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Innumeracy And Economic Policy

A favorite American story is how we snookered the Indians out of Manhattan for the pittance of $24 in 1626. Aside from the fact that the Indians in question were just passing through and did not have a legitimate claim of ownership, the notion that the Indians got a bad deal is based on the endemic innumeracy in our culture – far worse than the more publicized literacy problem.

If we compounded that original $24 at 6% annually from 1626 to today we come up with a value of about $190 billion. There are about 15,000 acres in Manhattan. After doing the calculus we come up with a value of about $13 million per acre. This is easily three or four times today’s average market price using the most generous assumptions.

What can we then properly conclude about what you just read? That the Indians actually got a great deal? I submit that the only solid conclusion we can make is that 6% compounded annually is an unsustainable high rate of return! Having the requisite numeracy for this example is the literacy equivalent of being able to read and understand Oliver Twist.

Inflation is another case illustrating our generalized innumeracy. Only an insignificantly tiny portion of the economics profession, let alone the general population, believes that a 2% annual inflation rate is an unmitigated disaster. Yet it is! Based on Will Durant’s estimates for gross price increases during the decline and fall of Rome the average annual inflation rate was barely 2%. Of course it was not a constant 2%, but that average was enough to be a key component of the collapse of the greatest power of the ancient world.

Let’s take a different look at a 2% compounded annual rate of increase in consumer prices. Compounded over only 360 years a mere 2% annual inflation rate means a gallon of gasoline costing just under $3 as this is written would be priced at $3,000 per gallon. Compounded over 720 years that gallon of gas would set you back $3,000,000! That’s $3 million folks! Now I know everyone reading this will be dead by the, so why worry – right?

Saving the best of these ethereal examples for last, consider that any real (inflation adjusted) per capita income growth of less than 1% annually is unacceptable to policy makers and the electorate. Starting with an estimated per capita income of $40,000 in the United States today, compounding a 1% real growth rate over 720 years we arrive at $40,000,000 per person income. That’s $40 million folks. Compounded over 1440 years it comes to $40 billion annual income per person. Eat your hearts out Buffett and Gates. Extending further into the future about the same amount of time from now as Jesus walked the earth in the past, or 2160 years, that 1% compounded growth rate tallies a per capita income of $40 trillion!

I saved the income example for last because it clearly bears on the stupidity of economic policy founded on the goal of attaining an even higher level of growth at all costs. If productivity can grow at that rate without government steroids – fine. However, marshalling all of our resources to meet that obviously unsustainable rate of income growth (through inflationist, consumption goosing policy) can only result in disaster for our economy and our planet.

Unfortunately, nothing can change until we cure our endemic innumeracy.
Parenthetically, I wonder how poverty will be defined 2,000 years from now – perhaps having no annual lunar vacation.

More concrete and closer to our daily experience, consider the case of Vioxx which, along with similar types of painkilling pharmaceuticals, is a godsend to untold numbers of arthritis sufferers. We are talking about crippling pain here!
The innumerate, elitist paternalist powers that be forced Vioxx off the market after tests showed that heart attack risk doubled for those taking the drug for 18 months or more. The innumerate media, including some with science degrees, trumpeted this doubling of risk.

Now what exactly was that risk that was doubled? Certainly going from 20% to 40% risk of heart attack would be a big deal. As it turns out the actual data showed a .75% probability of a heart attack for the relevant population that did not take Vioxx compared to 1.5% for those that took Vioxx for 18 months or more. By my reckoning that is less than a 1% increase in the risk of heart attack. I don’t know about you, but that would be just fine with me in exchange for getting rid of severe arthritis pain!

On top of that, the data found that for those who took Vioxx for less than 18 months had no increased cardiovascular risk. In English that means you are good to go if you stop before 18 months. Of course, this and the above analysis were entirely missing on television and your typical toilet paper press. Thousands more examples of similar import could be cited causing hundreds of $billions damage to our economy aside from the far more important human suffering. Innumeracy is a key component of this travesty.

Please share your examples of our cultural innumeracy with me.