Think First, Apply Math, Think Further: Food for Thought

By William J. Adams

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• Language: English
• Publisher: Xlibris US
• Release date: Aug 9, 2005
• ISBN: 9781469107271

William J. Adams

William J. Adams, Professor of Mathematics at Pace University, is a recipient of Pace’s Outstanding Teacher Award. He was Chairman of the Pace N.Y. Mathematics Department from 1976 through 1991. Professor Adams is author or co-author of over twenty books on mathematics, its applications, and history, including Elements of Linear Programming (1969), Calculus for Business and Social Science (1975), Fundamentals of Mathematics for Business, Social and Life Sciences (1979), Elements of Complex Analysis (1987), Get a Grip on Your Math (1996), Slippery Math in Public Affairs: Price Tag and Defense (2002) and Think First, Apply MATH, Think Further: Food for Thought (2005), The Life and Times of the Central Limit Theorem Second Edition(2009). His concern with the slippery side of math and what math can do for us and its limitations is a prominent feature of his writings on applications. Concerning higher education in general, he is the author of The Nifty-Gritty in the Life of a University (2007).

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CONTENTS

PREFACE

PART ONE

1

2

3

4

5

6

7

PART TWO

8

9

10

11

12

13

14

15

16

17

18

COMMENTS AND DISCUSSION OF

SELECTED FOOD FOR THOUGHT QUESTIONS

NOTES, REFERENCES, AND

READINGS OF INTEREST

To Gaja

PREFACE

Math books tend to be so focused on methods which fall under the heading of math technique that the dimension having to do with what math technique can and cannot do for us and the all-important thinking behind the scenes tend to get lost in the shuffle. Think First … reverses the standard priority. Its exclusive focus is on the thinking that should precede decision making when numbers emerge, and the thinking that should precede and follow the use of technical math methods. The only math method that enters the scene in a few places in this book is basic arithmetic.

Your first reaction might be, hurray, a book about math that’s not loaded down with the sort of technical stuff that brought me math anxiety attacks in the past. Well, yes, but as the current wisdom has it, there’s no free lunch. While to be encouraged, thinking is hard work that has been known to prompt thought anxiety attacks. Still, the risk is worth the potential reward.

Think First… is organized into two parts. Part One consists of Chapters 1 to 7, the first six of which discuss the dimensions of slippery numbers and provide food-for-thought questions to help us sharpen our sensitivity to these dimensions. Chapter 7 provides a variety of food-for-thought questions relevant to the discussion of slippery numbers in the preceding chapters organized into menus. Part Two consists of Chapters 8 to 18. Thepivotal Chapter 8 takes up the nature of and distinction to be made between validity and truth. This opens the door to Chapters 9 to 13 and 15 and 16 which address the development of math portraits, called math models, for a wide spectrum of real-world phenomena and human-created institutions. This shows off the power and versatility of math modeling as a tool for inquiry. Chapter 14 takes us under the hood of math modeling and math deduction for a peek at some of the all-important nuts and bolts factors that are crucial to applying math. The food-for-thought questions presented are an essential partner in our quest to obtaining a perspective on how math modeling works. Chapter 17 sums up the basic steps involved in employing math modeling as a tool for inquiry and Chapter 18 provides a variety of food-for-thought questions relevant to the discussion of math modeling and deduction organized into menus.

Comments and discussion for selected food-for-thought questions are provided at the end of the book.

As to the order in which parts and chapters are taken up, a linear order running straight through is fine but not necessary. Within a few limits whose nature is shown in Figure 1, you should feel free to skip around as your interest, curiosity, and the chapter headings entice you.

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It would be more informative to take up Chapter 6 after you have given some thought to the topics taken up in the first five chapters, and for this reason Chapter 6 is set apart from the first five in Figure 1. Chapter 7, Numerical Meals for Thought, draws from the first six chapters.

A similar observation is in order for Chapter 14. Some examples in 14 rely on background taken up in Chapters 11, 12 and 13, but you can skip over these examples or go back to the appropriate places in 11, 12 and 13 for the background needed. Chapter 18, Validity, Truth, Math Modeling: Meals for Thought, draws from Part 2.

