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04 March 2013

Matthew Yglesias Does Not Understand Basic Accounting

By Sean Davis

He is the author of Slate's "Moneybox" column which focuses on business, economics, and finance.  Brookings released a great report today on the route-by-route finances of Amtrak. Matt Yglesias read it and demonstrated that he knows literally nothing about basic accounting.

  1. The part of Amtrak that people actually use makes money—then it’s wasted subsidizing the rest:

  2. seanmdav 
    The hitch? The Brookings report excluded roughly 30% of Amtrak's annual costs that are not directly attributable to the specific routes, to the tune of $1.2 billion. In accounting parlance, these expenses are generally referred to as "overhead" and are incurred every year. One of the very first accounting courses required of most finance and accounting students is called Managerial Accounting or Cost Accounting and involves the allocation of overhead to products.

  3. seanmdav
    @mattyglesias Table 6 (income by route) shows $2.7B in 2011 costs. Amtrak expenses were $3.9B that year. What happened to other $1.2B?

  4. @mattyglesias And if you allocate that $1.2B per route by %revenue generated (or even half that), the "profits" go bye-bye.
  5. seanmdav
    either as a percentage of total costs incurred or revenue generated by route, the "operating surplus" from Amtrak's NE corridor disappears. In fact, the allocation of overhead for 2011 turns a $46.6 million "operating surplus" into an $800 million deficit. Those "operating surpluses" are an accounting fiction.

  6. @seanmdav I don’t understand what you’re asking, but you should take it up with @AdieTomer or other report authors.

  7. @mattyglesias He and I are on the same page. The report doesn't allocate overhead. Once it does, no profits. #accounting.

  8. @seanmdav Did you read my post? I feel like we’re agreeing on the policy question here.

  9. @mattyglesias Yes, every word. But your thesis depends on ignoring $1.2 billion in overhead costs. Include those and NE isn't "profitable."

I read his post, but it turns out that Matt Yglesias didn't read the whole report. How do we know this? Because although his column uses the term "operating profits" multiple times, the phrase doesn't appear a single time in the Brookings report. And why not? Because the Brookings authors know that there are no "operating profits" due to -- you guessed it -- $1.2 billion in overhead costs.

  1. @seanmdav My theses is that NE operating surpluses should be used to cover infrastructure costs instead of redirected to elsewhere.

  2. @mattyglesias Those "surpluses" are an accounting fiction. Once you allocate the $1.2B in overhead, they are totally wiped out.

  3. @seanmdav Again, I’m not understanding the disagreement. What do you think should be done with Amtrak?
  4.  seanmdav
    And we're back to step 1.

  5. @mattyglesias Take a step back. Amtrak had $3.9B in expenses in 2011. Brookings only analyzed $2.7B.

  6. @mattyglesias If you ignore that $1.2B in expenses, Amtrak NE had $46.6M "oper. surplus." Allocate the $1.2B, that becomes ~$800M deficit.

  7. @mattyglesias I'm beginning to think that perhaps you're the one who should've consulted the report's authors.

Keep this exchange in mind next time Yglesias opines on stocks and company valuations. After all, he's an expert.

[ADDENDUM: The following hilarious and depressing exchange happened after the Storify story was initially published]

  1. mattyglesias

    @seanmdav You seem very hung up on a semantic point. Do you disagree with what I’m saying policy-wise?

  2. seanmdav
    @mattyglesias I'm sorry if you think the difference between profitable and not profitable is semantic.
  3. mattyglesias

    @seanmdav So I’m tired of asking you this, but is there something about the way I said we should change Amtrak that you disagree with?
  4. seanmdav

    @mattyglesias Trust me, the mental exhaustion is mutual. In the meantime, you might find this list helplful:

  5. @mattyglesias Re: your question, I'm still trying to figure out how an unprofitable/cash flow negative operation can "subsidize" another.
  6. mattyglesias

    @seanmdav OK. If you ever want to send me an email outlining your preferred Amtrak policies or your disagreements with mine I’ll read it.

Head.  Desk.

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