Political Calculations
Unexpectedly Intriguing!
April 30, 2015

Five weeks ago, we served notice that we were going to be taking on the world's best economic forecasters and the Federal Reserve in anticipating the level of GDP in the United States during the first quarter of 2015 (2015-Q1) and that we would win.

One week later, we went meta - forecasting how the BEA's first estimate of 2015-Q1's GDP would itself be reported:

What we think is likely is that when the U.S. Bureau of Economic Analysis begins reporting its official estimates of U.S. GDP growth in 2015-Q1 near the end of April 2015, it will initially announce a positive figure that will be subsequently revised lower over the next two estimates as it catches up with delayed data reporting.

Let's just say that all would seem to be proceeding as we have foreseen, as unfolding events have eliminated most of the world's "Blue Chip" economic forecasters from serious consideration in this competition, clearing nearly all of the other competitors from the field!

The U.S. economy’s sharp slowdown in the first three months of the year may have caught almost all Wall Street forecasters off guard. But it didn’t surprise the Federal Reserve Bank of Atlanta.

The regional Fed bank’s frequently updated GDPNow forecast proved to be one of the most reliable indications of where first-quarter growth would stand. The Commerce Department reported Wednesday that the economy grew at a mere 0.2% annual rate, against Wall Street expectations of a 1% gain. When most private sector forecasters were overestimating growth, the Atlanta Fed gauge, last updated on Friday, had growth in gross domestic product pegged at 0.1% for the quarter.

The GDPNow gauge has been warning of weakness in the first quarter for some time. That notion was not by itself controversial, as most forecasters and Fed officials saw a weak 2015 kickoff. But the Atlanta Fed proved to be standout when it came to accurately quantifying how much trouble the economy had on its hands.

The difference, of course, is that the Federal Reserve's GDPNow forecast team took weeks to even get close to that assessment, incorporating new data whenever it was reported and revising their forecast for the 2015-Q1 accordingly. We got to our assessment for how the first quarter of 2015 would turn out a lot more quickly with a lot less effort.

But the competition is still not over. We have at least two more revisions to 2015-Q1's GDP before we can claim complete victory for our forecast that the U.S. economy actually contracted during the quarter, recording a negative growth rate. Should that happen, we'll be almost completely alone in a forecasting victory instead of sharing the crown for being just inside the innermost ring of the target for accuracy with just the few remaining contenders. Or rather, it will be just us and Mish, who coincidentally has also been predicting a negative outcome for 2015-Q1's GDP since January 2015.

The Atlanta Fed wasn’t the only one to be right about growth, but it had little company. In a Wall Street Journal survey, financial firm Raymond James predicted a 0.2% rise, while research company Wrightson ICAP forecast a 0.4% gain.

A number of Wall Street economists had praise for what the Atlanta Fed is trying to do. “I pay attention to it,” said Eric Green, an economist with TD Securities. He noted that it’s been doing a better job of other growth-tracking tools. Take, for example, the tracking estimate provided by forecasting firm Macroeconomic Advisers, which on Friday pegged first-quarter growth at a 1.4% rate.

To be fair, forecasting the total pace of growth in the U.S. economy is always a challenging task, with forecasters regularly missing the mark. What’s more, forecasters are trying to hit a moving target as GDP data undergoes a sustained cycle of revisions that can dramatically alter what was originally reported. The government’s next estimate of first-quarter growth comes in late May.

And then there will be third estimate released in late June and perhaps yet another revision in late July before all the dust for 2015-Q1's GDP reading is finally settled.

Meanwhile, we should note that the majority of the so-called "Blue Chip" forecasters aren't even the biggest losers in the competition to date.

Going back to 7 January 2015, you really have to feel sorry for the people who relied upon "most economists" or President Obama's Council of Economic Advisors to get their sense of the state of the U.S. economy going into the first quarter of 2015.

We certainly feel sorry for them!

Arrows Around Bulls Eye Target - Source: http://dhhs.ne.gov/children_family_services/Pages/children_family_services_pathways.aspx

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April 29, 2015

According to data published in December 2014 by the U.S. Bureau of Labor Statistics in its annual Highlights of Women's Earnings report, in 2013, women made up 48.2% of the total number of workers in the U.S. labor force and the average woman in the United States earned 76% of what the average man did.

Also according to the same BLS report, going by the usual number of hours worked each week, the median earnings for women in the U.S. was within 10% of those for men for all but two categories: people who work 60 or more hours per week and also people who work 35 or more hours per week, but whose hours vary considerably from week to week.

Meanwhile, it would appear that U.S. men are paid more to work longer hours, but that U.S. women are paid more to work fewer hours.