I should like to express my appreciation to my daughter Ramune for her illustrations and to my daughter Rasa for her assistance in preparing the manuscript.

W. J. A.

PART ONE

NUMBERS: RELIABLE? RELEVANT?

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1

Accept These Numbers At

Face Value At Your Risk

Sound advice when we are confronted by numbers in any setting.

CAN WE TRUST THESE NUMBERS?

It wasn’t too long ago that if you gave a talk during which you spoke utter nonsense, the chances were good that you would be denounced and hooted off the stage. On the other hand, if you had the talk committed to print and published, it took on a new life, being viewed as sacred and quoted and cited in books that claimed to be purveyors of wisdom.

These days the number has replaced the printed word as a sacred object and the more startling the number, the greater the wisdom that must lie behind it is a far too widely accepted view. While this might sometimes be true, the 50 cases cited serve to make clear the great variety of settings in which slippery numbers find their way to us.

I invite you to look them over; I am sure you will find some of special interest, and others less so. Make your own selection.

In replying to the questions posed in your selection consider the articles cited to establish a context and other relevant information that you might obtain.

1.   These numbers are all extremely fuzzy. How so? E. Schmitt, T. Shanker, Taliban and Qaeda Death Toll In Mountain Battle Is a Mystery, The New York Times, March 14, 2002; Al. B. Bearak, Afghans Declare Mountain Victory; Foes’Toll Unclear, The New York Times, March 13, 2002; A1

2.   The math in President George Bush’s proposed 2003 budget is fuzzy? How so? George Bush’s Budget: Unfurl the Fuzzy Maths, The Economist, Feb. 9, 2002, 27.

3.   In Zimbabwe’s presidential election held in March 2002 Robert Mugabe received 1,685,212 votes, outdistancing his main opponent Morgan Tsvangirai, who received 1,258,401 votes. But are the numbers credible? The Poll That Bob Stole, The Economist, March 16, 2002; 2830; D.J. Simon, Zimbabwe’s False Friends, The New York Times, March 16, 2002; A15; R.L. Swarns, An Election, Yes. But Free and Fair?, The New York Times, March 17, 2002; Wk-6.

4.   In America’s presidential election held in November 2000 George W. Bush defeated Albert Gore, Jr. to become President of the United States. At the end it came down to the state of Florida. Are the numbers and court decisions behind the numbers credible? "Supreme Court’s

Decision to Halt the Florida Recount," The New York Times, Dec. 10, 2000; 45; How the Supreme Court Voted, The New York Times, Dec. 14, 2000; A33; A. Lewis, A Failure of Reason, The New York Times, Dec. 16, 2000; 16; L. Greenhouse, Collision With Politics Risks Court’s Legal Credibility, The New York Times, Dec. 11, 2000; A1; D. Schorr, The Supreme Fix Was In, The Christian Science Monitor, Dec. 15, 2000; 11; R. Dworkin, A Badly Flawed Election, The New York Review of Books, Jan. 11, 2000; 53-55; Opening a Gavel of Worms, The Economist, Dec. 16, 2000; 30, 33.

5. What is The Reprocessing Protocol? What prompted Intertek Lab to offer The Reprocessing Protocol? P. Waldman, J. Carlton, Intertek Lab Fudged Thousands of Tests, An Indictment Says, The Wall Street Journal, Sept. 22, 2000; A1. Also of interest: R. Oppel, Jr., Environmental Tests ‘Falsified,’ U.S. Says, The New York Times, Sept. 22, 2000; A14.

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6. Official dishonesty? How so? C. Kleiner, Test Case: Now the Principal’s Cheating, U.S. News & World Report, June 12, 2000; 24.

1.   Are Texas’s education numbers too good to be true? P. Schrag, Too Good To Be True, The American Prospect, Jan. 3, 2000; 46-49.

2.   Are America’s productivity numbers for the late 1990’s as good as they once seemed to be? Measuring the New Economy, A Spanner in the Productivity Miracle, The Economist, Aug. 11, 2001; 12-13, 55-56.

3.   What did the Immune Response Corporation want to suppress? Why was the Company given a warning by the Food and Drug Administration in 1995? P. Hilts, Company Tried to Bar Report That HIV Vaccine Failed, The New York Times, Nov. 1, 2000; A24.

