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Karl Denninger: Bad Math, Bad Statistics

Wed, 15 Jul 2009 16:27:41 -0400

Sometimes someone on the internet is just so wrong that I become engulfed with rage and have to write about it.

In this case, an article was linked to on reddit about "Economic Fundamentals." The point of the article was that we are spending way too much on debt and credit. Which may be a perfectly valid fact, but it couldn't have been argued more poorly. His first argument that we are spending way too much on debt is the following:

In 1981, US GDP was $3.1 trillion dollars. In 1992 it was $6.3 trillion, a double. In 2005 it was $12.4 trillion dollars, another double. Doubling in roughly 12-13 years. Not bad, right?

Let's look at it a different way, this time in "current" (not inflation-adjusted, since GDP isn't) dollars. In 1981 the per-capita income in the US was $8,476. In 1992 it was $14,847, a 75% gain. In 2005 it was $25,036, a 69% gain.

Notice anything? Its not really that subtle, is it? GDP slightly more than doubled in each of those above periods, but per-capita income lagged, and the lag rate is increasing.

So what's wrong with this picture? If you guessed, "he's comparing a gross value with per capita value" you win a cookie. US population is increasing all the time, and therefore, even if per capita incomes have dropped, that doesn't mean total income hasn't. So if you multiply those figures by the population and then compare them, you get this (source):

1981: 229465714 * 8476.0 = 1.944 trillion
1992: 255029699 * 14847.0 = 3.786 trillion (94% gain)
2005: 292892127 * 25036.0 = 7.332 trillion (93.6% gain)

Er, doesn't look like a lag to me. In fact, it looks like it's doubling every 12-13 years just as much as GDP is. I also looked up total income statistics for the US, and found the following figures (source). (Note these figures are different. More on that later.)

1981: $2,580,600,000 (2.58 / 3.1 = 83% of GDP)
1992: $5,349,384,000 (more than double!) (5.34 / 6.2 = 86% of GDP)
2005: $10,252,973,000 (another double!) (10.25 / 12.4 = 82% of GDP)

Er, looks like the same thing. So if his thesis is correct, it certainly doesn't rest on this. I emailed him twice about this fact. You think he'd be happy to correct this unfortunate error of math. But no, instead he told me to "READ IT AGAIN":

GO BACK AND READ IT AGAIN. The issue isn't GDP-per-capita - IT IS PERSONAL EXPENSES IN EXCESS OF PERSONAL INCOME, BOTH PER CAPITA. Both of those series are from the BLS - SAME DATA SOURCE. We went from spending $400 more than we make (less than 5%) to 16% more than we make ($4,000), both per-capita per year. How? DEBT. As I said: GO BACK AND READ IT AGAIN.

First problem here is that the listed sources on his blog weren't the BLS: it was the Census Bureau. Anyway, that seemed besides the point. So I went back and read the rest of the article. In it, his next claim is the following:

In 1981 we spent $1.941 trillion, or $8,600 per capita, about $200 more than we made. That is, we barely spent more than we made - this was the start of the "gluttony of credit."

But in 2005 we spent $8.694 trillion, or $29,000 per capita, or about $4,000 per person more than we made, or a spending deficit of some sixteen percent!

Looks damning. But I checked his source for the spending amounts, and he uses the BEA. Here's where those different results for personal income come into play: I realized that statistics groups have different ways of measuring personal income. So I checked the BEA's personal income figures so they would be consistent with the personal expenditure figures. Here's the result (source):

1981: 11,266 (spent "about $8,600", actual spending $8,439, 74%)
1992: 20,870 (you didn't calculate this one, actual spending $16,485, 78%)
2005: 34,691 (spent "$29,000 per capita", actual spending $29,368, 84%)

So in every case, the expenditures are less than the income. The percentage is increasing, which is definitely cause for concern. But it's nowhere near the debt spending the article claims. So I emailed him about this, and he responded that the BEA make some kind of adjustment to their income numbers:

Because the BEA has ADJUSTMENTS they make to income. Care to try to back 'em out? I don't know if you CAN - this, by the way, is a big part of where the problem with their "savings rate" comes from - its false, because it counts paying down debt as "savings".