But you don't have to take our word for it! Here's the data straight from Table 5 of the report for the number of workers by sex for each category of the usual number of hours worked each week:



















2013: Number of Workers by Sex and Usual Number of Hours Worked Each Week
Hours Worked per Week Number of Workers Number of Women Number of Men
1 to 4 hours 520,000 338,000 182,000
5 to 9 hours 1,155,000 771,000 383,000
10 to 14 hours 1,785,000 1,168,000 617,000
15 to 19 hours 2,604,000 1,760,000 844,000
20 to 24 hours 6,654,000 4,307,000 2,347,000
25 to 29 hours 3,200,000 2,081,000 1,120,000
30 to 34 hours 6,268,000 4,035,000 2,232,000
Hours Vary (usually < 35 hours) 2,478,000 1,500,000 978,000
35 to 39 hours 8,128,000 5,380,000 2,748,000
Hours Vary (usually 35 or more hours) 5,427,000 2,060,000 3,367,000
40 hours 70,466,000 32,504,000 37,963,000
41 to 44 hours 1,031,000 390,000 642,000
45 to 48 hours 5,493,000 1,957,000 3,536,000
49 to 59 hours 9,119,000 2,805,000 6,314,000
60 or more hours 4,599,000 1,173,000 3,426,000
All 129,110,000 62,316,000 66,794,000

And here's the corresponding data from the same table as it relates the median weekly earnings by the usual number of hours worked each week:










2013: Median Weekly Earnings by Sex and Usual Number of Hours Worked Each Week
Hours Worked per Week Median Weekly Earnings (Both Sexes) Median Weekly Earnings (Women) Median Weekly Earnings (Men)
1 to 4 hours $58 $56 $61
5 to 9 hours $75 $76 $74
10 to 14 hours $113 $115 $109
15 to 19 hours $159 $163 $151
20 to 24 hours $205 $202 $210
25 to 29 hours $217 $223 $209
30 to 34 hours $264 $270 $255
Hours Vary (usually < 35 hours) $336 $352 $315
35 to 39 hours $495 $507 $466
Hours Vary (usually 35 or more hours) $672 $496 $791
40 hours $732 $691 $771
41 to 44 hours $880 $841 $912
45 to 48 hours $1,054 $993 $1,097
49 to 59 hours $1,270 $1,193 $1,317
60 or more hours $1,373 $1,202 $1,436
All $665 $584 $764

We thought it might be interesting to visualize all the data we've presented in table form above in a single chart. To do that, so we can show all the data with a single axis, we've calculated the percentage of all workers that are women along with the percentage of men's median weekly earnings that women earn for each category of usual hours worked per week.

Women's Share of Hours Worked and Percentage of Men's Median Weekly Earnings by Usual Weekly Hours Worked, 2013

What we see is that the median U.S. woman is typically being paid a 10% premium to work part time compared to a U.S. man working the same number of hours each week. As you can imagine, that kind of financial incentive would go a very long way to explaining why two-thirds of all working Americans who work less than 40 hours per week are women.

But as the number of usual hours worked each week rises, we see that situation reverses. For people who regularly work 40 up to 59 hours per week, women earn about 90% of what a man working the same number of hours does. However, as the number of hours required to earn incomes rise, we also see that fewer and fewer women are to be found working. At the topmost end, we see that for people who work 60 or more hours per week, the median income earned by a woman drops to 84% of the median working earnings of a man who puts in those kinds of hours, and also that only 26% of the total number of people who spend more than half their waking hours per week working at income-paying jobs like this are women.

U.S. women would also appear to be highly averse to working variable numbers of hours each week, which we see in the dips for the percentage share of workers who work varying hours each week with respect to those who work a steady number of hours.

While it is the combination of all these factors that results in the median weekly earnings for American women being just 76% of those for men, we find that it is the relatively higher pay rewards of part time employment for women as compared to men and the relative absence of women who choose to work 60 or more hours at income-paying jobs each week that are the greatest contributors to that statistic.

Data Source

U.S. Bureau of Labor Statistics. BLS Report 1051: Highlights of Women's Earnings in 2013. Table 5. Median usual weekly earnings of wage and salary workers, by hours usually worked and sex, 2013 annual averages. [PDF Document]. December 2014.


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April 28, 2015

How many times has the median sale price of the new homes sold in the U.S. sustainably doubled since the U.S. Census Bureau began monitoring them in January 1963?

The answer is revealed in our chart below!

Median and Average New Home Sale Prices in U.S., January 1963 - March 2015

With "sustainably doubling" being defined as when the median sales price has risen above the level when the price has doubled without falling back below it in all the time recorded since, the surprising answer is that the median sales price of new homes in the U.S. has only sustainably doubled just four times, with the fourth period just being recorded in October 2014!

Looking at more recent history, when we plot the trajectory of the trailing twelve month average of median new home sale prices against median household income since December 2000, we find that the current trend for the rate of increase of these prices is now rising at a rate that is just under half that recorded during the main inflation phases of what we've identified as the first and second U.S. housing bubbles.

U.S. Median New Home Sale Prices vs Median Household Income, December 2000 through March 2015

That puts the current growth rate of median new home sale prices with respect to median household income about 3--4 times greater that what was typical in periods outside of the expansion of housing bubbles in the U.S. economy.

U.S. Median New Home Sale Prices vs Median Household Income, 1967 through March 2015

References

Sentier Research. Household Income Trends: March 2015. [PDF Document]. Accessed 26 April 2015. [Note: We have converted all the older inflation-adjusted values presented in this source to be in terms of their original, nominal values (a.k.a. "current U.S. dollars") for use in our charts, which means that we have a true apples-to-apples basis for pairing this data with the median new home sale price data reported by the U.S. Census Bureau.]

U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 26 April 2015.

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April 27, 2015

According to a Reuters poll of 85 economists, conducted just last week, "U.S. economic growth is set to rebound in the second quarter."

But if that's true, why aren't U.S. stock prices reflecting that expectation for the future? From all appearances, they would seem to largely be stuck moving sideways to very slowly higher, much as they have been since the end of February 2015.

