elucidata

On the Importance of Inflation in Infographics

Adjust for inflation, even for relatively recent figures

June 17, 2010

May I rant for a moment? Inflation. It’s important.

Consider this lovely infographic, commissioned by Good magazine and created by the design firm Always with Honor. It was Good’s no. 3 infographic of 2009. They cleverly use sinking ships to represent the biggest bankruptcies of all time, putting the Lehman Brothers bankruptcy in context. And look how many are in the past ten years!

Oh, wait, those figures haven’t been adjusted for inflation.

Consider the little yellow motorboat way in the back. On April 12, 1987, Texaco filed for Chapter 11, a result of court-mandated $11 billion it owed to Pennzoil after some shady dealings in an acquisition of Getty.

As noted in the graphic, Texaco’s assets at the time were $34.9 billion. But that’s $34.9 billion 1987 dollars. (Check it, that figure’s quoted in an AP story on April 12, 1987.) Plug 1987 into the Bureau of Labor Statistics’ inflation calculator and suddenly that company was worth $67.0 billion. Enron’s 2001 bankruptcy at $65.5 billion becomes $80.6 billion in 2010 dollars. That’s a 23 percent adjustment over less than a decade.

Good magazine failed to convert their figures to current dollars. And that skews the numbers like crazy. (Never mind that their source only lists bankruptcies since 1986, and Chapter 11 has been in effect since 1979.)

Comparing dollars across different eras needs to set off warning bells.

End rant.

Notes.

Just for the record, from a UCLA law web site, the 20 largest bankruptcies in history, by total assets in 2010 dollars:

1. Lehman Brothers Holdings Inc., 2008 — $688.6 billion.
2. Washington Mutual, Inc., 2008 — $326.728 billion.
3. Worldcom, Inc., 2002 — $125.8 billion.
4. General Motors Corporation, 2009 — $92.0 billion.
5. CIT Group Inc., 2009 — $81.1 billion.
6. Enron Corp., 2001 — $80.8 billion.
7. Conseco, Inc., 2002 — $74.0 billion.
8. Texaco Inc., 1987 — $67.6 billion.
9. First RepublicBank Corp, 1988 — $61.1 billion.
10. Refco Finance Inc., 2005 — $53.4 billion.
11. Thornburg Mortgage, Inc., 2009 — $37.2 billion.
12. IndyMac Bancorp, Inc., 2008 — $32.4 billion.
13. UAL Corporation (United Airlines), 2002 — $30.4 billion.
14. General Growth Properties, Inc., 2009 — $30.2 billion.
15. Calpine Corp., 2005 — $30.1 billion.
16. Lyondell Chemical Company, 2009 — $28.2 billion.
17. New Century Financial Corporation, 2007 — $27.6 billion.
18. Pacific Gas & Electric Co., 2001 — $27.1 billion.
19. Colonial Bancgroup, Inc., 2009 — $26.1 billion.
20. First Executive Corp., 1991 — $24.4 billion.

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About the Author

Katie Peek is an astronomer by training, with a Ph.D. from the University of California, Berkeley, where she discovered extrasolar planets and investigated the formation of the Milky Way’s heavy elements. Now she likes to write about nature and the environment. Visit her web site at www.katiepeek.com.

Discussion

1 Comment

Jibi says:

Thanks for this finding buddy. I was doing a research on this topic ” why people don’t consider inflation while comparing amounts from different years”. Your article gave me more insights, that even experts make mistake. I really appreciate your observation, keep posting such things

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