STUMP » Articles » Piketty, Public Pensions, and Predetermined Policies » 28 May 2014, 15:15

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Piketty, Public Pensions, and Predetermined Policies  


28 May 2014, 15:15

Recently there has been some brou-ha-ha over Picketty screwing up his numbers in a manner reminiscent of Reinhardt and Rogoff.

I have no interest in really discussing Piketty in any deep way. There are lots of takes on his situation. One underplaying the problem, one saying ‘both sides have good points’, and here is one eviscerating Piketty. There’s lots more out there, but I’ve gotten to the point where I don’t care.

There are a couple reasons I don’t care. One is that I don’t think Piketty’s work is going to really last. It reminds me of Stephen Wolfram’s A New Kind of Science — not all that new of an idea, and far less shattering of a concept than Wolfram was trying to make it out to be. Also, at over a thousand pages, way too long, given the content, to be worthwhile reading. (Seriously, that work is a waste of time. Go read Godel, Escher, Bach — it’s shorter and much more interesting.)

At least Piketty is just under 700 pages.

But more to the point, the fix was in: few people using his book to bat others about the heads really read it. They had their preconceived “OHNOES! INEQUALITY!!!” (which seems to boil down to “OHNOES! SOMEONE WITH FEWER DEGREES MAKES MORE MONEY THAN I DO!”) policies in hand. Whether or not it was actually true was beside the point.

I’ve gotten embroiled in a similar kind of project, once, when I was a freshman in college. I was in a math modeling seminar, and our prof gave us a report prepared by Cuban and Japanese researchers to argue for loosening up restrictions on farming sea turtles (they wanted their soup & other turtle products, you see). Note that the model was objectively a mess and built up on all sorts of falsehoods. We had a great time bashing the work and wrote pages upon pages detailing the deficiencies of the work. We felt we had done our part in protecting endangered sea turtles

After which, our prof told us that our critique was really irrelevant. That the politics of CITES was such that it didn’t matter how good the Cuban/Japanese case was from a technical point of view. Sure, the CITES people would appreciate that we did this little research report for them for free, but they didn’t really need it to kill the proposed project anyway.

That quite took the wind out of our sails.

Poor little undergrads.

Anyway, back to Piketty. His research was convenient for those who want to flog particular wealth and income redistribution schemes (though I understand he doesn’t quite go for full-throated socialism. I guess one can’t win them all.) Likewise, there are people arrayed against such schemes and were going to pull his work apart, no matter what.

At which point, I want to praise Piketty for something he did do, which is how he got “caught” in his “errors” (or deliberate actions, or however you wish to characterize it.)

Piketty put his figures, spreadsheets, etc. out there for free, and as far as I can tell, the documents are still there.

(Aside: Here is a blog post linking spreadsheet best practices to Piketty’s problems – and, in many ways, Piketty did better than most. But he really needed more peer review before publication, and that happens way too infrequently…. of course, if Piketty’s mistakes weren’t really mistakes but deliberate choices, then peer review would have done diddly.)

Which brings me back to public pensions.

One of the big disputes in public pensions currently is how to value them. And the biggest dispute is that over the discount rate, which has an outsize effect compared to many other assumptions used in valuing public pensions.

The problem is that, unlike Piketty, where his numbers can be publicly checked because he published all his calculations, public pensions calculations do not disclose enough info for other people to check.

When Joshua Rauh and Robert Novy-Marx attempted to revalue public pensions, they had to use a fairly crude adjustment based on duration (I will explain another time), so that they got an approximate impact of the assumption change, as opposed to something directly from projected cashflows.

It would be really nice if those outside could look at the numbers and check for stuff like trying to project when public pension funds would be completely exhausted under various scenarios.

One person who has been very forthcoming in his own calculations is John Bury of Burypensions Blog. Here is a recent example from Bury: Checking Christie’s Math

I got the $681 million number that is supposed to be deposited as of 6/30/15 based on normal cost exhibits in the 7/1/13 reports put into a spreadsheet but I only get there if I apply that 7.9% assumed interest rate to 6/30/14 instead of 6/30/15. Christie would have ignored that extra $54 million in interest so he could make those claims for savings you saw above.

Elated that I tied into a number I put the exact same exhibits from the 7/1/12 reports into another spreadsheet. I did not get $695 million. I got $895 million even with only one year’s interest applied to those 7/1/12 numbers. With that extra year of interest the total contribution due next month would come to $965 million using Christie’s manufactured methodology. I see three explanations for this difference:

-I and/or Excel messed up
-The 7/1/12 actuarial reports have not been updated for all subsequent gimmickry
-Somebody transposed a ’9′ and a ’6′ or an ’8′ looked like a ’6′ on Christie’s teleprompter

Bury links his own spreadsheets and you can check what he did himself. Alas, he uses Excel, so you need to use that piece of software to check, and I prefer to use Google spreadsheets when I’m sharing something public like that (also, using Google docs more or less forces me to keep it simple).

In many cases, those making numerical arguments for this or that policy do not do what Bury or Piketty does, because they’re not all that interested in making a public case. Many times they’re in the “You can’t argue with numbers!” camp, which really makes me spitting mad. The moment I hear that, I assume there is something dishonest going on.

And be sure that there has been very self-interested reasons for politicians and public unions to try to hold onto some fairly cushy assumption sets in valuing public pensions.

In the short-term at least.

Unlike with Piketty, the numbers surrounding public pensions is having and will have a huge impact that will be impossible to hide. Because while one may fudge the numbers about how much future pension promises cost, one cannot hide the actual cash flowing out the door to retirees.

And that flood will be overwhelming in many cases, at least in enough time. Meredith Whitney was wrong about the timing, but the time will come.

It has happened before. It will happen again, as it’s pretty clear that places such as New Jersey and Illinois are in such a deep hole they will see that those cushy assumptions did no good for them in the long run.

Maybe they will listen to the numbers that predict before the numbers of hindsight catch up with them.

But my experience with politics tells me that’s doubtful. Sometimes it takes unmistakeable disaster for people to recognize reality.

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