S&P 500 Year to Date in 2015, Through 24 April 2015, Source: Google Finance

In truth, following a poor showing in the first quarter, the U.S. economy would appear to once again be setting up additional economic disappointment in the second quarter of 2015.

The reasons why are pretty straightforward. A sustained decrease in the global price of oil has negatively impacted U.S. energy (oil and gas) producers, whose expected earnings in 2015 has plummeted with to other industrial sectors, several of which have greatly benefitted from those lower oil prices.

S&P 500 Future 2015 Earnings per Share by Sector in 2015, Through 16 April 2015, Source: Yardeni Research, 26 April 2015

The so-far isolated distress in the U.S. oil and gas production industry largely explains why the U.S. stock market has been moving sideways. In fact, most of the distress to date has been felt by small firms in this industry, which we estimate to account for about 55% of all the dividend cuts that have been recorded to date in 2015.

Cumulative Number of Announced Dividend Cuts in U.S. Stock Markets by Day of Quarter and Quarter Through 24 April 2015

Because energy companies with larger market capitalizations are better able to absorb the negative impact of lower oil prices upon their industry, they haven't been forced to take the painful action of cutting their own dividends, which is why stock prices in the major indices haven't fallen with the prospects for earnings in the U.S.' energy sector. But that distress also accounts for why U.S. stock prices haven't risen more considerably as other industries have benefited from lower oil prices. The U.S. economy isn't firing on all its cylinders, nor is it expected to in the near future.

S&P 500 Alternative Future Trajectories - 2015Q2 - Standard Model - Snapshot on 24 April 2015

At present, given the current expectations for future dividends, U.S. investors would appear to be focused on 2015-Q2 in setting current day stock prices. As long as their focus continues to fall on this current quarter, as they await greater clarity from the U.S. Federal Reserve this week with respect to its plans to hike short term interest rates in the U.S., stock prices may continue following their largely sideways to slightly upward trajectory while that uncertainty continues, assuming no major changes in the expectations for future dividends.

However, if they shift their focus to a different point of time in the future, there is a high potential for stock prices to fall, the degree to which will depend upon which future point of time they might choose to focus their forward looking expectations upon and the timing of when such a shift in focus would occur.

References

Seeking Alpha Market Currents. Filtered for Dividends. [Online Database]. Accessed 26 April 2015.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 26 April 2015.

Yardeni, Edward and Abbott, Joe. Yardeni Research. Earnings, Revenues, & Valuation: S&P 500/400/600. [Archived PDF Document]. 26 April 2015.

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April 24, 2015

Six minutes and 17 seconds of the all the unique THX "Deep Note" sound system checks that have played before your feature presentation at your local THX-certified movie theater. Time to turn the sound up!

The audience *was* listening. And now, its new all over again - here's the rejuvenated sound:


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April 23, 2015

In March 2015, environmental scientists employed by California Department of Fish and Wildlife published a study examining the impact of diverting surface water to sustain marijuana cultivation upon four northwestern California watersheds. For a state that has been experiencing an extreme drought, the researchers were alarmed to find that marijuana growers were diverting up to 100% of the water flowing in a number of small streams in Humboldt, Mendocino and Trinity Counties during dry periods for the purpose of irrigating their pot farms.

California’s Mediterranean climate provides negligible precipitation during the May—September growing season. In Northern California, 90–95% of precipitation falls between October and April [14]. Marijuana is a high water-use plant [2,15], consuming up to 22.7 liters of water per day. In comparison, the widely cultivated wine grape, also grown throughout much of Northwestern California, uses approximately 12.64 liters of water per day [16]. Given the lack of precipitation during the growing season, marijuana cultivation generally requires a substantial amount of irrigation water. Consequently, MCSs are often situated on land with reliable year-round surface water sources to provide for irrigation throughout the hot, dry summer growing season [7,8,12]. Diverting springs and headwater streams are some of the most common means for MCSs to acquire irrigation water, though the authors have also documented the use of groundwater wells and importing water by truck.

Converting liters to gallons, a single marijuana plant can consume up to 6 gallons per day.

TakePart summarizes the California Department of Fish and Wildlife scientists' research and findings:

They chose four areas, all surrounded by forests, and all with streams containing endangered salmon. The scientists estimated that the growing operations were using between 138,200 and 191,265 gallons of water a day. People in Northern California, for comparison, use an average 172 gallons of water per day per person.

Marijuana growers were taking 100 percent from three of the streams studied and 25 percent of a fourth stream.

Those streams aren’t just picturesque—they’re critical to the survival of the coho and Chinook salmon and steelhead trout.

Doing some more quick math, the estimated cultivation of 23,033 to 31,878 marijuana plants in these regions was consuming the same amount of water per day as somewhere between 803 and 1,112 people. Or rather, 28 plants consume the same amount of water as the average northern Californian.

But that's just that small region. To find out how much water is being diverted to grow marijuana in California, we need to know how many plants are being grown throughout the state.

Map - U.S. Outdoor Cannibis Cultivation Areas - Source: http://www.deamuseum.org/ccp/cannabis/production-distribution.html

To determine that, we're going to use the same methodology that was done in a study by the U.S. Department of Justice's National Drug Intelligence Center for its 2010 drug market analysis of the High Intensity Drug Trafficking Area in Central Valley California. Here's how they described it:

California Produced More Outdoor Grown Marijuana in 2009 than Mexico: (Method 1-Seizure Based): Mexico’s 29,025 MT production was eclipsed by California’s cannabis output of 49,105 Metric Tons in 2009. How was the California output computed? To determine the California output potential we used different (published) methods in an attempt to determine the accuracy of these estimations.