4.   What prompted two officials at Hong Kong University to resign? M. Landler, In Sharp Debate on Freedoms, Top Hong Kong Educators Resign, The New York Times, Sept. 17, 2000; A7.

5.   What data did Mr. and Mrs. Harry Snyder falsify and why? Couple Sentenced for Faking Test Results, The New York Times, Sept. 3, 2000; 21.

6.   A case of poor bookkeeping or deliberate intent to deceive? E. Wyatt, Schools’ Federal Aid Data Under Investigation, The New York Times, Nov. 1, 2000; B8.

7.   Were data on an engine defect suppressed? S. Labatan, L. Bergman, Documents Indicate Ford knew of Engine Defect but Was Silent, The New York Time, Sept. 12, 2000; A1.

8.   How were the tests on a missile interception program rigged? T. Weiner, Lies and Rigged ‘Star Wars’ Test Fooled the Kremlin, and Congress, The New York Times, Aug. 18, 1993; A1; T. Weiner, General Details Altered ‘Star Wars’ Test, The New York Times, Aug. 27, 1993; A1; E. Schmitt, Aspin Disputes Report of ‘Star Wars’ Rigging, The New York Times, Sept. 10, 1993; A1; T. Weiner, Inquiry Finds ‘Star Wars’ Tried Plan to Exaggerate Test Results, The New York Times, July 23, 1994; A1.

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15. Research fraud at a Cornell Lab? How so? N. Bernstein, Charges of Research Fraud Arise at a Cornell AIDS Lab, The New York Times, Sept. 26, 1998; A1.

1.   Do approved cigarette tests provide reliable measures of tar doses that smokers are subjected to? R. Kerber, Do Approved Cigarette Tests Understate Tar? The Wall Street Journal, Jan. 30, 1997; B1.

2.   Is the sharp drop in crime in recent years real or manufactured? F. Butterfield, As Crime Falls, Pressure Rises to Alter Data, The New York Times, Aug. 3, 1998; A1; A. Fine, Philadelphia Takes Lead in Cleaning Up Crime Statistics, The Christian Science Monitor, Dec. 28, 1998; 2.

3.   Numbers pulled from the air? How so? C. Wren, Phantom Numbers Haunt the War on Drugs, The New York Times, April 20, 1997; E4.

4.   How did the rats compromise blood pressure readings? J. Bishop, They Smell a Rat and It Really Raises Their Blood Pressure, The Wall Street Journal, June 10, 1994; A1.

5.   Is it common practice for computer companies to skew data on the speed of microprocessor chips? J. Markoff, Intel Admits it Overstated Chips’ Speed, The New York Times, Jan. 6, 1996; 33.

6.   What records were altered and why? E. Becker, S. Myers, Pentagon Says Commander Admits He Altered Records, The New York Times, Jan. 20, 2001; A8.

7.   What slippery math is being employed to make the case for Social Security as a system of private retirement accounts? P. Krugman, Breaking the Contract, The New York Times, March 5, 2002; A23.

8.   What math did President Bush employ to promote his proposed overhaul of Social Security that few economic planners would be likely to embrace? E. Wyatt, Bush Uses Own Brand of Math on Social Security, The New York Times, March 2, 2002; A11.

9.   Russia’s economy grew by 5% in 2001, the budget was balanced, and inflation came down. Good numbers, but is there more to it than meets the eye? Scratch and Sniff: Russia’s Economic Recovery is More Fragile Than It Seems," The Economist, Feb. 16, 2002; 71.

10.   How do the numbers concerning the impact of oil drilling in the Arctic National Wildlife Refuge not lie, strictly speaking, but not tell the truth? P. Krugman, Two Thousand Acres, The New York Times, March 1, 2002; A23.

11.   What is the problem of getting an accurate count of race in the census? R. Thorton, What the Census Doesn’t Count, The New York Times, March 23, 2001; A19.

12.   Misleading numbers in medical studies? How so? Watch for Weasel Numbers in Medical Studies, Business Week, June 17, 2002; 85.

13.   Are data reported from company funded medical studies trustworthy? P. Raeburn, The Credibility Gap in Drug Research, Business Week, June 24, 2002; 28.

