Political Calculations
Unexpectedly Intriguing!
31 May 2005

After looking at what the difference an education may make in one's lifetime earning potential, the next question I had was "How much is a college degree worth today?" The best way to answer the question is to see what the starting salaries being offered to recent graduates are and fortunately, William Polley recently linked to a CNN/Money article that looks at what pay the members of the Class of 2005 are pulling in on average across the U.S.

The tables below are taken from data compiled by the National Association of Colleges and Employers (NACE). The first table includes the average starting salaries for a variety of degrees:

Average Starting Salaries for 2005 Graduates by Degree
Degree Salary ($USD)
Chemical Engineering 54,246
Electrical Engineering 52,009
Computer Engineering 51,496
Computer Science 51,292
Mechanical Engineering 51,046
Aerospace Engineering 50,701
Industrial Engineering 49,541
Accounting 43,809
Information Sciences 43,732
Civil Engineering 43,462
Economics/Finance 42,802
Business Administration 39,448
Marketing 37,832
Liberal Arts 30,337

The next table presents the average starting salaries for the positions that employers are most frequently seeking to fill this year.

Average Starting Salaries for Employers' Most Offered Positions
Occupation Salary ($USD)
Accounting (Private) 44,564
Management Trainee 35,811
Teaching 29,733
Consulting 49,781
Sales 37,130
Accounting (Public) 41,039
Financial/Treasury Analysis 45,596
Software Design/Development 53,729
Design/Construction Engineering 47,058
Registered Nurse 38,775

The numbers presented in the tables above are preliminary numbers for the most recent NACE survey. Final numbers for the Class of 2005 will be available in September 2005.

30 May 2005

This week's Carnival of the Capitalists is hosted by the Slacker Manager, who when not hosting the CotC is busy "paving the path of least resistance, so you don't trip and fall!"

Maybe it's the holiday weekend, or maybe I've been overly influenced by the Slacker Manager's philosophy from recent exposure, but I'm just not up to picking what I think are the best posts of this week's edition. Therefore, the path of least resistance this week is to say "go read 'em all!"

I recently received a solicitation from Buzz Aldrin asking for support for the Korean War Veterans National Museum. It included what can only be described as an incredible story - one as much about survival and triumph as it is about the horrors of that war - which I believe deserves special attention this Memorial Day. The story, which I'm quoting from the letter, is that of Roy Manring:

Roy joined the Army on a $500 bet and he wound up in Korea in July of 1950. His regiment was in 31 days of fighting and they found themselves deep in enemy territory.

Roy and other members of this unit were taken prisoner by the North Koreans and were forced to march for three days and four nights with little food and almost no water.

One American slipped out of the bonds that tied him to the other prisoners. When the North Koreans found out, they beheaded him.

Then, on the morning of August 18, 1950, Roy and the ohter 47 or so POWs were lined up and machine-gunned by their North Korean captors.

Roy was hit 5 times and was bleeding heavily. Somehow, he maintained conscoiusness, and knowing the enemy would be back, he managed to crawl underneath the body of one of the dead GIs.

When the North Koreans returned, the started sticking bayonets in the bodies, checking for survivors.

Roy grunted when they stabbed him in the leg, but the North Korean soldier thought the sound came from the dead body on top of Roy, so he shot the corpse two more times.

Both bullets passed through the body and struck Roy, giving him a total of 7 bullet wounds.

As the North Korean troops moved on, Roy struggled to get away, and he was shot 5 more times in the back.

Unbelievably, he was able to keep going until he came across an American patrol, which started firing at him, believing him to be the enemy. One of the bullets actually grazed his head before he managed to yell at them and tell them he was an American.

While Roy spent the next 18 months in hospitals recovering from his wounds, news of the massacre of the POWs spread and he became a national celebrity.

In spite of his celebrity, however, there was no big party to honor him when he came home - because there were no parties or parades for any Korean War veteran.

Fifty years later, it's hard to even find significant mentions of the Korean War in school textbooks. While I don't have a website address for the Korean War Veterans National Museum, you might find more information through the Korean War Educator site, as well as much more history.

27 May 2005

Update 16 Dec 2005: The 2004 edition is now available!

Welcome to Africa! Today's dynamic GDP table presents data for the entire African continent minus Western Sahara, for which no economic data is available. You may rank the data by clicking upon the column heads. If you're interested in comparing this data against individual states in the U.S., you may do so by looking at this dynamic table, which allow you to sort individual U.S. states according to their 2002 Gross State Product (GSP), the state equivalent of Gross Domestic Product (GDP).

As with Political Calculations' other looks at international GDP data, the data in the table below has been adjusted for each country's Purchasing Power Parity, which takes into account how much an individual can buy within a country along with the currency exchange rate between the individual country's currency and the U.S. dollar. This allows for a more direct comparison between countries with different rates of exchange in their currencies, as well as what their currencies are capable of buying within their own countries.

2002 African GDP and Population Data
Country GDP-PPP ($USD Billions) 2003 Estimated Population GDP-PPP per Capita ($USD)
Algeria 167 32818500 5089
Angola 16.9 10766471 1570
Benin 7.3 7041490 1037
Botswana 15.1 1573267 9598
Burkina Faso 13.6 13228460 1028
Burundi 3.8 6096156 623
Cameroon 27 15746179 1715
Cape Verde 0.6 412137 1456
Central African Republic 4.7 3683538 1276
Chad 10 9253493 1081
Comoros 0.4 632948 697
Congo, Republic of the 2.5 2954258 846
Congo, Democratic Republic of the 34 56625039 600
Cote d'Ivoire 24.5 16962491 1444
Djibouti 0.6 457130 1354
Egypt 268 74718797 3587
Equatorial Guinea 1.3 510473 2488
Eritrea 3.3 4362254 756
Ethiopia 50.6 66557553 760
Gabon 7 1321560 5297
Gambia, The 2.6 1501050 1732
Ghana 42.5 20467747 2076
Guinea 15.9 9030220 1761
Guinea-Bissaau 1.1 1360827 808
Kenya 32 31639091 1011
Lesotho 5.6 1861959 3008
Liberia 3.5 3317176 1055
Libya 41 5499074 7456
Madagascar 12.6 16979744 742
Malawi 7.2 11651239 618
Mali 9.8 11626219 843
Mauritania 5.3 2912584 1820
Mauritius 13.2 1210447 10905
Morocco 115 31689265 3629
Mozambique 19.2 17479266 1098
Namibia 12.6 1927447 6537
Niger 8.8 11058590 796
Nigeria 113.5 133881703 848
Reunion 3.6 755171 4767
Rwanda 9 7810056 1152
Sao Tome and Principe 0.2 175883 1137
Senegal 16.2 10580307 1531
Seychelles 0.6 80469 7779
Sierra Leone 2.8 5732681 488
Somalia 4.1 8025190 511
South Africa 432 42768678 10101
Sudan 52.9 38114160 1388
Swaziland 4.8 1161219 4134
Tanzania 22.5 32922454 683
Togo 8 5429299 1473
Tunisia 63 9924742 6348
Uganda 31 25632794 1209
Zambia 8.9 10307333 863
Zimbabwe 27 12576742 2147
Africa (All) 1806.2 852813020 2118

