? Not $11 trillion? That makes, kind of, a big difference. 

What about the other numbers?

• Un-funded federal employee pension contingent liabilities (incl. Postal service) - $4 trillion
• Un-funded state & local government employee pension & medical contingent liabilities - $2.7 trillion

The sloppy website offers no source for these figures. They are presented with question marks next to them. I can only assume they are just as inflated and misleading as the first number.

What else is wrong with this picture? The term “unfunded liability” has been used to refer to a gap between a company's projected financial commitments (over a finite period of time) and the revenues that are expected to be available to fund that commitment. The key word here is company. No government obligation can be truly considered “unfunded” because of the U.S. government has the power to tax—which is the ultimate resource to meet its obligations. This is not to say that looking at “unfunded liability” is pointless, but “infinite horizon discounted values” are too easy to fudge to produce terrifying numbers.

Especially when what you compare them to is the defense budget for one year rather than the “infinite horizon discounted value” of military expenditures over the same period of time. It's like comparing apples to air plane hangers. Calculating "infinite horizon discounted value" means evaluating a set of infinite sums under various conditions then taking the maximum of these values. It is useful in a few contexts, but it can be misleading:

In a letter to the Social Security trustees in December 2003, the American Academy of Actuaries, the leading professional organization of actuaries, warned that infinite-horizon projections "provide little if any useful information about the program's long-term finances and indeed are likely to mislead anyone lacking technical expertise in the demographic, economic, and actuarial aspects of the program's finances into believing that the program is in far worse financial shape than is actually indicated"

 

I'm certian that when Republican use these figures to scare the public they are just making and "honest" mistake. It's just a little sloppy math, 75 years, infinity what's the difference?

(The upside of all of this is that now I'm reading a very interesting paper about how these calculations are done. I'll see if I can reconstruct the process by which the 12 trillion figure for SS came in to being. I'm math person not an economics person so this could take some time. No promises.)

Comments

[gunslnger.livejournal.com]

I don't think you can legally do this to the money that has already been paid in, but you could certainly change it now so that all future monies paid in are subject to this restriction.