Tom Sgouros: Short Takes
Saturday, October 15, 2011
Occupy Providence
This afternoon at 5, please join me at Burnside Park in Providence to kick off Occupy Providence. The Wall Street occupation has spawned similar protests in over a hundred other cities now, and activists in Providence are joining the fray. You don't have to sleep in the park to support the protest. Stop by and join them this week (and after...)
You may have already heard a lot about the Occupy movement, and I expect you'll hear a lot about the Providence branch. It's easy to sneer at protests, but it's the wrong thing to do. More on Monday, and in the meantime, see you around the park.
Road subsidies
One of the bugbears of arguing public transit is the fiction that somehow public transit requires subsidy while good old automobiles do not. But who builds the roads? Supposedly roads are financed by the gas tax and that makes a tidy little circle where the users pay for their roads.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTUnfortunately, like so many similarly tidy little stories, it isn't true. When it comes to road building and maintenance, Rhode Island has augmented its gas tax with funds from other taxes for decades, and now, a new report from the US Government Accountability Office points out that it's true at the federal level, too. The report, called "All States Received More Funding Than They Contributed in Highway Taxes from 2005 to 2009" looks at the fiscal years 2005-2009, so these are all budgets approved before Obama took office. There was obviously an impact on road budgets from ARRA (the Obama "stimulus package"), but much of that took place in the following fiscal years. The pattern of spending more on roads than was brought in by gas taxes was set before him.
What about Rhode Island? According to the report, over the years in question we got back $2.96 for every dollar our residents pay in federal gas taxes, in third place behind only to Alaska, at $4.99 and DC, at $5.29. At the low end, Texas gets back about $1.03 for every dollar they pay.
Transportation infrastructure is an expense the government has taken on because historically the private sector either couldn't or wouldn't do it. There's nothing wrong with that -- Rome was made great by the quality of its roads (among other things) -- but we have to stop pretending that some forms of transportation don't require subsidy. The truth is that they all do, and the real decisions are questions of priority.
Benford's Law and Accounting Data
The most mind-expanding blog post I've come across recently was here. Benford's law is a little known statistical fact about numbers and processes. It seems that most sets of measurements of a more-or-less growing quantity are heavily biased towards numbers that begin with a 1. Numbers that begin with a 2 are in -- strangely enough -- second place, followed by numbers that begin with -- are you with me? -- a 3.
This sounded pretty improbable to me so I downloaded all the monthly consumer price indexes since 1913 from the Bureau of Labor Statistics, and ran the analysis on them. Sure enough, it's true, and there were about twice as many numbers that start with 1 as start with 2 and twice as many 2s as 3s. You need more data than that for the pattern to be reliable in the 7,8 and 9 region, but it all seems to work out, strange as it sounds.
But not all collections of numbers obey this law. Most quantities associated with a company's finances will obey it, so you'd expect to see it in reports of revenues, expenses, profits, and capital. But random numbers do not, nor do most sets of numbers someone makes up, so it's a common tool forensic accountants use in detecting fraud. So the guy who runs the "Studies in Everyday Life" blog did a Benford's law analysis on a large collection of financial data from several hundred public companies and charted the size of the deviations from Benford's law over the past 50 years. According to the law, this is a decent measurement of how well corporate accounts reflect the real world. And lo and behold, you can see financial crises in the resulting time series.
There's a huge increase in the 1980s, about when the S&L crisis was heating up. There's another huge increase in the late 1990s, when dotcom stocks were being pumped sky-high and companies like Enron and WorldCom were creating a crisis in the accounting industry. You can see a drop when Sarbanes-Oxley went into effect (though not a huge one), and you can see a run-up and then a drop that seems to correspond to our latest financial catastrophe and the resetting afterwards.
There's more review that needs to be done before really taking these results to the bank, so to speak, but it's a bit of evidence that a lot of corporate results may not be what they seem. Anyone interested in defending the stratospheric pay of our corporate CEOs should be concerned about this data. After all, CEOs and their apologists defend their pay with the performance of their companies, but it appears that over the past 40 years the incidence of fraudulent financial data has increased almost as fast as CEO pay.
Tom Sgouros is the editor of the Rhode Island Policy Reporter, at whatcheer.net and the author of "Ten Things You Don't Know About Rhode Island." Contact him at [email protected].
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