Sources and Acknowledgements:

Gross Domestic Product (GDP) Data: The World Factbook, 2003 via Bartelby.
July, 2003 Population Estimate: The World Factbook, 2003 GDP Data via Bartelby.
Table Sorting Function: The Daily Kryogenix


26 May 2005

Inspired by The Manolo....

Martha Stewart wearing the Poncho of Shame Martha Stewart holding the Poncho of Shame

Ironman says, Ayyyyy!, the Martha is the next the Donald!

Previously on "The Apprentice"

Political Calculations' coverage of Season 3 of "The Apprentice", in reverse chronological order:

The Final Two
Interviewing in Hell
Targeting Customers
Designing "The Apprentice"
Credit, Trust and "The Apprentice"
Managing Difficult People
Accountability and "The Apprentice"
Project Managing to Win
Catching Up on "The Apprentice"
Last Week on "The Apprentice"


25 May 2005

I recently contributed to some back of the envelope analysis over at Josef's Public Journal regarding the performance of Sound Transit's Sounder commuter rail service following the release of the Seattle based Coalition of Effective Transportion Alternatives' "Sound Transit Report Card". In his followup post, "Sounder Math (01)", Josef noted the exceptionally low ridership for Sounder commuter rail between the downtowns of Seattle and Everett, which averages 150 round-trip passengers each workday. By comparison, in 2004 the route between the downtowns of Tacoma and Seattle averaged just under 1,700 round-trip passengers per day.

Everett-Seattle Sounder Rail RouteTacoma-Seattle Rail Route Why the major difference in ridership between the two cities? I believe the difference is primarily due to the rail routes between them. The rail corridor between Tacoma and Seattle parallels the Interstate 5 (I-5) corridor for much of its route. Meanwhile, the rail route between Everett and Seattle parallels the coast of the Puget Sound. The difference for commuters? Many more businesses are located along the highway than are located along the Sound. Most businesses near the Everett-Seattle rail line are actually located some distance away off Washington State Highway 99, which would require commuters to take secondary public transportation in order to reach their places of work. In addition to the time required to travel via commuter rail, this imposes a substantial additional burden and hassle in getting to their places of work. For commuters between Everett and Seattle, Sounder rail simply doesn't make much sense - certainly not when they may avoid the hassle and drive instead, or take already established bus service if that puts them nearer their work than Sounder commuter rail service.

The exception of course applies for those commuters who work in downtown Seattle, who work much closer to Sounder's stations and do not have to go out of their way just to complete their commute to work. The bottom line is that when it comes to public transportation, how close a commuter's workplace is to the nearest station trumps nearly all other considerations in determining how successful a route will be.

That got me thinking about what it would take to make public transportation successful in being attractive to enough commuters to make it the most preferred choice. The good news is that architects and public officials have individual pieces of the puzzle that only need to be put together. The bad news is that cities, and our ideas about them, would have to be completely reconsidered (not to mention being monstrously expensive!)

Making Public Transportation Work

Solare: Cross Section First of all, to really make public transportation really work, you need to make everybody live and work within easy access of it. From the public transportation standpoint, where today's cities go astray is in their grid system. Once city streets extend beyond easy walking distance of a main street or transportation corridor, public transportation begins to become more difficult to provide. As the distance grows greater, public transportation service becomes more and more difficult to provide, and as a result, it becomes more costly, less efficient and less effective as a viable means of moving people from place to place.

So, to make public transportation viable as the primary means of transport for an entire city, cities themselves need to be designed to closely follow a single transportation corridor. This is where the concept of Solare: A Lean Linear City comes into play. Born in the mind of Paolo Soleri, the leading architect behind some very ambitious urban reconsiderations, including the Arcosanti project near Cordes Junction in central Arizona, SOLARE has been conceived as a "continuous urban ribbon" especially designed for China. Soleri's linear city concept consists of:

Two main parallel structures of thirty or more stories extending for kilometers to hundreds of kilometers.... Each [urban] module can accommodate a population of about 1500 people and the spaces for productive, commercial, institutional, cultural, recreational, and health activities.

The image below shows a view of the concept from both overhead (the upper portion) and from the side (the lower portion):

Solare: Overhead View

If you can, imagine the city illustrated above stretching for hundreds and hundreds of miles.

So, What's The Price Tag?

When I look at a concept like this, the first question that forms in my head is: "How much is *that* going to cost?" Unfortunately, I haven't found any cost estimates to indicate what the price tag for a linear city would be, so I turned to the most talented people in the world at thinking really, really, really big: Texans. Here's a description of the Trans-Texas Corridor, which is simply the biggest road of which I've ever heard:

The Trans-Texas Corridor project, as envisioned by Republican Gov. Rick Perry in 2002, would be a 4,000-mile transportation network costing an awesome $175 billion over 50 years, financed mostly if not entirely with private money. The builders would then charge motorists tolls.

But these would not be mere highways. Proving anew that everything’s big in Texas, they would be megahighways — corridors up to a quarter-mile across, consisting of as many as six lanes for cars and four for trucks, plus railroad tracks, oil and gas pipelines, water and other utility lines, even broadband transmission cables.

Source: "$175 Bil Megahighway Proposal Splits Texas" via Google's cache of the Arizona Republic's January 15, 2005 edition.

Now, just multiply that $175,000,000,000 figure by anywhere from 100 to 1000, and you can see what a city to go alongside of it might conservatively cost. Then again, you could pay for it on the installment plan, and it would have no excuses for not having a viable public transportation system from the get go. It's all just a question of how much it's worth to shut up the advocates of ever increasing public transportation services....