14.   What is the problem with African Numbers? N. Onishi, African Numbers, Problems and Number Problems, The New York Times, Aug. 18, 2002; Wk-5.

15.   What is the Office of Management and Budget’s Statistical Policy Directive No. 3? What is its significance? A. Krueger, Economic Scene: In Numbers We Trust, Provided They’re Safe from Political Meddling, The New York Times, May 30, 2002; C2.

16.   Fraudulent data at Bell Labs? How so? K. Chang, Panel Says Bell Labs Scientist Faked Discoveries in Physics, The New York Times, Sept. 26, 2002; A1.

17.   Tainted testing? S. Kilman, Validity of Mad-Cow Tests Questioned, The Wall Street Journal, Jan. 16, 2004; A3.

33. A case of deliberate omission of data? S. Strom, Japan Assailed for Omitting Data in Growth Calculations, The New York Times, May 24, 2000; C1.

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34.   Unreliable Federal nutrition data? How so? What were the consequences? M. Burros, Report Finds Federal Nutrition Data to Be Unreliable, The New York Times, Nov. 23, 1993.

35.   A problem with economic statistics? How so? Damn Lies, The Economist, Nov. 23, 1996; 18.

36.   Metropolitan Transportation Authority hanky-panky with millions of dollars to build a case for a transit fare increase? What did the judge say? R. Kennedy, Hevesi Says M.T.A. Moved Millions to Simulate a Deficit, The New York Times, April 23, 2003; B1. R. Kennedy, Saying Public Was Misled, Judge Rescinds Transit Fare Increases, The New York Times, May 15, 2003; A1.

37.   Social Security’s deficit determined by manipulation on the part of politically appointed trustees? D. Langer, Cooking Social Security’s Deficit, The Christian Science Monitor, Jan. 4, 2000; 9.

38.   An optimistic view of Social Security’s soundness; on what basis? D. Francis, Social Security’s Boosted Staying Power, The Christian Science Monitor, May 7, 2000; R. Eisner, The Great Deficit Scare (New York: The Century Foundation Press, 1997), Ch. 4.

39.   The numbers painted a delightful picture, but was it realistic? J. Annells, Japan’s Big Start in ‘96 Crunched by Numbers, The Christian Science Monitor, July 1, 1996; 7.

40.   Faked tests and evaluations of a key component of the proposed anti-missile system? W. Broad, Missile Contractor Doctored Tests, Ex-Employee Charges, The New York Times, March 7, 2000; A1. W. Broad, Antimissile System’s Flaw Was Covered Up, Critic Says, The New York Times, May 18, 2000; A22. W. Broad, Antimissile Testing Is Rigged to Hide a Flaw, Critics Say, The New York Times, June 9, 2000; A1. T. Postol, G. Lewis, We Can’t Tell the Missiles From the Mylar, The New York Times, July 7, 2000.

41.   How so? L. Altman, Experts See Bias in Drug Data, The New York Times, April 29, 1997; C1.

42.   Did questionable numbers determine the outcome of the 1876 presidential election? What were the consequences? N. Kleinfeld, President Tilden? No, but Almost, in Another Vote That Dragged On, The New York Times, Nov. 12, 2000; 30. Watch Yourself at Dinner, Dubya, The Economist, Nov. 25, 2000; 30.

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43. What did the General Accounting Office find when it audited seven Star Wars tests conducted between 1990 and 1992? T. Weiner, General Details Altered ‘Star Wars’ Test, The New York Times, Aug. 27, 1993.

44.   Murky Oil Data? How so? A Sleuth in the Murky World of Oil Data, J. Gerth, The New York Times, Aug. 12, 2003; W1.

45.   The Food and Drug Administration’s safe exposure level to methylmercury in fish (0.4 micrograms per kilogram of a person’s body weight per day) has been criticized as misleading. How so? J. Gorman, Does Mercury Matter? Experts Debate the Big Fish Question, The New York Times, July 29, 2003; D5.

46.   In New York City’s school system is the dropout rate around 20 percent, the official rate, or is it more like 25 to 30 percent? What’s the problem? T. Lewin, J. Medina, To Cut Failure Rate, Schools Shed Students, The New York Times, July 31, 2003; A1.

