Tuesday, February 18, 2014

Rocky Balboa Is Smarter Than Norman Ornstein

I'll admit, I don't have a degree in math. I don't excel at it. I don't particularly enjoy it. My forte lies in other things. I have the utmost respect for my friends who are engineers or have hard science degrees. Much like fire, poisonous snakes, and VX gas, I have a healthy respect for math.

The second you don't respect this, it kills you.
Accordingly, I don't try to mess around with math without making darn sure that I'm doing it correctly and following the rules.

Some goof named Norman Ornstein doesn't excel at math either. There's nothing wrong with that. The problem is that he doesn't have the same healthy respect for math that I do. When you don't have a healthy respect for something that you can't control, you get into trouble.

Norman Ornstein got himself into trouble with math. Here, see if you can spot the problem:
The first iteration of KidSave, in simple terms, was this: Each year, for every one of the 4 million newborns in America, the federal government would put $1,000 in a designated savings account. The payment would be financed by using 1 percent of annual payroll-tax revenues. Then, for the first five years of a child's life, the $500 child tax credit would be added to that account, with a subsidy for poor people who pay no income. The accounts would be administered the same way as the federal employees' Thrift Savings Plan...under the initial KidSave proposal, the funds could not be withdrawn until age 65, when, through the miracle of compound interest, they would represent a hefty nest egg. At 5 percent annual growth, an individual would have almost $700,000.
Since I'm not Euler, I'm going to break this down a bit. The Federal government is going to give every baby a $1,000 in an account. Then each year (for five years) the feds drop $500 more dollars into the account. So on the child's fifth birthday, they'll have $3,500.00 of principal. (and maybe a little interest over those five years) With me so far? So we're maybe at $4,100.00 with the interest at year five.

As an aside, who the heck gets a 5% rate of return? If you know anywhere that guarantees a 5% rate of return these days, send me an e-mail. Banks around here are paying less than 1%. But let's just leave that aside. Assume that your old buddy Ornstein has a magical bank that pays 5%. If you put your $4,100.00 in there, at the end of sixty years, will you have "almost $700,000.00"?

Hint, it's not even close. Not. Even. Close. The link above has the more detailed fisking.

If you're a "math person" (or just have some common sense) you'll immediately realize that you can't take $4,100.00 and turn it into "almost $700,000" with a 5% interest rate over sixty years. It's just not possible. Perhaps the best line of the piece above is as follows:
I am no finance guy, but it was immediately obvious to me that Ornstein’s numbers are ridiculous. If you could turn $3,500 into $700,000 in 60 years at 5%, I wouldn’t be practicing law these days. As Rocky said to his two goldfish, “If you guys could sing and dance, I wouldn’t be doin’ this.” Money, unfortunately, does not sing and dance as hypothesized by Ornstein.
Yo, how's about some compound interest?

Math. It doesn't care about your good intentions. It's just going to do its thing. So show some respect, sucker. Also, for all y'all out there defending Obamacare, I have news for you. Math is coming.


  1. Ahh, don't be so hard on the poor guy - he's only a decimal point off. The kid would wind up with about $70,000. The scary part is where the initial principal would come from...

  2. An appropriate video...

    Even using my "Rule of 72" calculation in my head, I came within a couple thousand of the correct result.

    1. Nice. I haven't seen a "Get Smart" reference in a long time.

  3. I also don't think that inflation was even factored in or considered.