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24 May 2005

How much does education matter in determining what an individual's future earnings will look like? In 2002, the U.S. Census Bureau issued a report (available as a 104KB PDF document) that documented the average wage by age for surveyed individuals who had attained a defined level of education in the years from 1997 through 1999. The following chart, which was produced using data from Table 1 of the report, illustrates these results for all workers in 1999 U.S. dollars:

Average Lifetime Earnings Trajectories for All U.S. Workers, 1999 U.S. Dollars
Click image for a larger version.

What makes the chart interesting is that it represents a snapshot of what an individual's annual earnings may look like, adjusted for inflation, over their lifetime. For instance, we can see annual earnings rising rapidly (for most groups) as the average individual gains job-specific skills in the years immediately after entering the workforce. Other patterns we see in the trajectories reflect the supply and demand for educated workers, the effect of benefits upon the lifetime earnings trajectories and even the impact that early retirement of higher income earners upon documented average wages by education level may have at older ages.

Supply and Demand for Educated Workers

The authors of the report note the variation in the earnings trajectories shown in the chart. As the age of the worker increases, we see peaks and dips in the salary curves that seem correlated, as there is a peak occurring in the average earnings for one level of educational attainment while a dip occurs in another curve. These variations reflect the relative supply and demand for various occupations over time that require certain levels of education. For instance, the Census Bureau notes in its 2000 report that:

In the 1970s, the premiums paid to college graduates dropped because of an increase in their numbers, which kept the relative earnings range among the educational attainment levels rather narrow. Recently, however, technological changes favoring more skilled (and educated) workers have tended to increase earnings among working adults with higher educational attainment, while, simultaneously, the decline of labor unions and a decline in the minimum wage in constant dollars have contributed to a relative drop in the wages of less educated workers.

The chart therefore shows that variation in the supply and demand for skilled workers over time in the relative peaks and valleys that occur in each education-level curve at a given worker age.

Other Interesting Patterns

Flattening Curves: For all but those with professional degrees (doctors, dentists, veterninarians, etc.), the average earnings curves also appear to flatten out over time, rather than increasing steadily as workers age. This effect may be due to a transition from primarily receiving earnings in the form of salaries and wages to receiving an increasing portion of earnings in the form of benefits (such as for health care) which are not recorded by the Census Bureua's surveys.

Old-Age Drop-off: We also notice a significant decrease in earnings for individuals in nearly every education level at the upper end of the age range. While the Census Bureau's 2000 report makes no comment on this phenomenon, I would hypothesize that this nearly across-the-board decrease represents the loss of higher income earners in the survey population to early retirement, rather than an indication that individuals have their earnings reduced at the end of their careers. Another factor that may play into the drop-off is older workers reducing their hours worked per year, which would also reduce their income.

Your Equivalent 1999 Salary

Aside from conducting a new survey with sufficient breadth and depth to capture average income profiles by age, there's really no good way to update the chart with today's salaries and wages. What I can do however, is convert your current annual income and wages into 1999's dollars - and here's the calculator to do the math:

Current Year Earnings Data
Input Data Values
Your Current Annual Income ($USD)
Annualized Inflation Rate Since 1999 (%)

Equivalent 1999 Earnings
Calculated Results Values
Equivalent Income and Wages ($USD)

The figure that appears for the Inflation Rate, 2.22%, represents the annualized rate of increase in the Consumer Price Index between 1999 and 2005 (as reverse engineered from data obtained using the Bureau of Labor Statistics' Inflation Calculator - this provides a direct conversion from the value of today's dollars to 1999's dollars. You might alternatively want to consider the rate of increase in average wages themselves, which increased at an annualized rate of 2.83% between 1999 and 2003 (more recent data is not available at the time of this post.)

Using the Calculator with the Chart

Aside from what I expect is the chart's most common use, that of scaring students from dropping out of school, probably the most useful application to which the chart may be put is to visualize the path one's earnings may take as they age. If you assume that your earnings will largely parallel the trajectories shown in the chart for your level of education, you might find that information useful for your financial planning. Have fun with it! And kids, stay in school....

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23 May 2005

Today's Carnival of the Capitalists is brought to you by Ideologic LLC's Harish Keshwani - the mind behind one of the most cleanly designed blogs I've seen to date. Of course, the main reason to go is to see the Carnival - and since I've submitted what I think is a real humdinger of a post this week, I won't attempt to pick out the best among the rest - go see them all!

The problems of operating a mainstream news outlet are continuing to mount. Outside of growing questions regarding the credibility and quality of news being reported by mainstream outlets, decreasing circulation, sagging revenues from print ads and increased competition from online news sources are beginning to take a toll on the mainstream news organizations' bottom lines, driving established newspapers and other media to begin charging for content that they had previously provided online at no charge.

The latest evidence of these moves came recently, as the New York Times announced that it would wall off its more popular op-ed and news columnists from the remaining portion of the newspaper's online edition, after long resisting such a move. The newspaper will require paid subscriptions in order for online readers to access their columns. The new premium service will also include access to the newspaper's online archives.

The New York Times is initiating its "TimesSelect" premium service at a time when the online ad market is surging, and other newspapers have moved to make their online content free to capitalize upon increased online advertising revenue. Wendy Post of Online Media Daily reports industry analyst David Card's reaction to the announcement:

David Card, an analyst with Jupiter Research, called the decision to implement a subscription model "somewhat puzzling," given both a surging online ad market and the NYTimes.com's long refusal to charge for content. Even when the online ad market was in a slump, and other businesses migrated to a subscription model, the Times stuck with free offerings--which, Card said, makes Monday's announcement particularly ironic.

As noted by BusinessWeek back in its January 17, 2005 issue, the New York Times had been considering whether or not to implement a subscription-based revenue model for access to its online content for some time. The move appears to be designed as a hedge against potential declines in online advertising revenue, which suggests that the New York Times' management anticipates a falloff in this area in the future.

Not Just For-Profits

The drive to begin generating revenue from services that have previously been provided at no charge or as a public service is also taking hold at several notable non-profit publications, including the American Medical Association's online newspaper, the AMA News. The AMA recently announced its plan to restrict access to the organization's online newspaper to the group's membership.

While the AMA's newspaper is not supported by advertising, it is funded by the group's membership dues. Here, the move toward blocking access to the online newspaper's content appears to be an attempt to convert its non-member readers into members of the AMA.