My response:

Source, please. I looked at the BEA's methodologies and see nothing about "adjustments" made to income. I don't see it in the table. And the numbers I got weren't even adjusted for inflation. Perhaps I'm ignorant of some government trickery to falsify the income numbers, but getting two different numbers from two different sources who may very well use VASTLY DIFFERENT methodologies is just bad science, bad math, and even bad statistics.

He responds:

Now you've gone from a discussion to ad-hominen attacks. I have twice asked you to re-read the original article. You keep coming back with canards; the entire issue is the efficiency of the economy - that is, what is the "spread" between spending and income, and what is the "spread" between GDP and income. I've presented my case and have no more time for someone who wishes to argue that the RATIOS aren't the important issue when that's exactly how the original argument was framed.

Now, I did say that his math was bad. I did say that his article was flawed. But people really need to learn what "ad hominem" actually means instead of just throwing it out there every time they feel threatened. Also, I'm pretty sure I never sent him any canards and my complaints were legitimate. This is the part that gets me frustrated enough to type this blog out.

In any case, what's this "spread" he's referring to? Well, he wrote a follow-up article in which he talked about the GDP to Personal Income "spread":

In numbers, in 1981 per-capita GDP was $13,600 while per-capita income was $8,476, a "spread" of 60%. In 2005 per-capita GDP was $42,200 while per-capita income was $25,036, a "spread" of 68%.

Lower "spreads" denote a greater return of GDP into the hands of people - that is, a more efficient economy. The wider the spread the more "parasitic drains" there are on GDP - that is, the greater the amount of GDP that winds up somewhere other than in the people's hands.

But here's the problem: he is still using Census values. The Census web site itself says: "Income data obtained in household interviews are subject to various types of reporting errors which tend to produce an understatement of income."

So here's the numbers with the BEA's figures:
1981: PCI $11,266 / GDP $13,601 = 82.8%
2005: PCI $34,691 / GDP $41,961 = 82.6%
So the "spread" really only dropped by 0.2%. But let's look at 2007:
PCI $38,654 / GDP $45,670 = 84.6%

It's clear that this "spread" value is meaningless. Confronted with this fact, Karl replies:

You haven't proved anything Stephen. You have steadfastly refused to go to the point of the article, and this has consumed over an hour of my time today.

You know, I was at least hoping he'd make some kind of correction or at the very least acknowledge that his article has data in it that, at the very least, conflict with other sources. But this is the internet, where you never have to say you're wrong.

Am I wrong? I repeatedly asked him why he refused to accept the BEA figures, or what kind of "adjustments" they made, and he kept on saying that "If you read the report like I do every month, you'd know that you'd have to go through every year and adjust!!" He never articulated exactly what kind of thing might be unacceptable in the income figures. He said that they "made ADJUSTMENTS" but after I explicitly asked him, out of ignorance, not spite, what kind of adjustments since I couldn't find any mention of them on the BEA's site. If someone out there reads this and knows the answer, I would really like to know. Karl, on the other hand, refused to answer, saying he doesn't want to do my work for me.

Anyway, the point of the whole story is that I was silly and expected a blogger on the internet to recant their mistakes when I pointed them out. The best bloggers do, but I find that crazy bloggers and unwillingness to admit wrongdoing are strongly correlated.

(email conversation)

What if everyone installed a solar panel?

