WALL STREET (JOURNAL) GIBBERISH, 2010 FIRST QUARTER NEWSLETTER

Normally I use this occasional feature to expose spoken or written "wisdom" that is technically correct, but is also misleading and potentially harmful to investors’ financial well-being. However, every so often I point out that "thinking" found in Wall Street Journal editorials or columns is misleading because those pontifications usually reflect the views of many in the investment industry. (My personal view is that they believe the government should do what it can to enable their well-to-do readers to obtain the greatest possible wealth, which is for the good of the country and world.) Here is another such example.

The February 18 "Wonder Land" column by Daniel Henninger featured a graph, which is reproduced below, and which I have seen shown by others who share his view, that is supposed to show federal government spending is reaching what he believes is the point where "political physics" as exemplified by the tea party movement, will result in the spending being "arched over and down," whatever that means. (Although he and the tea partiers say spending is going up too much, they rarely, if ever, say what they would reduce or eliminate other than the ubiquitous “waste, fraud, and abuse” that every politician promises to get rid of as if it were a simple matter of doing so.)

The graph is designed to show that since 1970 federal spending has grown much, much faster than the income of the American people. It shows that federal spending in constant dollars has increased 221% since 1970 while median household income has gone up only 32% over the past 38 years. How can we afford this? How is this possible? Are the voters so confused or ignorant (at least until the tea parties started) that they permitted this to happen?

Not at all! In effect the graph compares not the classic "apples to oranges," but even worse, apples to the growth rate of orange trees. Just because you put two lines on a chart does not mean that they have any relationship to each other. Median income is essentially an average while total spending is not.

As a baseball fan, I could make a similar graph comparing the number of hits in the National League in 1959 through 2009 to the batting averages over that period. The number of hits has a little more than doubled since it was 106% higher in 2009 than in 1959, but the batting average is virtually the same in the two years, 0.260 in 1959 and 0.259 in 2009. By Henninger’s "logic" hitting is clearly out of control. Most any baseball aficionado will point out that there are twice as many teams in the National League now as there were in 1959 and they play 162 games each season now, up from 154 games in 1959.

The graph should show either federal spending per household or total (household) income. The latter would be a little better. Either quite likely would show current federal spending is relatively higher than it was in 1970, but it would not be nearly as “shocking” as the graph. It makes we wonder if Henninger, those who reproduced his graph, and those who "think" as he does, such as the Heritage Foundation that produced the graph, realize why the graph is deceptive and meaningless. If they don’t, it brings into question the points they are trying to make, and if they do, it brings into question whether what they say can be trusted.

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