This move is being opposed by an online coalition of bloggers organized by Michael Ostrovsky, MD, a member of the AMA who also authors the MedGadget blog. Arguing that the online AMA News is a "publication of public policy and health issues," Dr. Ostrovsky strongly advocates that the AMA should keep providing its online newspaper to the public at no charge. Ostrovsky is encouraging his blog's readers to provide online feedback at AMA's web site to support maintaining free access to the online newspaper.

Segmenting the Internet

It's too early to tell if the move to a subscription-based revenue model as opposed to an advertising-based model will be effective at being able to sustain the New York Times' financial margins in the face of the challenges which it faces. Likewise, public interest groups like the AMA need to balance the interest of public policy against their ongoing costs of operation in deciding what course to set. In the near term however, it appears that a trend toward creating online media fortresses has been clearly initiated, changing the dynamics of how information will be transmitted across the Internet by raising barriers to prevent its unrestricted flow.


20 May 2005

Update (11 January 2005): What could be better than looking at 2002 GDP data for Europe? How about looking at 2004 data for the entire European Union!

We are coming something of a full circle today, since I began looking at GDP in various regions of the world after a noting a report comparing the GDP per capita of the nations of Western Europe and individual states in the U.S. Today's dynamic GDP table presents data for the whole of Europe - you may rank the data by clicking upon the column heads. If you're interested in comparing this data against individual states in the U.S., you may do so by looking at this dynamic table, which allow you to sort individual U.S. states according to their 2002 Gross State Product (GSP), the state equivalent of Gross Domestic Product (GDP).

The GDP data in the table below has been adjusted for each country's Purchasing Power Parity, which takes into account how much an individual can buy within a country along with the currency exchange rate between the individual country's currency and the U.S. dollar. This allows for a more direct comparison between countries with different rates of exchange in their currencies, as well as what their currencies are capable of buying within their own countries.

2002 European GDP and Population Data
Country GDP-PPP ($USD Billions) 2003 Estimated Population GDP-PPP per Capita ($USD)
Albania 14 3582205 3908
Andorra 1.3 69150 18800
Armenia 12.6 3326448 3788
Austria 226 8188207 27601
Belarus 85 10322151 8235
Belgium 297.6 10289088 28924
Bosnia and Herzegovina 7.3 3989018 1830
Bulgaria 50.6 7537929 6713
Cyprus 10.2 771657 13201
Czech Republic 155.9 10249216 15211
Denmark 155.5 5384384 28880
Estonia 15.2 1408556 10791
Finland 136.2 5190785 26239
France 1540 60180529 25590
Georgia 15 4934413 3040
Germany 2184 82398326 26505
Greece 201.1 10665989 18854
Hungary 137.7 10045407 13708
Iceland 7 280798 24929
Ireland 118.5 3924140 30198
Italy 1438 57998353 24794
Latvia 20 2348784 8515
Liechtenstein 0.8 33145 24891
Lithuania 29.2 3592561 8128
Luxembourg 20 454157 44038
Macedonia 10 2063122 4847
Malta 7 400420 17482
Moldova 11 4439502 2478
Monaco 0.9 32130 27077
Netherlands 464 16150511 28730
Norway 143 4546123 31455
Poland 368.1 38622660 9531
Portugal 182 10102022 18016
Romania 166 22271839 7453
Russia 1350 144526278 9341
Serbia and Montenegro 25.3 10655774 2374
Slovakia 66 5430033 12155
Slovenia 36 1935677 18598
Spain 828 40217413 20588
Sweden 227.4 8878085 25614
Switzerland 231 7318638 31563
Turkey 468 68109469 6871
Ukraine 218 48055439 4536
United Kingdom 1520 60094648 25293
Europe (All) 13200.0 801015179 16480

Sources and Acknowledgements:

Gross Domestic Product (GDP) Data: The World Factbook, 2003 via Bartelby.
July, 2003 Population Estimate: The World Factbook, 2003 GDP Data via Bartelby.
Table Sorting Function: The Daily Kryogenix


19 May 2005

Tana Kendra Today, fans of the third season of "The Apprentice" will find out which of the remaining Apprentici will be anointed by Donald Trump as heir to a small organizational corner of Trump's corporate world. The only question left is will it be the frequently flustered Kendra (YES) or the exquisitely evil Tana (NO)?

As we've seen in the past seasons, the final decision basically comes down to how the final two contestants organize a party. Kendra was given the task of orchestrating Best Buy's "Video Game Championships" while Tana was given the Olympian task (literally, not figuratively) of putting together an exhibition aimed at helping New York City land the 2012 Olympics.

To help them in their respective missions, both Tana and Kendra received "help" from the shallowest talent pool possible: previous rejectees from the show. While real business people would never restrict themselves in this fashion (and that includes the show's rejected contestants who at least have proved some level of real-world business competence), it does make for an interesting case study in how managers must often get things done with less than optimal resources.

Between the two, Kendra made more right calls than did Tana. Kendra monitored her people as they performed their delegated responsibilities, while Tana delegated the responsibilies she did not see fit to track, and did nothing to shepherd her errant flock.

The difference between the two approaches in management showed through in the results. Kendra's team came through for her, and her event's sponsors even suggested they might offer her a job if Trump did not. Tana's team failed to come together, with several items that needed to be taken care of left incomplete or unusable. This was directly due to Tana's extreme hands-off management approach with her staff, whom she derided as "The Three Stooges" and "Dumb as Dumber."

That's why management matters. Management really is the art of getting things done through other people. And that's why in the real world, and even in Donald Trump's version of it encapsulated in "The Apprentice," Kendra wins.


18 May 2005

John Mauldin writes one of the most thought-provoking weekly newsletters related to investing. This past week's newsletter is no exception, as he focuses on the work of Research Affiliates chairman and editor of the Financial Analysts Journal Rob Arnott, who has recently authored a study with Jason Hsu and Phil Moore evaluating the performance of the economic theories that underlie the construction of today's major stock market indices, such as the S&P 500. The study is available at the Research Affiliates' web site as a 1.3MB PDF document. What follows below are excerpts taken from a speech given by Rob Arnott at Mauldin's Accredited Investor Strategic Investment Conference in April 2005, as reported by Mauldin in his newsletter. Emphasis and links added are mine.

Any given economic theory will perfectly describe the world as long as you agree with the underlying assumptions. More often than not, however, the underlying assumptions take us from the real world into a world of, well, theory.

One of the most famous theories is the capital asset pricing model (or CAPM). It is the basis for a number of index models, especially capitalization weighted indexes like the S&P 500.

