Money People

Obscene Math

Recovered from the Wayback Machine.

I was a double major in university, psychology and computer science. Double majors weren’t all that unusual, except that most doubles were in fields that had some class overlap, such as computer science and math. The only overlap I had in my two fields were statistics courses. I could take undergraduate and graduate level statistics classes in the psych department to meet a portion of my computer science math requirements.

There were only two of us signed up for graduate level statistics class, so the professor had us meet in his office. The statistics were so complicated, we had to use computers and software created in the days before “usability” was a criteria for all of our course work. I’ve since managed to forget most of my statistics training except for one valuable lesson: don’t trust statistics. If you’re determined, you can manipulate statistics to prove any point, regardless of how extreme.

A case in point is a New York Times op piece by two gentlemen, Michael Cox and Richard Alm, from the Federal Reserve Bank in Dallas. According to their statistics, there really aren’t two separate classes, rich and poor, in this country. In fact, the poor live a comparable lifestyle to the rich.

Income statistics, however, don’t tell the whole story of Americans’ living standards. Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society […] if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. A similar narrowing takes place throughout all levels of income distribution. The middle 20 percent of families had incomes more than four times the bottom fifth. Yet their edge in consumption fell to about 2 to 1.

The data the authors use to perform their statistics is based on the fact that though rich people invest or bank their extra income, while poor families “magically” live beyond their means, they all “consume equally” and therefore are more equal than not.

Of course, Cox and Alm gloss over the fact that most poor people are overridden in debt, barely keeping ahead of bankruptcy in order to indulge in frivolous expenditures like medical treatment.

No, Aunt Sally has a 19 inch color TV in her mobile home while Aunt May has a 60 inch top of the line plasma TV in her pad overlooking Central Park, so there really is no difference between the two.

It’s true that the share of national income going to the richest 20 percent of households rose from 43.6 percent in 1975 to 49.6 percent in 2006, the most recent year for which the Bureau of Labor Statistics has complete data. Meanwhile, families in the lowest fifth saw their piece of the pie fall from 4.3 percent to 3.3 percent.

Income statistics, however, don’t tell the whole story of Americans’ living standards.

Speechless. I’m just…speechless…

update More from Paul Krugman and Dean Baker, especially in regards to flawed sampling forming the basis for the pretty charts.

update 2 Excellent commentary from The Big Picture, who focuses only on exposing the flaws in the statistics applied (because there’s not enough time to expose all the other flaws in the writing).

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