47.   A zero dropout rate: too good to be true? M. Winerip, The ‘Zero Dropout’ Miracle: Alas! Alack! A Texas Tall Tale, The New York Times, Aug. 13, 2003; B7.

48.   What number games did the banks play to aid Enron’s deception? F. Norris, Bankrupt Thinking: How the Banks Aided Enron’s Deception, The New York Times, Aug. 1, 2003; C1.

49.   Coca-Cola manipulated the numbers in a marketing test? How so? C. Terhune, How Coke Officials Beefed Up Results of Marketing Test, The Wall Street Journal, Aug. 20, 2003; A1.

50.   Whose numbers on pesticide levels in soft drinks do you believe: those of the Center for Science and Environment, a non-governmental group, or the government’s? A. Waldman, India Tries to Contain Tempest Over Soft Drink Safety, The New York Times, Aug. 23, 2003; A3.

51.   Slippery numbers arising in the preceding cases fall into at least one of the following categories: (a) boldfaced lie, (b) compromised numbers (through omissions, for example), (c) compromised conditions, (d) legitimate, but misleading, (e) not-legitimate, (f) questionable. For the cases you singled out as being of interest pinpoint the category which best describes the numbers that arise.

SLIPPERY ACCOUNTING

Accounting, as turn of the century events make clear, isa case that warrants special consideration. A good part ofthe problem stems from the fact that generally acceptedaccounting principles (GAAP) are open to interpretation, which, alas, also leaves them open to a variety of shenanigans in the determination of expenses and revenue. As advertised, slippery accounting is the focus of Slippery Accounting.

Part 1: Things to Keep in Mind

1.   What are dodgy accounting’s greatest hits? R. Abelson, Truth or Consequences? Hardly, The New York Times, June 23, 1996.

2.   What is the problem with pro-forma reporting? D. Henry, The Numbers Game, Business Week, May 14, 2001; 100-110.

3.   What is Business Week’s position on pro-forma accounting? Editorial: Time to Cut the Accounting Shenannigans," Business Week, May 14, 2001; 146.

4.   What are the accounting wars about? M. McNamee, C. Schmitt, P. Dwyer, Accounting Wars, Business Week, Sept. 25, 2000; 156-166. Also of interest: M. McNamee, P. Dwyer, Commentary: Where Levitt’s Plan Falls Short, Business Week, Sept. 25, 2000; 172; G. Morgenson, Score One for the Law In Accounting Rule Fight, The New York Times, Sept. 17, 2000; Bu7; F. Norris, Accounting Firms Accept Rule to Limit Conflicts of Intest, The New York Times, Nov. 15, 2000; A1.

5.   What prompts the comment: In today’s financial climate, auditors’ reports have about as much credibility as buy recommendations from Wall Street analysts? D. Henry, For Accountants, A Major Credibility GAAP, Business Week, July 23, 2001; 71.

6.   How do new financial reporting standards distort reality? D. Rocker, Fantasy Accounting, Barrons, Feb. 26, 2001; 41.

7.   Can a seemingly simple number be anything but straightforward? A. Tergesen, Cash-Flow Hocus-Pocus, Business Week, July 15, 2002; 130, 132.

8.   What is backing in? A. Berenson, Tweaking Numbers to Meet Goals Comes Back to Haunt Executives, The New York Times, June 29, 2002; A1.

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9. What are your options for financial hocus-pocus? P. Krugman, Flavors of Fraud, The New York Times, June 28, 2002; A27.

1.   Why do companies report one set of numbers to the IRS and a different set to shareholders, and what does this mean for shareholders? A. Tergesen, How to Spot Tax Tinkering: See If Products Are Really Boosting Profits, Business Week, May 20, 2002; 142, 144.

2.   Numbers reached by applying generally accepted accounting principles [GAAP] are woefully inadequate whenit comes to giving investors a good sense of a company’s prospects. How so? N. Byrnes, D. Henry, Confused About Earnings? Business Week, Nov. 26, 2001; 77-84.

Part 2: Cases of Interest

12.   Enron’s core energy-trading business played fast and loose with projections and other numbers? How so? P. Coy, S.A. Forest, D. Foust, E. Thornton, Enron: How Good An Energy Trader? Business Week, Feb. 11, 2002; 42, 43.