Now, for most of us, our biggest bet is in equities. Is theory leading us astray here? Let's suppose we have a perfect crystal ball. It can't tell us the share prices of every asset a year from now, or two years from now, but it can tell us the cash flows into the future on every investment we could make. The crystal ball lets us calculate the true fair value of every asset in the market. If we know the true fair value, then the market value will match that, the capital-asset pricing model will be correct, and the index will be perfectly efficient, in the sense that there is no way to boost returns without boosting risk.

Now let's suppose our crystal ball is just a little bit cloudy and we can't see the future precisely. Then what winds up happening is that every asset is trading above or below true fair value. We can't know what true fair value is. But we can know that every stock, every asset, every bond is going to be trading above or below what its ultimate true fair value is. Even the most ardent fans of the efficient markets hypothesis would say, "That's reasonable. That's reality."

Now if every asset is trading above or below its true fair value, then any index that is capitalization-weighted, (price-weighted or valuation-weighted) is automatically going to have us overexposed to every single asset that's trading above its true fair value and underexposed to every single asset that's trading below its true fair value.

So this is the first time we've circled back to some concrete implications for the market. It means that capitalization-weighted indexes on which our entire industry relies, are fundamentally, structurally flawed and will inherently overweight every stock that's above fair value and underweight every stock that's below fair value.

Now let's look at what that does to returns. If you put most of your money in assets that are above fair value, you have proportionately too little in assets that are below fair value, and you're getting a return drag. The cap-weighted indexes are producing returns that are below what they should be, below what would be available in a valuation-indifferent index.

If you construct an index that is valuation-indifferent, that doesn't care what the PE ratios are, that doesn't care what the market capitalization is, then return drag disappears -- and you can quantify it. It's about two to four percent per year. And how many managers out there reliably add two to four percent per year in the very long run? Darn few of them.

Now while it's a bad index, equal weighting will outperform a cap-weighted index. A lot of folks think that equal-weighted indexes outperform mainstream capitalization indexes because they have a small-stock bias. The theory being that small companies beat large because they have a value bias, and cheap stocks outperform expensive ones. That's not quite correct. What equal weighting does is underweight every stock that's large, regardless of whether it's cheap or dear, and overweight every stock that's small, regardless whether it's cheap or dear. This means that from a valuation perspective every stock that's overvalued is overweight in the cap- weighted index, and in the equal-weighted index it's a crap shoot, 50/50. You have even odds, whether it's overvalued or undervalued, of being over- or underweight.

Let's look at this from the vantage point of a concrete example. Let's suppose we have a world with two stocks. Each has a true fair value of a hundred bucks, but the marketplace doesn't know what the true fair value is. One stock is estimated by the market to really be worth fifty bucks and the other is estimated to really be worth a hundred and fifty, but both valuations are wrong. Capitalization weighting puts 75 percent on that overvalued stock.

Now suppose over the next ten years, today's valuation errors are corrected. Both stocks move to a hundred dollars, but a new 50-percent error is reintroduced because news has come along and people have been drawn into the hype that one company looks really good and the other looks really bad. These errors are introduced into the pricing, and you have a steady state: the size of the errors stays steady, but the old errors have been corrected. In that world, the estimated cap-weighted return is zero, and the equal-weighted return is 33 percent.

Mauldin describes the math behind Arnott's 33% return: "Both stocks start at $50 and $150 for a total portfolio of $200. In ten years, both stocks are worth $100. If you cap weighted your portfolio, you would not have made anything. If you put an equal $100 into the companies, you would have made $100 on the lower priced stock and lost $33 on the higher priced stock, for a portfolio profit of $67 on your original $200. Thus Rob's 33% return."

Returning to Arnott's comments:

In the May, 2005 issue of the Financial Analyst Journal, I published a short study in which I looked back over the last 80 years and asked the question, "How often does the number-one-ranked company in market capitalization outperform the average stock over the next one year, three years, five years, and ten years?" And the simple answer seems to be that on average, over time, about 80 percent of the time, the largest-capitalization company underperforms over the next ten years.

Now the magnitude of that underperformance is in the 40 to 50 percentage-point range -- it's huge. The largest-capitalization company, on average, underperforms the average stock by 40 to 50 percentage points over the next ten years. You'd expect the same pattern but less reliably in the top ten companies. Some of the top ten will deserve to be there; their true fair value is higher. Some of them will not deserve to be there. This symmetric pattern of errors will push many that don't deserve to be there into that top ten, and some of the ones that do deserve to be there, out of the top ten.

What do we find? On average, over time, seven out of ten of the top-ten stocks under-perform the average stock over the next ten years, and three out of ten outperform. Meaning three out of ten probably deserved to be in that top ten. The average underperformance: 26 percentage points over the next ten years. So this is huge.

Now, how do we reconcile the fact that capitalization-weighted portfolios are market clearing -- that is they span the entire market, they cover everything in exactly the proportion that the market owns those assets -- with a return drag that is so easy to eliminate?

This gets back to finance theory and the capital-asset pricing model. I had a discussion with the originators of the model. There were two notable originators: a fellow named Jack Treynor and a fellow named Bill Sharp. And Bill Sharp's take on this was very simple, and that's that this couldn't possibly be. Jack Treynor's take on it was just as simple: "Wow, this is neat, this is correct, let me write a paper on it documenting why it works." So a very different reaction from the two co-founders of the capital-asset pricing model.

But the simple fact is, the capital asset pricing model works if your market portfolio spans everything: every stock, every bond, every house, every office building, everything you could invest in on the planet including human capital, including the net present value of all of your respective labors going into the future. There's no such thing as an index like that, it doesn't exist. So right off the bat you can say that the S&P 500 is not the market, and anyone who says that it's efficient because it is the market is missing the point: it's not the market.

Can we improve on cap weighting? Absolutely! Any index that is replicable, objective, and focused on large and liquid companies which are easily tradable is a potentially useful index. Any such index that is valuation-indifferent should beat the stock market. If it doesn't care what PE ratios are or what the price is when setting how large your investment in an asset should be, it should beat cap weighting.

What could you do that would do that? You could look at book values. Find the thousand largest companies by book value and create an index weighted by book value. Never mind what the price is, never mind what the market capitalization is, simply do it by book value. You could do it based on revenues: which companies have the highest revenue base or sales, and then weight them by revenues or sales. You could even do it based on head count. What are the thousand biggest employers in the United States? How many people do they employ, and weight the index by the number of employees.