First we began with the 2009 DC/SEP actual seizures of outdoor marijuana, 7,365,760 plants which weighed 5,140 MTxii We applied the WDR median percentage (15%) and calculated that 49,104,576 marijuana plants was the production potential for California in 2009. Applying the Gaffney formula to determine metric tonsxiii, this equates to a gross weight of 49,105 MT of marijuana possibly produced in California during 2009.

We found the number of marijuana plants seized by law enforcement in California in 2014 and an estimate of the total crop that was seized compared to previous years in the Washington Post:

The number of marijuana plants seized and destroyed by the Drug Enforcement Administration fell slightly last year and remained sharply lower than the record numbers seen at the dawn of the Obama administration. According to the DEA's records, 4.3 million marijuana plants were destroyed last year, down from 4.4 million the year before and 10.4 million in 2009.

With 2.7 million plants destroyed, California alone contributed 63 percent of the total haul last year. But California's numbers have fallen sharply during the Obama administration, taking the national numbers down with them. "Coinciding largely with the downsizing of, and then ultimately the disbanding of, the state's nearly 30-year-old Campaign Against Marijuana Planting (CAMP) program, DEA-assisted annual marijuana seizures in California have fallen over 60 percent percent since 2010," said Paul Armentano, deputy director of NORML, in an email.

Those numbers give us what we need to estimate the number of marijuana plants grown in California in 2014. Since the number of plants seized by law enforcement has dropped only because of the Obama administration's changes to federal drug enforcement policies, all we need to know is by how much those enforcement efforts have declined. Since those seizures have fallen by 60% from 2009's levels, we just need to multiply 2009's 15% of plants seized figure and to reduce it by 60%. Doing that math:

15%*(100% - 60%) = 6%

We find that law enforcement authorities believe that they seized about 6% of the number of marijuana plants grown in California in 2014. To find the total number of marijuana plants being grown in the state that year, we just need to divide the number of plants seized in 2014 (2.7 million) and divide it by 6%. The result of that math puts the estimated number of marijuana plants currently been grown in California at 45 million.

Outdoor Cannibis Cultivation Area - Source: http://www.deamuseum.org/ccp/cannabis/production-distribution.html

Multiplying those 45 million plants by 6 gallons of water per day puts the total water consumed by pot farmers at 270 million gallons a day - the same amount of water that would be consumed by 1,569,767 northern Californians. With the average time to grow a mature plant being about 105 days (or 3.5 months) long, providing enough time for two full crops per year, that works out to be 56.7 billion gallons a year, which works out to be 174,006 acre feet of water consumed per year.

That puts marijuana cultivation at a little over double California's strawberry crop when it comes to annual water consumption.

California's Annual Agricultural Water Use (In Million Acre Feet) - Source: Slate http://www.slate.com/content/dam/slate/articles/business/moneybox/2015/04/150417_SLATE_Chart_CaliWater02.jpg.CROP.original-original.jpg

From the numbers presented in the chart above, it is pretty clear that marijuana cultivation is a smaller contributor to California's overall water shortage problems compared to other commercial crops, even though it would rank in the top 10 of California's thirstiest crops. However, the irrigation practices of marijuana growers in a number of the state's watersheds is causing considerable ecological damage, as the growers who unlawfully divert any portion of the water flowing in natural streams to irrigate their pot crops during California's dry seasons would appear to be little more than environmental rapists who are facing too few consequences under the Obama administration's politically selective law enforcement policies.

References

Bauer S, Olson J, Cockrill A, van Hattem M, Miller L, et al. (2015) Impacts of Surface Water Diversions for Marijuana Cultivation on Aquatic Habitat in Four Northwestern California Watersheds. PLoS ONE 10(3): e0120016. doi:10.1371/journal.pone.0120016.

Holthaus, Eric. Stop Vilifying Almonds. Slate. [Online Article]. 17 April 2015.

Ingraham, Christopher. Facing budget pressures, the DEA is pulling up less weed. Washington Post Wonkblog. [Online Article]. 24 March 2015.

U.S. Department of Justice. Central Valley California High Intensity Drug Trafficking Area. Marijuana Production in California. [PDF Document]. 4 June 2010.

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April 22, 2015
Stock Market Chaos

We've been working behind the scenes here at Political Calculations on how to visually describe the near-real time health of the private sector of the U.S. economy using what is perhaps its simplest and most powerful indicator: the number of U.S. companies acting to cut their dividends.

Here, we've previously identified that the U.S. economy may be considered to be comparatively healthy when no more than 10 companies take the step of cutting their cash dividend payments to their shareholding investors in a single month. If more than 10 companies take that action during a single month, those collective actions are sufficient to indicate that a significant portion of the private sector of the U.S. economy is experiencing recessionary conditions, where the nation's GDP growth rate may be described as sluggish.

More recently, we've determined whenever the number of companies acting to cut their dividends in a single month rises above the 20-25 per month mark, it is likely that a significant portion of the U.S. economy is in outright contraction, where it is possible that the U.S. economy as a whole may be also be experiencing negative growth. We list the threshold for economic contraction as a range because we don't have enough data as yet to refine where the threshold really falls.