13.   A strong touch of Enron about it? How so? P. Krugman, Bush’s Aggressive Accounting, The New York Times, Feb. 5, 2002; A25.

14.   Does Congress employ the same cook-the-books methods that made Enron infamous? G.R. Craddock, Congress Uses Playbook Similar to Enron’s, The Christian Science Monitor, Feb. 6, 2002; 2.

15.   A startling example of financial engineering? How so? W. Symonds, H. Timmons, D. Brady, Behind Tyco’s Accounting Alchemy, Business Week, Feb. 25, 2002; 42, 44.

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16.   Did Boeing exploit accounting rules to conceal a huge production disaster? What did the auditors say? S. Holmes, M. France, Boeing’s Secret, Business Week, May 20, 2002; 110-120. S. Holmes, D. Henry, And Where Were the Auditors? Business Week, May 20, 2002; 120.

17.   Accounting hype at CISCO? J. Byrne and B. Elgin, CISCO Behind the Hype, Business Week, Jan. 21, 2002; 54-61.

18.   A case of pro-forma alchemy? Out By $100 Billion, The Economist, Feb. 23, 2002; 77.

19.   Why do some companies want earnings to look as bad as possible? A.K. Smith, Uncooking the Books, U.S. News & World Report, May 14, 2001.

20.   A very simple fraud? How so? D. Sparks, Asleep At the Audit? Business Week, March 6, 2000; 150-152.

21.   A case of earnings management or of lying, deceit, and fraud? F. Norris, D. Henriques, 3 Admit Guilt in Falsifying CUC’s Books, The New York Times, June 15, 2000; C1. Also: F. Norris, Asleep At the Books: A Fraud That Went On and On and On, The New York Times, June 16, 2000; C1.

22.   Fraud in reporting profits? How so? F. Norris, MicroStrategy Chairman Accused of Fraud by S.E.C., The New York Times, Dec. 15, 2000; C8. Also: C. Schmitt, P. Dwyer, Did the Auditors Cross the Line? Business Week, Sept. 25, 2000; 168-172.

23.   HCA—The Healthcare Company is guilty of fraud? How so? K. Eichenwald, HCA to Pay $95 million in Fraud Case, The New York Times, Dec. 15, 2000; C1.

24.   A corporate scandal that was sudden, vast and simple? What are the basics? S. Romero, A. Berenson, WorldCom Says It Hid Expenses, Inflating Cash Flow $3.8 Billion, The New York Times, June 26, 2002; A1. S. Romero, F. Norris, New Disclosures From WorldCom May Add to Accounting Scandal, The New York Times, July 2, 2002; A1. J. Glater, K. Eichenwald, Audit Lapse At WorldCom Puzzles Some Professionals, The New York Times, June 28, 2002; C1.

25.   What prompted the S.E.C. to file a civil complaint against six former officers of Waste Management Inc.? How is the Arthur Andersen accounting firm involved? K. Eichenwald, Waste Management Executives Are Named in S.E.C. Accusation, The New York Times, March 27, 2002; C1.

26.   How has pension accounting gone awry? Editorial, The New York Times, Oct. 20, 2002; Wk-10. J. Finer, A Little Fancy Arithmetic, The Washington Post National Weekly Edition, Oct. 28-Nov. 3, 2002; 20.

27.   With all the attention that has been given to reforming slippery accounting, are some companies still playing by the old rules? D. Henry, H. Timmons, Still Spinning the Numbers, Business Week, Nov. 11, 2002; 120.

28.   The ultimate in slippery numbers; how does it work? F. Norris, Legal but Absurd: They Borrow a Billion and Report a Profit, The New York Times, Aug. 8, 2003; C1.

29.   Contingent convertible bonds blindside shareholders through hidden costs? How so? D. Henry, The Latest Magic in Corporate Finance, Business Week, Sept. 8, 2003; 88-9.

30.   How does Russia’s Enron differ from ours? P. Starobin, C. Belton, Russia’s Enron, Business Week, Feb. 18, 2002; 50-52. S. Tavernise, U.S. Auditors Find Things Are Different in Russia, The New York Times, March 12, 2002; W1.