You can do anything of this sort, anything that captures the scale of a company, so you have a bias towards large and liquid companies that is replicable and objective but that doesn't pay attention to valuation. Does it work? You bet. The graph below shows that the thousand largest by capitalization over the past 43 years, the red line, would have taken every dollar you invested and turned it into 70 dollars. Well that's awesome, that's what a quarter-century bull market from '75 to '99 does -- the biggest bull market in US capital markets history. Taking a dollar to seventy dollars is remarkable. But if you use any of these other measures, any of them, you do roughly twice as well. In fact a little better than twice as well for the average: 160 dollars for every dollar at starting value. It's a huge gap. Look also at what happened after '99. The S&P 500 is still down 10 percent in total return including income. Fundamentally weighted indexes: up 30 percent.

Here is a small version of the graph Arnott describes above. Click the image for a slightly larger and clearer version:

Alternative Weighted Index Performance with Historical Data 1962-2003

Returning again to Arnott's comments:

So fundamental indexing does appear to offer structural advantages over conventional capitalization weighting. How does it work over time?.... The S&P 500 comes in at 10.53 percent a year over the last 43 years. The reference cap -- the thousand largest by cap without the ministrations of the committee that selects which companies make it into the S&P -- stands about 0.18 percent lower, at 10.35 percent per annum. The average of the fundamental indexes? The worst of the fundamental indexes produces a 12 percent annual return, much better than the conventional indexes. And the best produce almost 13 percent -- the average is 12.50 with excess returns of 2.15 percent.

Mauldin notes that "reference cap is what Rob uses to mean his universe of the largest 1000 stocks." His newsletter also contains the tables illustrating the data cited by Arnott above, including the statistical correlation data (t-statistics) that preface Arnott's following comments:

How consistent is this approach? It's awfully consistent. During economic expansions, you add almost two percent a year. During recessions -- when you most need those returns -- you add three and a half percent. During bull markets you add 40 basis points. You don't really add anything in bull markets, because they are driven more by psychology than by the underlying fundamental realities of the companies. And so during bull markets you keep pace. Which is good; it's important. During bear markets you find yourself adding 600 to 700 basis points per annum. Bear markets are when reality sets in and people say, "Show me the numbers." Bear markets are when this really comes on strong. Also, during periods of rising rates, two and a half percent added. During periods of falling rates, one and a half percent added.

There's some more, but the excerpts provided above cover the main points of Arnott's paper and speech. The full text of Mauldin's newsletter with all tables and graphs illustrating Arnott's points is available at Investors Insight.

It's certainly food for thought when considering what to do with your investment portfolio!

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17 May 2005

Will Newsweek survive? That's the question that must now be posed by the lost of trust and credibility the news magazine had with the public through what can only be described as an amazing level of self-inflicted damage. Worse, the burden of repairing the damage wrought by Newsweek's faulty reporting must be borne by those who are most damaged by it. (HT: The Belmont Club).

Ordnarily, when an organization finds its credibility damaged, it has something like a twelve-step program it may follow to rebuild the trust it has lost. The magnitude of the damage done by Newsweek's reporting may not allow that to happen here. In this respect, the situation that Newsweek the business finds itself in is similar to that of Arthur Andersen following its role in the accounting scandals surrounding dubious practices at Enron.

Once one of the five big accounting firms in the U.S., with thousands of employees spread across the world, Arthur Anderson is today a shell of its former self - more a legal entity for the sake of directing mail and settling claims than a functional business. Newsweek's transgressions are far worse, having inspired the loss of life and the damage of the United States' hard-won credibility in the Islamic corners of the world. This damage may have great repercussions for many more years to come, as the U.S. now must overcome the stigma that Newsweek's reporting has attached to it.

Will Newsweek survive? Maybe the better question is: "Should it?"

16 May 2005

The incoming word from the Uncapitalists:

It's that time of the week again: the unruly mob of uncapitalist nay-sayers are beseiging the blog-o-sphere. There will, as the ILWU president told Seattle protesters, be no business as usual today. Throw on a hoodie and keffiyeh, because this is Carnival of the Uncapitalists.

Interesting posts of the week include:

  • Red Harvest looks at the winners and losers in United Airlines' ongoing bankruptcy meltdown.
  • The Mutualist blog, the blogosphere's home of free-market anti-capitalism, takes a look at how the U.S. health-care industry may be considered to be a "radical monopoly," and notes "making something a 'right' that requires labor to produce also carries another implication: slavery."

This week's Carnival of the Capitalists is hosted by Andrew Hughes of AnyLetter. Contributed posts well worth reading include:

13 May 2005

Update (11 January 2005): Political Calculations has updated its GDP Rankings in Muslim Nations with 2004 data!

Tyler Cowen of Marginal Revolution recently asked and answered the question "Is Islam Good for Prosperity?," which he later followed up with more information. I thought it might be interesting to present the following snapshot of economic output [Gross Domestic Product (GDP) adjusted for Purchasing Power Parity (PPP) with the U.S. Dollar] for the countries and territories where Muslims represent at least a plurality of the population. As always, the data in the dynamic table below may be ranked by clicking the column headings.

GDP in the Muslim World, 2002
Country GDP ($USD Billions - PPP) Population (July, 2003) GDP per Capita ($USD - PPP)
Afghanistan 19 28717213 662
Albania 14 3582205 3908
Algeria 167 32818500 5089
Azerbaijan 27 7830764 3448
Bahrain 9.8 667238 14687
Bangladesh 239 138448210 1726
Bosnia and Herzegovina 7.3 3989018 1830
Brunei 6.5 358098 18151
Burkina Faso 13.6 13228460 1028
Chad 10 9253493 1081
Comoros 0.4 632948 697
Cote d'Ivoire 24.5 16962491 1444
Djibouti 0.6 457130 1354
Egypt 268 74718797 3587
Eritrea 3.3 4362254 756
Ethiopia 50.6 66557553 760
Gambia, The 2.6 1501050 1732
Gaza Strip 0.7 1274868 577
Guinea 15.9 9030220 1761
Indonesia 663 234893453 2823
Iran 456 68278826 6678
Iraq 58 24683313 2350
Jordan 22.8 5460265 4176
Kazakhstan 105 16736795 6274
Kuwait 34.2 2183161 15665
Kyrgyzstan 13.5 4892808 2759
Lebanon 19.3 3727703 5177
Libya 41 5499074 7456
Malaysia 210 23092940 9094
Maldives 1.3 329684 3792
Mali 9.8 11626219 843
Mauritania 5.3 2912584 1820
Mayotte 0.1 178437 476
Morocco 115 31689265 3629
Niger 8.8 11058590 796
Nigeria 113.5 133881703 848
Oman 22.4 2807125 7980
Pakistan 311 150694740 2064
Qatar 17.2 817052 21051
Saudi Arabia 242 24293844 9961
Senegal 16.2 10580307 1531
Sierra Leone 2.8 5732681 488
Somalia 4.1 8025190 511
Sudan 52.9 38114160 1388
Syria 59.4 17585540 3378
Tajikistan 8 6863752 1166
Tunisia 63 9924742 6348
Turkey 468 68109469 6871
Turkmenistan 26 4775544 5444
United Arab Emirates 53 2484818 21330
Uzbekistan 65 25981647 2502
West Bank 1.7 2237194 760
Yemen 15.7 19349881 811
The Muslim World (All) 4184.8 1393893016 3002

