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Bankrupt Logic

This is an excerpt from Gregg Easterbrook‘s “Tuesday Morning Quarterback” column on ESPN.com on September 11th.  While this column is primarily dedicated to Football (Pro, College, and High School) they also make some great commentary about the news stories of the day.  This one just hit home with me so I wanted to share it with you.

Bankrupt Logic: Organizations err, and individuals make mistakes. Trust me, I have plenty of experience! So perhaps vice presidential candidate Paul Ryan‘s boast that he ran a sub-three-hour marathon, when the actual time was more than four hours — followed by his weird statement that the claim of track-star time was “the best of his recollection” — was just a pair of dumb errors.

But there’s so much difference between three-hour and four-hour marathons that this is as if a White House candidate boasted, “I won the World Series with a grand slam in the bottom of the ninth,” then later said, “That was the best of my recollection. I meant to say that I play softball at picnics.” When your columnist was on the dating scene, girls chased me everywhere. That’s the best of my recollection, anyway.

But though to err is human, it is a warning sign when politicians make things up, hoping they will never be fact-checked. In his convention speech, Ryan gave considerable emphasis to his claim that 1.4 million businesses filed for bankruptcy in 2011, far more than the 330,000 that did so in the final year of the Jimmy Carter administration. Turns out 47,086, not 1.4 million, is the correct number for 2011. Ryan drastically overstated, in order to make things sound much worse than they are. But, his campaign asserted, since the correct figure for the final Carter year is 43,694, Ryan’s basic point was right — more business bankruptcies last year under Obama than in Carter’s final year.

How could Ryan have been off by such a gigantic margin? There are 6 million businesses with employees in the United States. If 1.4 million had gone bankrupt in 2011, that would mean 23 percent of American businesses folded in a single year. Calamity! Every fourth store or office you passed would be boarded up. The actual figure represents 0.7 percent of American businesses closing last year. Ryan presents himself to the electorate as a leading expert in economic policy. Yet he was able to read the claim that 1.4 million businesses folded in a single year without saying to himself, “This number cannot possibly be right.” An actual expert in economic policy would have known the 1.4 million figure was way off.

Now think about Ryan’s claim that regardless, his basic point was on target. Since Carter’s final year in office, the U.S. population has grown 36 percent. Other things being equal, we’d expect business bankruptcies to grow by about the same percentage. Instead, 2011 business bankruptcies were 7.8 percent higher than the final Carter year — a decline, relative to population.

Because the population is rising, practically everything sets a record each year. In 2011, there were more haircuts and cheesesteaks than during Carter’s final year, too! Consider the common statement “there are more people today with cancer than ever before,” which like Ryan’s corrected number is true but misleading. What’s important is the rate of cancer — is it up or down per capita? ( It’s down.) In economics, per capita or GDP-adjusted comparisons are what count. Ryan presents himself to the nation as an expert on economic policy. An actual expert would have used adjusted numbers.

Now let’s check the tables of the American Bankruptcy Institute. During the Ronald Reagan presidency, business bankruptcies averaged 67,845 per year. During the Obama presidency, business bankruptcies have averaged 54,975. Adjusting for population growth, business bankruptcies under Obama are 40 percent lower than they were under Reagan.

Probably in both cases, Reagan and Obama, the numbers are driven largely by economic trends beyond the control of the White House. But to the extent presidential policy matters, Reagan was a free-market conservative — the sort of person who believes a failing business should be allowed to fail. Obama is a liberal — the sort of person who believes a failing business should get government help. No surprise, then, that far more businesses failed annually under Reagan.

Ryan denounced the automaker bailout. If government aid to business is bad, as Ryan says, then inevitably, more business bankruptcies will occur. But he also says that’s bad!


About carpebootium

I am a modern-day pirate. I travel the world and trade in today's currency, information. I sail through opportunity, comedy, history and strategy to turn turbulent into tournament, chaotic into cathartic, and embarrassing into emboldening. There are none who should fear me save two: Those who have what I want and those who get in my way. Are you done sailing your calm waters with strong undertow? Have you your fill of empty treasure and oasis destinations? Well good...come and join my crew! We're a lively lot from all over the world but be forewarned...anyone attempting to drop anchor will be thrown overboard, shot, harpooned and then marooned on an isle of cannibals. We move on! If you are ready...welcome aboard the Carpe Bootium!


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