Previously, we've had to wait until the end of a calendar month to get the data for the number of companies that cut their dividends during the month. But we now have data sources that report that kind of information on a daily basis:

We've found that these two sources capture a large percentage of all the dividend declarations each month, with a relatively low level of "false positive" errors in their reporting. In particular, these kinds of errors are something we've seen with the WSJ's Dividend Declarations report, which because it's an automated reporting system, will occasionally trip up when dealing with unusual situations, such as special one-time dividend payments following a merger (see the atypically good comments at Seeking Alpha here for more discussion of a recent example).

Meanwhile, because we're still working out where the threshold between economic expansion and contraction exists where the number of companies acting to cut their dividends is concerned, we want to be able to match that daily dividend reporting up against an entire quarter, which should give us a sense of how the GDP growth rate for a quarter will be reported.

So what we've done is to develop a chart that tracks the cumulative number of dividend cuts announced each day throughout an entire quarter, identifying the various thresholds that correspond to a relatively healthy expansion (green), distressed conditions (yellow) or a relatively unhealthy economic contraction (orange-to-red). Our results comparing the number of dividend cuts in the first quarter of 2015 (2015-Q1) and the second quarter to date (2015-Q2) are presented below:

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter, 2015-Q1 and 2015-Q2, Snapshot on 21 April 2015

At this point of the second quarter of 2015, it is clear that the U.S. economy is experiencing a higher level of distress than at the same point of time during the first quarter. We see that the number of dividend cuts announced through 21 April 2015 is already sufficient to classify the U.S. economy as experiencing contractionary conditions in this first month of 2015-Q2.

We also see that overall, the first three months of 2015 fell well into the contractionary zone, suggesting that the U.S. economy shrank in 2015-Q1. We'll find out if that was indeed the case by the end of June 2015, after the U.S. Bureau of Economic Analysis releases its third estimate of GDP for 2015-Q1. The BEA will release its first estimate of GDP for 2015-Q1 on Wednesday, 29 April 2015 and will revise it in each of the two following months (their release schedule is available here). And perhaps one more time when they perform their annual larger scale revisions spanning multiple quarters over multiple years in July.

We'll periodically update this chart while the number of dividend payments being cut remains at elevated levels.

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April 21, 2015

Since we were discussing Greece in our discussion of the debt capacity of nations in our previous post, we thought this might be an opportune time to update our chart showing the trajectory of the Greek government's spending per capita and its tax revenues per capita against the nation's GDP per capita now that we can update all this data through 2014 with the latest update to the International Monetary Fund's World Economic Outlook.

The results of that data visualization exercise are presented below.

Greece Government Revenues per Capita and Expenditures per Capita vs GDP per Capita, 2000-2014

The most significant observation is that Greece has continued on its contractionary trajectory. Greece's economy has shrunk, causing the Greek government's tax collections to shrink, which has forced it to shrink its spending. In fact, in 2014, Greece's economy has basically returned to where it was a decade earlier, but with a higher level of spending and tax collections as compared to 2004.

It's important to note that these things are all interconnected. Previous Greek government administrations implemented large tax hikes in both 2010 and 2012, which negatively impacted Greece's economy. This is why we see the relative amount of tax collections rise for given levels of GDP per capita as compared to the period from 2000 to 2010, and also why we see both GDP per capita and tax revenue per capita never the less fall. Meanwhile, the Greek government has also had to significantly cut its spending to more affordable levels in response to its falling tax revenues and economy.

But perhaps the really interesting thing is what has happened to the Greek government's tax collections as its new government led by Prime Minister Alexis Tsirpas swept into power. Beginning in December 2014, as that outcome became likely, Greeks with the ability to refrain from making tax payments began doing so.

While that action has clearly strained the Greek government's fiscal situation, that's not what's interesting about it. It's the amount by which the Greek government's tax collections have fallen that stands out, where the data we have to date suggests has fallen to levels that, if they hold over a full year, would be consistent with the level of taxes collected in 2004 when the Greek economy last recorded a similar level of GDP per capita.

We suspect that might be the phenomenon of Hauser's Law at work. Here, once a nation has effectively maximized its ability to extract revenue from its population and businesses with respect to the size of its economy, it is essentially unable to collect significantly more than that percentage share for much more than a limited period of time regardless of how high it may set its tax rates.

GDP Multipliers for Government Spending Cuts and Tax Hikes

For the Greek government, that maximum level would appear to be about 40% of its GDP, which is the maximum level that it has largely sustained since 1995. While Greece's tax hikes of recent years has allowed the government's tax revenues to temporarily exceed that level in the period from 2011 through 2014, it is unlikely that higher level of tax collections can be sustained, which is why Greece's tax collections have really collapsed. It's really more of a surprise that they were at such an elevated level for as long as they were.

That's an important thing for both Greece's current government and its creditors to consider as Greece nears default on its debt payments. Until Greece can break its negative feedback cycle of tax hikes and economic recession, it will never be able to reverse its course. In the short term, the optimum solution would be for Greece's creditors to write off a significant portion of the short term debt whose payments are coming due in the next 18 months, while in return, the Greek government would commit to freezing its already reduced spending at current levels for up to 24 months and implementing modest tax rate reductions to reverse its economic trajectory.

That makes sense if the Greek government is only capable of collecting 40% of the nation's GDP in taxes, and we can all see in the chart above that the 2010 and 2012 tax rate hikes have already failed to produce sustainable higher revenues. Only a growing Greek economy can produce the outcome desired by both the Greek government and its creditors.