Gross Domestic Product (GDP) Data: The World Factbook, 2003 via Bartelby.
July, 2003 Population Estimate: The World Factbook, 2003 GDP Data via Bartelby.
Table Sorting Function: The Daily Kryogenix

12 May 2005

It’s the second to last episode of the third season of “The Apprentice,” which only means one thing: it’s time for the interviews from hell.

Here’s the scenario: three job candidates enter Donald Trump’s version of Interview Thunderdome, and only two will leave to go on to compete in the show’s final event management task. In between the candidates and success lays a gauntlet of “inquisitors” “interrogators” “interviewers” who have no other reason for being on the show other than to drill the applicants with questions, searching to create a fissure through which they might feed. Suzanne Condie Lambert notes the tenor of the interviews in her weekly episode wrap-up:

Craig, Tana and Kendra face a series of corporate honchos, who ask probing questions like: "Why should Trump hire you?" "Who among your competitors wouldn't you hire?" And "What is the average air-speed velocity of an unladen swallow?"

Sure, it’s fun to think about it when you watch others go through it, but what if it was you? How should you deal with the interview from hell?

To answer the question, we turn to the Job Fairy, who notes from her own records of a real-life interview from hell that what you hear from the interviewers in the form, content and tone of their questions is really saying a lot about their company. Here’s a short excerpt from the Job Fairy’s weblog:

The interviewee learned unbelievable amounts about the dynamics of the company from the way they were treated in the interview. The interviewee learned that the client company does not promote from within. This made the current employees jumpy, as they could not expect to rise through the ranks. The interviewee also learned that newcomers were seen as a threat to those that were already entrenched.… The interviewee also realized that they would not have any meaningful rapport with their peers, should they ever be hired. This atmosphere of mutual distrust would also prevent any unwelcome coalitions from forming that might threaten the position of the hiring manager. Yes, this interview was quite an experience; among the worst the interviewee had ever endured. The interviewee certainly learned more from it than they had ever bargained on.

It’s worth reading the entire article, as this short excerpt of its conclusion doesn’t do it justice.

Now, “The Apprentice” is as much about entertainment as it is about getting through a difficult job interview - we can enjoy the performance of the Apprentici when they get grilled by professionals, and are judged by it. It should come as no surprise to the show’s viewers who Donald Trump fired following the interviews:

Craig's impersonation of a water-deprived goldfish makes his inevitable sacking the least-shocking firing since Shannen Doherty "quit" Beverly Hills, 90210.

I’m going to miss Ms. Lambert’s "Tales from ‘The Apprentice'" column when the show’s season is finished.


11 May 2005

I hope that's not as vain as it sounds. Since Political Calculations is now over six months old, I marked the occasion by submitting a post from more than sixty days ago to this week's Best of Me Symphony, where bloggers may re-run their "good old stuff." Fans of "Monty Python" may get a kick out of the quotes that have been paired with each contribution.

My contribution examines "The Legacy of Walter Duranty," where a New York Times journalist hid the truth about massive famines in Josef Stalin's Soviet Union while receiving a Pulitzer prize for his "reporting" from the affected region in 1932. That legacy of trading truth for status continues today as both the New York Times and the Pulitzer Prize Board refuse to respectively renounce or revoke Duranty's prize.

Update (17 May 2005): I've changed my thinking regarding whether the CEPR calculator should be used. My reasons are at the bottom of the post....

With the President having recently refined his proposal for reforming Social Security, the second generation of web-based calculators that purport to model the President's proposal are just now coming online. While I have not yet finished detailed reviews of the Version 2.0 efforts, I have seen enough of the "Accurate Benefits Calculator" developed by the Washington D.C. based Center for Economic Policy Research to conclude that it's a wasted effort whose primary purpose is to misdirect its users into accepting its unfounded underlying assumptions.

Which is a shame, because it otherwise has a relatively clean interface, some really neat features (the graphing function is truly cool), and it does its math correctly. If it were not fundamentally flawed in its methodology, it would be a real contender for Political Calculations' Gold Standard. But it is, and it no more deserves the award than the highly flawed first generation effort put forward by the Senate Democrats.

CEPR Accurate Benefits Calculator Methodology Excerpt The key element of CEPR's effort at misdirection revolves around the calculator's assumption that the rate of return in the stock market may be directly related to the rate of growth in the United States' Gross Domestic Product (GDP). This assumption is detailed in CEPR's accompanying methodology (available as a 23KB PDF document), which shows the derivation of a mathematical formula linking growth in GDP to the stock market returns. The formula, when fully derived, links the stock market's rate of return to it's Price-to-Earnings (P/E) ratio, it's Dividends-to-Earnings (D/E) ratio and the rate of growth in GDP (G). I'll account for the math, as it's nearly perfect - if I were grading it, it would receive 9 out of 10 points (not all work was shown, but it was possible to figure out the missing steps). A much larger version of the miniaturized image at the right detailing CEPR's math is available.

By linking growth in GDP to the rate of return one may expect from the stock market, the effect of CEPR's assumption is to reduce the stock market rate of return well below its long term inflation-adjusted average of 6.5 to 7.0% given what would otherwise be reasonable P/E and D/E ratios. The value identified as being a "stable" rate of return from equities by CEPR is 4.35%, more than 2.0% too low when compared to the stock market's long term averages. Users of the CEPR calculator are warned against increasing the "premium" on stock market returns, since this action may produce P/E and D/E ratios that represent "implausible levels." It would take a very knowledgable user to recognize that the "implausible levels" in the Price to Earnings ratio and the Dividends to Earnings ratio are the result of an assumption that is, in itself, utterly unrealistic.