31.   A case of bi-partisan book-cooking? D. Francis, Budget Fudge, The Christian Science Monitor, Aug. 25, 1999; 8.

32.   What is the art of robbing Peter to pay Peter? A. Sloan, Books Cooked D.C. Style: ‘Saving’ Social Security By Borrowing from It, Newsweek, Feb. 16, 1998; 42-43.\

33.   Beltway budgeters manipulate the bottom line? How so? A. Sloan, The Surplus Shell Game, Newsweek, Jan. 19, 1998; 28.

34.   The balanced budget is a myth? How so? F. Hollings, Beltway Accounting, The New York Times, Oct. 9, 1997; A31.

Part 3: Reforming the System

The battle to reform the system which opened the gates to the aforenoted flood of figure fraud and manipulation began when the public’s consciousness was aroused by the Enron debacle. For those interested in this dimension references 130 cited in Notes, References, and Readings are recommended. The focus of reforming the system is centered on the business sector, not on government itself.

RATINGS

Stock ratings, expressed in quantitative form, seem so precise, but are they necessarily an objective reflection of an analyst’s judgment? Sometimes there’s more to it than meets the eye.

1.   Why was Merrill Lynch disturbed by John Olson’s rating of Enron’s stock? What did they do about it? Is too much being made of the incident or is there a message here about the ratings game? R. Oppel, Jr., Merrill Replaced Research Analyst Who Upset Enron, The New York Times, July 30, 2002; A1.

2.   Why, according to Kenneth A. Boss, was he fired by Solomon Smith Barney? Any message here? G. Morgenson. Pressuring Analysts: Hard Habit to break, The New York Times, Aug. 11, 2002; Bu-1.

3.   Why has Jack Grubman, once knighted as Solomon Smith Barney’s king of telecom, been dethroned? P. Elstrom, Business Week, May 13, 2002; 44. G. Morgenson, Bullish Analyst of Tech Stocks Quits Solomon, The New York Times, Aug. 16, 2002; A1.

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4. How does Henry Blodget’s rating report to investors about LFMN (Lifeminders) compare with what he was saying privately to colleagues? D. Kadlec, Buy! (I Need the Bonus), Time, May 20, 2002; 55.

1.   Are credit ratings for financial constraints overrated? Discuss. Rating Agencies: Badly Overrated, The Economist, May 18, 2002; 69.

2.   What has N.Y. State Attorney General Eliot Spitzer been up to? M. Vickers, Can This Man Make Wall Street Behave? Business Week, April 22, 2002; 38.

IS THE UNEMPLOYMENT RATE TRUSTWORTHY?

The official unemployment rate is what the Labor Department declares it to be at the beginning of each month. For a certain month the official rate is cited as 6.5 percent, let us say; what does this mean? It means that 6.5 percent is the figure determined by means of the official rules which define the calculation of the rate from the data obtained. The 6.5 percent figure is intended to provide a picture of unemployment in the country. The quality of the picture obtained depends on the quality of the official rules—the camera, the quality of the data obtained—the film, and the quality of the photographer—those who make up the official rules and carry them out.

Numerous critics of the picture of unemployment provided by the unemployment rate have argued that the picture is seriously out of focus because it does not record those who have become discouraged and have stopped looking for work, who are on the edge of unemployment, such as those who are temporary or freelance workers seeking full time work, who are working at jobs beneath their education or skill level, who are older men and women pushed into lower paying jobs.

Modification of the Camera and Film

In November 1993 the Government publicly acknowledged that it had been substantially underestimating unemployment for at least a decade, particularly among women and discouraged workers. To obtain a more accurate picture of unemployment, revised camera and film, including the collection of additional data, revision of the questionnaire employed, changes in definitions, and the computerization of the entire process, beginning with employment of laptop computers by interviewers going into households, were put into operation in the beginning of 1994.

In its redesigned questionnaire, the Labor Department dropped what had come to be called its most notoriously complex question: Did you have a job or business from which you were temporarily absent or on layoff last week? It was replaced by simpler, more straightforward questions. The new questionnaire employed a series of yes or no questions to determine whether the interviewee is part of the work force. The interviewer is not asked to use