Saturday, May 31, 2008

Figures Don't Lie, but Liars Can Figure

My dad likes to say, “Figures don’t lie, but liars can figure.” His point is that you can spin statistics a lot of different ways to support the story you want to tell. If you assume that statistics are neutral truth and can always be taken at face value, you are making a big mistake. If you want to be a savvy media consumer, when you’re faced with a bunch of numbers, take a minute to stop and think about what you’re hearing.

The Two-Income Trap

Here’s one recent example: Two economists, Elizabeth Warren and Amelia Warren Tyagi wrote a book called The Two Income Trap: Why Middle Class Mothers and Fathers are Going Broke, which basically argues that the need to purchase more expensive houses in better school districts has forced both parents to work in middle-class families. The fairly liberal authors suggest that the government needs to help out these middle-class families with better schools, government-provided health care, money for child care, etc., etc. However, as Todd Zywicki points out, they are playing fast and loose with some of their data:

Ms. Warren and Ms. Tyagi compare two middle-class families: an average family in the 1970s versus the 2000s (all dollar values are inflation-adjusted). The typical 1970s family is headed by a working father and a stay-at-home mother with two children. The father's income is $38,700, out of which came $5,310 in mortgage payments, $5,140 a year on car expenses, $1,030 on health insurance, and income taxes "which claim 24% of [the father's] income," leaving $17,834, or about $1,500 per month in "discretionary income" for all other expenses, such as food, clothing, utilities and savings.

The typical 2000s family has two working parents and a higher income of $67,800, an increase of 75% over the 1970s family. But their expenses have also risen: The mortgage payment increases to $9,000, the additional car raises the family obligation to $8,000, and more expensive health insurance premiums cost $1,650. A new expense of full-time daycare so the mother can work is estimated at $9,670. Mother's income bumps the family into a higher tax bracket, so that "the government takes 33% of the family's money." In the end, despite the dramatic increase in family income, the family is left with $17,045 in "discretionary income," less than the earlier generation.

The authors present no explanation for why they present only the tax data in their two examples as percentages instead of dollars. Nor do they ever present the actual dollar value for taxes anywhere in the book. So to conduct an "apples to apples" comparison of all expenses, I converted the tax obligations in the example from percentages to actual dollars.

In fact, for the typical 1970s family, paying 24% of its income in taxes works out to be $9,288. And for the 2000s family, paying 33% of its income is $22,374.

Although income only rose 75%, and expenditures for the mortgage, car and health insurance rose by even less than that, the tax bill increased by $13,086--a whopping 140% increase.

Basically, Warren and Tyagi hide the most substantial increase in the family budget--taxes. Because admitting that the tax burden on the middle class is significant and increasing doesn’t fit with their agenda of bigger government social programs fueled by tax dollars. When you see sets of numbers presented in non-comparable ways, you ought to wonder why.

Economic Reporting

Democrats and the media are broadcasting never-ending bad news about the economy. But you need to know that there is often more than one way to interpret these statistics. Here’s one example: We’ve heard that “real wages are stagnant” or “real median household income is down.” Jon Henke takes a look at this common refrain. First, some definitions. Median household income is the wage and salary income received by a household in the middle of the US income distribution. “Real” income means that the numbers are adjusted for inflation. So, if your “real” income is the same as last year, that means that you should be able to buy about the same amount of stuff this year as you could last year. Now, according to Jon Henke, some things you need to know about the assertion that real median income has dropped:
  • The decline in median income is statistically insignificant. The Census Bureau calculates the median income using the Current Population Survey, and like all surveys this provides a good estimate of the real data, not an exact true figure.
  • 32.2% of employee compensation is from benefits, not wages. Real total compensation is up.
  • Median household income is, obviously, reported by the household, not the individual. The Census Bureau also reports that average US household size is dropping. So, if household income is roughly constant, this means that individual income must be increasing.
  • People don’t only get income from wages. If you include capital gains, employer-provided benefits, and other non-cash transfers (welfare payments), household income is up.
    All this complicated economic lingo means that our economic situation isn’t quite as bleak as some people would like you to think. Of course, individuals will still face hard times, the economy is slower than it was a couple of years ago, and rising oil and food prices aren’t helping, but continued GDP growth and an unemployment rate around 5% indicate an economy that is not in recession.

Just two examples that show why you need to stop and think about statistics. Don’t assume they present the truth. Always remember, figures don’t lie, but liars can figure.

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