Correlating GDP Growth and the Stock Market

When I say there's a mountain of data to test the assumption, I mean it. Perhaps the most comprehensive example of this data is represented in the most recent release of the Global Investment Returns Yearbook, which provides a comprehensive analysis of the long-term record of investment options (including stocks, bonds, etc.) around the world since 1900. The yearbook is the result of the work of the London Business School's Professors of Finance Elroy Dimson and Paul Marsh, and the school's Director of the London Share Price Database Mike Staunton. The Ireland-based business and personal finance portal finfacts.com notes:

The core of the Yearbook is provided by a long-run study covering 105 years of investment since 1900 in all the main asset categories in Australia, Belgium, Canada, Denmark, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, South Africa, Spain, Sweden, Switzerland, the United Kingdom, and the United States. These markets today make up over 92% of world equity market capitalisation. With the unrivalled quality and breadth of its database, the Yearbook has established itself as the global authority on long-run stock, bond, bill and foreign exchange performance.

The authors of the Yearbook examine all this data, considering whether or not there is a real correlation between the growth in a nation's Gross Domestic Product (GDP) and the real rates of return provided by their stock markets. They find that:

  • Using data for all 17 countries, including that for the rapid post-war expansion period in the German and Japanese economies, the authors demonstrate that there is no apparent relationship between equity returns and GDP growth.
  • The study also analyses additional countries where data is available, but for fewer than 105 years. Using this extended group of 53 countries, the authors again find no relationship between economic growth and stock returns.

- Excerpted from finfacts.com

The following chart illustrates the inflation adjusted rates of GDP growth per capita and the rates of return in the stock markets of the seventeen countries with data extending back to 1900:

Real GDP Growth per Capita and Real Equity Rates of Return, 1900-2004
Click for a larger image.
Source: ABN AMRO/LBS Global Investment Returns Yearbook 2005 (Chart 28), via finfacts.com.

The lack of consistent proportionality between each country's rate of GDP growth and the rate of return in its stock market across the board shown in the chart illustrates the lack of correlation between the two figures. For reference, the data from the chart is presented in the dynamic table below. Click any of the column headings to rank the countries according to their respective performance:

Real GDP Growth per Capita and Real Equity Returns, 1900-2004
Country Real GDP Growth per Capita (%) Real Equity Returns (%)
Australia 1.9 7.8
Belgium 1.8 2.2
Canada 2.1 6.1
Denmark 2.1 5.0
France 2.2 3.4
Germany 1.5 2.9
Ireland 2.4 4.7
Italy 2.7 2.3
Japan 3.6 4.2
Netherlands 1.9 5.1
Norway 2.6 3.5
South Africa 1.2 7.0
Spain 2.6 3.6
Sweden 2.6 7.8
Switzerland 1.8 4.2
UK 1.8 5.4
USA 2.0 6.8

A Sad Conclusion

The problem with the assumption advanced by CEPR, which I should note has also been advanced by economist Paul Krugman, is that it does not agree with historic data. At all. If the assumption that the nominal return on stocks is tied to nominal growth in the economy is going to be considered to be valid, it has to be able to demonstrate that the correlation exists in the mountain of data available to test the hypothesis. This is the test the CEPR calculator fails. Worse, it demonstrates a lack of critical thinking and understanding of scientific method on the part of those who developed and advanced this key assumption behind the calculator's math. At the very worst, it suggests either that those advancing the assumption do not understand basic economic principles or are all too willing to resort to dishonesty for the sake of making a partisan argument.

Sadly, much of the calculator's user interface is devoted to convincing its users to not adjust the rate of return from the stock market to a more realistic, higher figure. As such, the calculator becomes little else than an exercise in misdirection, whose results must default to a lack of trustworthiness as its assumed links between the stock market's price to earnings ratio, dividend to earnings ratio and GDP growth are wholly without merit. In the final measure, it's just not worth the disturbing the flow of otherwise happy electrons to download the CEPR's calculator onto your personal computer.

Update: The Heritage Foundation has noted the contributions of this "Scrappy Little Blog"(TM) to the Social Security debate, and has also noted additional deficiencies in the CEPR's tool.

P.S.: Changed "and have noted" to "and has also noted" in the previous update. Also, here's a link to a better description of the London Business School study.

Update (17 May 2005): As I hinted at the top of the page, I've changed my thinking as to whether or not the "otherwise happy flow of electrons" should be redirected to bring CEPR's calculator to your personal computer. While the calculator's interface may overemphasize an assumption that I believe lacks sufficient evidence to accept without clearly reinforcing studies to support its central premise, its creators truly did build a good tool - one that allows the user to disregard CEPR's assumption and adjust the calculator's default values to values they believe more appropriate. I believe a good tool will let you play "what-if" and the CEPR tool's flexibility delivers in this regard.

If you use the CEPR tool, I strongly encourage you to adjust the "premium" in the advanced user portion of the interface. You may increase the value by as much as 2.45%, which brings the total inflation-adjusted return from the modeled PRA to 6.8%, which agrees with the long-term historic average for returns on equities. You may also enter negative values, say -1.35%, which would represent a portfolio made up of government bonds earning 3.0% returns.

Also, in looking at the table of results, while your eye may be drawn to the "Scheduled" benefits, make sure you look at the "Payable" benefits immediately below it - for those retiring after 2052, this is the value you need to compare your "Bush" plan against, since this is the year the CBO projects Social Security's trust fund will be depleted. For those retiring before 2052, and who will be receiving benefits after 2052, multiply the payable benefits number by 78% to get your post-trust fund depletion benefit level, since your current law benefits, regardless of their level, will be cut by 22% at that point.

The truth is that while I have reservations about CEPR's assumption, I do recognize that the tool itself has real value and represents an honest effort - the more so since it effectively models the Congressional Budget Office's (CBO) projections for Social Security. As such, it makes for an excellent counterpoint for the Heritage's Foundation's calculator which is based upon the Social Security Administration's own projections. Go use both.

Update 10 October 2009: We should also have pointed out a major deficiency in the CEPR's math. The formula they use to replace earnings growth with GDP growth is fundamentally flawed in that they've mistaken earnings per share for earnings. While aggregate earnings for publicly traded companies are indeed proportional to GDP, the same cannot be said of earnings per share. Since it is changes in the "per share" aspect that distinguishes stock prices, one cannot substitute GDP for it. This is a primary reason why changes in stock prices are not correlated with changes in national GDP.


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