Tue, 28 Apr 2009 22:55:01 -0400

My sister and I were discussing solar power, and I was saying that the only reason we aren't using solar power now is a simple matter of money. I said, "do you have any idea how much power we'd have if every family put a solar panel on their house?" Well, I sure didn't. So I tried to get a ballpark figure. The median square footage of a new one-family house is 2,227 sq.ft. (Source: Median and Average Square Feet of Floor Area in New One-Family Houses) A one-family house is the most common, so we've got a good median. Now assume that most houses have two floors (the basement does not count towards square footage!), and we end up with an average roof of 1138 square feet, or 33ft square. Now, there are 83,465,000 homes in the United States as of last census. (Source: Residential Finance Survey) Multiply that number and you get a total roof area of 94,983,170,000 -- about 95 trillion square feet. Now, the average solar panel in the US will not be at optimal angles, and to keep cost down, we can't have them be tracking panels. (Never mind you have to clean the snow off the panels in the north.) So it looks like on average, we're going to get 2kWh per meter squared in a day. Our ~95 trillion square feet figure adds up to 8,824,225,240 square meters: 17,648,450,480 kilowatt hours every day. The US uses 3,816,000,000,000 kilowatt hours per year (Wikipedia)-- or 10,454,794,520 kilowatt hours per day. So, solar panels on the roof of every house comes out to about 2% of our current energy consumption. But of course that's not the whole story. Fields for solar power generation would get more of the sun's energy, sometimes up to 10kWh a day. That would require only 1,045,479,452 square meters of solar field to power the country -- that is 403 square miles. That's a 20x20 mile square -- chopped up and spread around the country. There are about 250 cities in the United States with a population greater than 100,000 people. If every one of them made a field a 1.2 miles square, it would cover it. This is all just ballpark figures. I'm not even sure how solar efficiency comes into play, but solar power looks awfully good to me. Perhaps someone has some facts I'm not aware of, but for now, it seems the only real issue is money.

Drilling in ANWR

Fri, 04 Jul 2008 09:20:56 -0400

Are people still talking about ANWR?

Because this is the thing to remember:

With respect to the world oil price impact, projected ANWR oil production constitutes between 0.4 and 1.2 percent of total world oil consumption in 2030, based on the low and high resource cases, respectively. Consequently, ANWR oil production is not projected to have a large impact on world oil prices. Relative to the AEO2008 reference case, ANWR oil production is projected to have its largest oil price reduction impacts as follows: a reduction in low-sulfur, light (LSL) crude oil prices of $0.41 per barrel (2006 dollars) in 2026 in the low oil resource case, $0.75 per barrel in 2025 in the mean oil resource case, and $1.44 per barrel in 2027 in the high oil resource case. Assuming that world oil markets continue to work as they do today, the Organization of Petroleum Exporting Countries (OPEC) could neutralize any potential price impact of ANWR oil production by reducing its oil exports by an equal amount.

Source: EIA Analysis of Crude Oil Production in the Arctic National Wildlife Refuge

Translation: drilling in ANWR will provide only 1.2 percent of the world's oil in the best case scenario, an increase in supply that OPEC can compete with by reducing its exports. And that's in 10 years.

But what, you say, if we set aside all that oil just for use in the United States? More info:

In all three ANWR resource cases, ANWR crude oil production begins in 2018 and grows during most of the projection period before production begins to decline. In the mean oil resource case, ANWR oil production peaks at 780,000 barrels per day in 2027. The low- resource-case production peaks at 510,000 barrels per day in 2028, while the high- resource-case production peaks at 1,450,000 barrels per day in 2028.

To put this into perspective: total US consumption is 20,687,000 barrels a day. (Source: EIA Oil Facts) ANWR drilling would therefore represent only 2.5 to 7% of total oil production in the United States, and that is its peak in 2028. And the name of the game is gas prices, yes? So if they had been allowed to drill in ANWR, that might've lowered the prices, what, 20 or 30 cents? And that's assuming it was all put into direct US use by the federal government, Venezuela-style.

This is all not to mention that oil producers in the US have 68 million acres that is already set aside for drilling but is not being used. So if we're in such a rush to start drilling everything in sight, why aren't these people being asked?