An interesting option for Greece's creditors would be to exchange the short term debt they would be asked to write off for GDP-linked warrants. This would allow them to recover a portion of the money they would otherwise lose outright, which would be enabled by the positive growth of Greece's economy.

But the real question is whether anyone among Greece's government or its creditors are smart enough to figure this strategy out before they commit to policies that ensure a much bigger default and failure.

Data Sources

Knoema. IMF World Economic Outlook, April 2015. Greece. [Online Database]. Accessed 18 April 2015.

Eurostat. Population. [Online Database]. Accessed 18 April 2015.

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April 20, 2015
Wile E Coyote, Gravity Lessons - Source: http://archive.ahrq.gov/news/events/conference/2010/moyer/

When it comes to its national debt, how much ruin is there in a nation?

Our question about the amount of ruin in a nation actually traces back to the surrender of British troops under the command of John Burgoyne at the Battle of Saratoga in October 1777 during the American Revolution, when a contemporary of Adam Smith lamented that the nation was ruined, to which Smith replied "There is a great deal of ruin in a nation."

But can we quantify how much ruin that might be?

That question is immediately relevant today because of the reaction of global stock markets to the news that the heavily indebted nation of Greece was much closer to the edge of a fiscal precipice than had previously been understood, where the Greek government is now scraping the "bottom of the barrel" in hunting for "cash to stay afloat" as it seeks to make promised payments to its creditors.

Thanks to Louis Woodhill, we have the math to be able to quantify how much debt a nation can afford to accumulate before it might reach the point of its ruin, based upon its inflation-adjusted, real economic growth prospects, how much it costs for it to borrow in real terms, how much of its GDP its government is capable of collecting through taxes, fees and other revenue-generating schemes, and also how much of its revenue it is able to devote to making debt payments.

The final factor is the time horizon, which represents the number of years over which a government's creditors would be satisfied to receive interest payments at all, regardless of whether any the principal for the amount they loaned is ever paid down. Here, Woodhill suggests that 1,000 years is a reasonable proxy for representing an infinite time horizon for the term of the loan to a nation's government.

The default numbers however aren't those for Greece. We've instead used data for the United States as projected by the Congressional Budget Office in its 2014 Long Term Budget Outlook from July 2014 in its appendix covering its very long term assumptions for economic variables after 2024. If you're accessing this post on a site that republishes our RSS news feed, you can access the tool directly at our site.

National GDP and Debt Service Data
Input Data Values
Average Real GDP Growth Rate [%]
Average Real Interest Rate [%]
Tax Collections as Percentage Share of GDP [%]
Government Debt Service as Percentage Share of Tax Collections [%]
Time Horizon [Number of Years in the Future]

How Much Total Public Debt Can a Nation Afford to Have Outstanding?
Calculated Results Values
Nation's Total Public Debt Capacity as Percentage of Current Year GDP

With these projections, the debt capacity of the United States is 395.1% of its current day GDP. That compares to the nation's debt to GDP ratio of 102.4% at the end of 2014. The margin between these two percentages goes a long way toward explaining why U.S. Treasury yields, the interest rates the U.S. government must pay on the debt securities it has issued, are so low as compared to those that Greece must pay its creditors.

However, if you play with the tool, you can see how quickly that apparently healthy situation can change if economic growth slows too much or if the interest rates the U.S. government must pay its creditors rises. Trimming the real annual GDP growth rate for the U.S. to just 2.0% cuts the nation's debt capacity by more than half. If then the average real interest rate that the U.S. government must pay on all the money it borrows were increased by just half a percentage point, the U.S. government would find itself with the same fiscal outlook as Greece if that situation were sustained.

Speaking of which, Woodhill has provided the following historical data since 1995 to help explain why Greece's increasing national debt has pushed that nation to where it finds itself now at the edge of the precipice of fiscal ruin, and would even if it only were required to pay the same rate of interest on its debt as does the United States.

Historic Economic and Debt-Related Data (1995-2013)
Debt Capacity Factors Greece United States
Average Real GDP Growth Rate [%] 0.52 2.44
Average Real Interest Rate [%] 2.7 2.7
Tax Collections as Percentage Share of GDP [%] 40 17.5
Government Debt Service as Percentage Share of Tax Collections [%] 5 5
Time Horizon [Number of Years to Project Into Future] 1000 1000

Plug these numbers into our tool to see what we mean!

How Greece Got There, or Rather, Previously on Political Calculations

We've been periodically monitoring Greece's deteriorating fiscal situation for a number of years. Here's our previous analysis, presented in chronological order.



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April 17, 2015

Not long ago, in an e-mail exchange with an individual who accused us of being "likely in the the top 5-10%" (which we are, definitely, wink, wink, nudge, nudge, say no more!), and therefore of being "clearly unable to understand the lives or plight of the lower 50%", into which group they placed themselves (hey - they're the ones who self-identified!) They also accused us of being "someone from the conservative side of the political spectrum".

Today, we're going to clear up exactly where we fall on the political spectrum. Via John Whitehead, we've taken "The World's Smallest Political Quiz". Here is a screen shot of our first-time-ever results:

Ironman's World's Smallest Political Quiz Results

We played around with the quiz, tweaking some of our answers slightly to account for some of the inherent vagueness in how to interpret the various options for each of the questions asked, but only managed to move the dot marking our location in the political spectrum one square to the left or one square up from our natural positions on the issues presented, when we managed to move it at all.

(Meanwhile, John Whitehead, tie-dye wearing hippie - at least, as compared to us - reports that one can achieve a 100% libertarian status in the quiz by agreeing with each proposition.)

Still, we appreciate that many of our readers might think that we fall much further to the right in the political spectrum. We suspect that impression has a great deal to do with our approach to the positions we take on the topics we cover, where we have two overriding principles:

  1. Data wins. We don't take any political position unless we have real world data and objective analysis that clearly supports it.

  2. Competence matters in performance. We have little to no tolerance for displayed incompetence.


This combination of principles largely accounts for our negative assessment of President Obama's tenure in office and his preferred policies, which many of the President's most ardent and not uncoincidentally unthinking supporters perceive as meaning that we're very much on the right of the political spectrum. Instead, the truth is that we're right in the center, the only place where people can be truly fair and objective.

We suspect that is perhaps what really upsets such mindlessly hate-filled and jealous people so greatly, because that combination of principles gives us the super power of being able to accurately see the world as it is, which makes it possible for us to be right so much more often than such negatively-affected extremists can ever hope to be.

But then, maybe that's just our perspective from actually being in the center of the political spectrum. We just don't see the point of spending any part of life in such an inadequacy-driven rage, because the data says that's no way to live.

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April 16, 2015

Last week, we featured a number of what we'll call "statistical equilibrium charts" showing the negative break in trend for new jobless claims in the eight states where domestic U.S. oil production has surged in recent years. These charts are really no diferent from the kind of statistical control charts that have been routinely used in modern industrial production for decades to conduct statistical hypothesis tests, but for our application, we really shouldn't use the word "control" in the name of a chart for a process that isn't controlled.

Today, we're going to update that chart with the data we now have through the last full week of March 2015.

8 States - Residual Distribution for Seasonally-Adjusted Initial Unemployment Insurance Claims, 31 May 2014 - 28 March 2015

In this chart we observe that when oil prices began falling in early July 2014, the trend in new jobless claims for the high cost of oil production states of Colorado, North Dakota, Ohio, Oklahoma, Pennsylvania, Texas, West Virginia and Wyoming shifted downward but otherwise remained flat into mid-November 2014. And then, that flat trend broke when new jobless claims suddenly began to rise steadily around 15 November 2015.

In reality however, new jobless claims lag the events that prompt changes in their trends by two to three weeks, which is due to the typical weekly and biweekly payroll cycles for U.S. firms. Here, firms seek to minimize disruption to their operations by allowing their current pay cycle to play out before implementing changes in their employee retention plans. Since most Americans are paid either weekly or biweekly, that means new jobless claims show up in the data two to three weeks after the decisions to alter staffing levels have been made.

With that lagging effect in mind, that puts the decision to increase the pace of layoffs in these states at the last week of October 2014 and first week of November 2014. Since falling oil prices would be all but 100% confirmed to be the trigger for the change in trend, that timing corresponds with the spot prices of West Texas Intermediate crude oil dropping below $80 per barrel - about 25% below the peak value of $107.95 recorded on 20 June 2014.

But what about the other 42 states? Here's our chart showing the trend for new jobless claims over the exact same period of time:

42 States - Residual Distribution for Seasonally-Adjusted Initial Unemployment Insurance Claims, 31 May 2014 - 28 March 2015

What we find here is that in all the other United States, falling oil prices have prompted a steady trend of improvement in new jobless claims, indicating stronger economic growth was occurring in the rest of the nation. In these states, when oil prices first started falling, there was an immediate benefit for U.S. consumers, who could now buy both the same quantity of petroleium-related products as they did before oil prices began falling, and additional things too, such as dine-out meals. Falling oil prices prompted revenues to grow in other sectors of the U.S. economy in these states.

The same effect initially held true in the 8 high-cost-of-production "shale play" states. Here, when oil prices first started falling, instead of cutting their production and investment right away, domestic U.S. oil producers, continued business as usual. In effect, they did the equivalent of tapping their savings to continue operations as they waited to see if the price drop would be short term event or if it would deepen.

That's why 2014-Q3 saw such apparently robust economic growth, as these two factors combined to produce an outsized surge in GDP growth in that quarter. But not a sustainable one in the face of oil prices that continued to fall and stay down....

The shakeout then began after oil prices dropped below $80 per barrel in early November 2014, which has continued at least through the end of March 2015 (at this writing), where the negative impact is perhaps now beginning to spread out past just the energy industry to hammer business investment and credit markets.

That is why the GDP growth rate dropped so much below the previous quarter's figure in 2014-Q4 and now threatens to be outright negative in 2015-Q1. Because the U.S. has become such a major oil producing nation in recent years, falling oil prices is no longer the pure economic stimulus it had previously been for U.S. economic growth.

But you wouldn't perhaps realize that if you looked at the data on the national level. Nationally, the trend appears flat because these two trends have generally offset each other.

50 States - Residual Distribution for Seasonally-Adjusted Initial Unemployment Insurance Claims, 31 May 2014 - 28 March 2015

And that's why we call this scenario a hidden recession. Especially to a U.S. media that has pretty much completely missed it until just under two weeks ago, despite all the early warning signs screaming it.

As a final comment, we'll observe that new first time unemployment insurance claims data will be released later this morning. You're welcome to draw the appropriate dots on our charts to get the most up-to-date versions possible for yourselves....

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April 15, 2015

How many pages does it take to explain the U.S. tax code in 2015?

