Archive for February, 2012

Remarkably Dumb Journalism

Wednesday, February 29th, 2012

While my post has little to do with Soviet military history, this does touch on Poland and on Harvard, so I can claim some relevance to the region and to higher education.

CNN Money this morning had the latest example of a remarkably stupid journalistic trope that never seems to die: that “Company X is worth more than Country Y.” In this particular case, it’s the claim that Apple is worth more than Poland, based on the idea that Apple’s market capitalization is greater than Poland’s Gross National Product. Both come to about $500 billion at the current Polish exchange rate, though Poland’s almost 50% better off if we use purchasing power parity.

Gregg Easterbook of ESPN likes doing the same thing for higher education, noting that Harvard, or rather Harvard’s endowment, is worth more than Kenya, or more than Iceland and Honduras combined.

Here’s the basic problem: comparing GDP to market capitalization or to endowment confuses what a what a country PRODUCES, the goods and services it makes, with what a company is WORTH, or what it would cost to buy it. Those are two entirely different concepts: comparing GDP to market capitalization or endowment is like comparing apples and apple trees. Take a bond: it might produce $5 in income a year, but cost $100 to buy.

The stock market says Apple is worth about $500 billion. So let’s see what we think Poland might actually be worth. Put another way, what would it cost to buy Poland? All these calculations are rough, back-of-the-envelope figures, but I think they illustrate the point.

Why don’t we start with industrial plant? An IMF working paper by Doyle, Kuijs, and Jiang puts Poland’s capital stock as of 2000 at about 200% of GDP, which would suggest that buying all the capital goods of Polish businesses would cost us about $1000billion.

Now agriculture. Poland’s largely agricultural: 40-50% of its land is farmland. Let’s say 40% of Poland’s 300,000 square kilometers is productive farmland, in order to be conservative. That makes 120,000 square kilometers, or 12,000,000 hectares. Let’s go with a conservative valuation of $4000 per hectare. That gives us $50billion for Polish farmland. That’s a substantial bargain, the result of legal obstacles to foreign ownership.

What about real estate? Poland’s got about 12 million households. Let’s take conservative estimates of a value of $1000 per square meter for residential real estate, and average property size of 60 square meters. That gives us $720billion for housing stock alone, not counting commercial property.

So leaving out all the malls and office buildings going up in Warsaw, and all those cows and pigs in the Polish countryside, we find it would cost at least $1770 billion to buy Poland, making it worth at least three times as much as Apple.

My question is why professional financial journalists make basic mistakes like this.