So why is (was?) this a big deal for Republicans? I would suppose that simple politics is the answer: they can frame the issue as if Democrats are trying to protect the stupid environment like little girly liberals instead of saving America from financial crisis. The other, more cynical view, is that the Republicans are stumping for oil companies to add more onto their bottom line. I'm actually not that cynical, I think it's the former reason: the other day, I heard Sean Hannity screaming that we ought to let the federal government drill in ANWR and sell the oil directly to the people. Big government controlling oil? That doesn't sound like the Sean Hannity I know.

In conclusion, the media has absolutely failed the public in this regard. I hope that people figure out how stupid the whole debate was, because this issue seems like it's disappearing fast. This entry may already be old news.

Delegate Math

Wed, 05 Mar 2008 14:01:27 -0500

This primary has been giving me a heart attack recently so I'm going to try and make myself sane by posting something on the Internet. I'll admit right up front that I'm a big Obama supporter, and I would have voted the old John McCain over Hillary Clinton (but not the new, party-line-toeing, I'm-just-as-conservative-as-Bush-I-swear John McCain). This is basically because I don't like Hillary's closed-door politics, I don't like her relative silence on wiretapping and other civil liberties, and I don't like her position on Iran. Obama is also the most tech-friendly candidate out there. Hell, Lawrence Lessig supports Obama.

Typo in the Constitution?

Thu, 27 Sep 2007 23:24:22 -0400

I can't stand it when people mistake "it's" for "its". That's why I was outraged to see the same typo on Cornell's transcript of the Constitution. (Specifically, Article I, Section 10.) Here's the passage in question:

No state shall, without the consent of the Congress, lay any imposts or duties on imports or exports, except what may be absolutely necessary for executing it's inspection laws...

How could they make a mistake? Unless it was in the original...

An ffmpeg tutorial

Sun, 27 May 2007 19:49:47 -0400

I wrote a tutorial on how to use ffmpeg a library that can read movie files and encode and decode them pretty much transparently. This allows you to work with video files a lot more easily because you don't have to worry about all the different kinds of crazy formats. This tutorial goes over how images are encoded for video (not RGB but YUV!), threading, and how to sync digital audio and video. I submitted this to reddit where it fared pretty well, and someone else submitted it to digg, too. Overall, the reaction has been very good, which is awesome.

How to make mod_rewrite strip a query string

Tue, 22 May 2007 02:11:28 -0400

In dealing with my shared hosting account, I had some issues with the PHP settings forcing the session functions to use URL sessionids instead of cookies, so all my links had ?dranger=234fad4c710be etc., on them. This makes Google give me icky looking URLs, so I went in and fixed it by changing the URL rewriting function in PHP.

Unfortunately, Google had already crawled my URLs, so now it has a whole bunch of repeated links in its index of my page (e.g. index.html AND index.html?dranger=234fad4c710be). So I needed to go in and set mod_rewrite (which I'm already using heavily to make my other URLs pretty) to strip the query string of get variables from the request and return that as a 301 Redirect (moved permanently). I didn't see anything described like this in the mod_rewrite docs. Unfortunately, it's not as easy as:

RewriteRule (.*)?dranger= /$1 [R=301]

because the text that RewriteRule is checking doesn't contain the rewrite rule. In addition, this doesn't work, either:

RewriteCond %{QUERY_STRING} dranger=
RewriteRule (.*) /$1 [R=301]

because when it rewrites the URL, it appends the query string onto the rewritten URL. What a drag. But I did notice that this:

RewriteCond %{QUERY_STRING} dranger=
RewriteRule (.*) /bob.html?x=44 [R=301]

will remove the previous get variable. So I tried this out:

RewriteCond %{QUERY_STRING} dranger=
RewriteRule (.*) http://www.dranger.com/$1? [R=301]

which not only stops the query string from being added but removes the single question mark — which is exactly what we wanted!

New Site

Wed, 09 May 2007 08:25:36 -0400

Finally, two or three months after I figured I'd have it done, I finally have got my site up and running more or less how I want it! http://www.dranger.com is my place to put all my internet stuff that I want to public to see. But why did it take so long? I got overambitious: