Political Calculations
Unexpectedly Intriguing!
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.

Labels:

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.



Labels: ,

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 thing 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.

Labels: ,

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....

Labels: ,

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!


Labels: ,

About Political Calculations



blog advertising
is good for you

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:

ironman at politicalcalculations.com

Thanks in advance!

Recent Posts

Applications

This year, we'll be experimenting with a number of apps to bring more of a current events focus to Political Calculations - we're test driving the app(s) below!

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

This page is powered by Blogger. Isn't yours?

Visitors since December 6, 2004:

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button

JavaScript

The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.

Other Cool Resources

Blog Roll

Market Links
Charities We Support
Recommended Reading
Recommended Viewing
Recently Shopped

Seeking Alpha Certified

Archives
Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.