Wolters Kluwer, the publishers of the CCH Standard Federal Tax Reporter, a leading publication for tax professionals that summarizes the administrative guidance and judicial decisions issued under each section of the U.S. tax code, has the answer, which they visualized as part of their Whole Ball of Tax for 2014:

Tax Law Pile Up 2014

Through the 2014 tax year, the one for which people are either filing their income tax returns or are requesting extensions for on or by this 15 April 2015, it takes 74,608 pages to explain the U.S. tax code to the tax professionals who understand it the most, or rather, about 10 feet of shelf space for the printed version!

In 2008, the IRS itself reported that the physical version of the CCH Standard Federal Tax Reporter took up 9 feet of shelf space, when it was just 67,506 pages long.

Doing the math, that means that the U.S. tax code has been growing at an average rate of about 2 inches a year. About the same as an average human child from Age 5 up until they hit puberty!

Meanwhile, for those who have finished filling out their IRS Form 1040s and have gotten them in the mail, here's a tool where you can find your percentile ranking within the U.S. income spectrum!


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April 14, 2015

Near the end of the third quarter of 2012, the U.S. economy was heading toward a mild-to-moderate recession. In response, the Federal Reserve initiated a new round of its Quantitative Easing (QE) programs, QE 3.0, in which it would purchase $40 billion worth of Mortgage-Backed Securities (MBS) each month to try to prop up a fading U.S. housing market.

Three months later, the Federal Reserve recognized that a number of very large tax hikes on both working Americans and investors would take effect on 1 January 2013, an outcome that was ensured by the re-election of President Barack Obama, which would send the U.S. economy into deep recession unless it acted to expand its QE programs. In December 2012, the Fed announced that it would also begin purchasing $45 billion worth of U.S. Treasuries, which we identify as QE 4.0, which would offset the negative economic impact of President Obama's desired tax increases.

The Federal Reserve's combined QE programs were successful and are the only reason the U.S. economy avoided recession. In 2014, the Federal Reserve tapered off its purchases of both MBS and U.S. Treasuries, terminating both in December 2014.

Since we now have the finalized data for the U.S.' nominal Gross Domestic Product through the end of 2014, we can now update our counterfactual analysis of how the U.S. economy would have performed in its absence. The chart below reveals how nominal GDP evolved from 2012-Q1 through 2014-Q4:

Nominal U.S. GDP, With and Without QE 3.0/4.0, 2012Q1 through 2014Q4

Here are the basic findings of our analysis:

  1. Government spending cuts resulting from the federal budget sequester had a minimal impact on nominal GDP, contributing no more than about 10% to the fiscal drag acting on the U.S. economy.
  2. Around 90% of the fiscal drag imposed on the U.S. economy after 2012-Q3 came from tax hikes imposed in 2013.
  3. The U.S. economy experienced a temporary burst of organic economic growth in 2013-Q3 and 2013-Q4, which corresponds to a record harvest for nearly all major crops grown in the U.S. at high prices (in 2013-Q3), which was sustained in 2013-Q4 with their export to foreign markets, most notably China.
  4. In the absense of that economic activity, nominal GDP collapsed back to the level supported by the Federal Reserve's QE efforts in 2014-Q1.
  5. Some organic economic growth returned to the U.S. economy in 2014-Q2, as the U.S. economy finished its adaptation to the tax increases that had been imposed in 2013. That adaptation is what allowed the Fed to begin tapering its QE 3.0 and 4.0 programs.
  6. Strong organic growth returned to the U.S. economy in 2014-Q3 in response to falling oil prices, as domestic U.S. oil producers initially held off on cutting back their production.
  7. In 2014-Q4, the growth rate of nominal GDP fell off sharply from its pace in 2014-Q3 as domestic U.S. oil producers were forced to cut back their operations and investments to remain solvent, even though lower oil and fuel prices continued to enable growth in other sectors of the U.S. economy.

And that closes the books on QE 3.0 and 4.0!

About the GDP Multipliers Used in Our Counterfactual Analysis

The Multiplier Effect - Source: Lion Investing We featured a discussion of the fiscal multipliers for government spending and tax policies in our previous discussion of Spain's disastrous economic choices of 2012. At present, we're continuing to assume that the fiscal multiplier for the Fed's quantitative easing programs is approximately 1.0, in the absence of data that might contradict that figure. As yet, there really isn't any data to contradict this estimate, although with the latest GDP revision, the data suggests the multiplier rounds down to that figure.

Data Sources

Board of Governors of the Federal Reserve System. All Federal Reserve Banks - Total Assets, Eliminations from Consolidation. [Text Document]. Accessed 13 April 2015.

Cloyne, James. What Are the Effects of Tax Changes in the United Kingdom? New Evidence from a Narrative Evaluation. [PDF Document]. CESIFO Working Paper No. 3433. April 2011.

Owyang, Michael T., Ramey, Valerie A. and Zubairy, Sarah. Are Government Spending Multipliers Greater During Periods of Slack? Evidence from 20th Century Historical Data. [PDF Document]. Federal Reserve Bank of St. Louis. Economic Research Division. Working Paper 2013-004A. January 2013.

Romer, Christina D. and Romer, David H. The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks. [PDF Document]. March 2007.

U.S. Bureau of Economic Analysis. National Income and Product Accounts, Gross Domestic Product: Fourth Quarter and Annual 2014 (Third Estimate). [PDF Document]. 27 March 2014.

Previously on Political Calculations


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About Political Calculations

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

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