Political Calculations
Unexpectedly Intriguing!
April 28, 2016

Previously, we declared that the tipping point for cigarette taxes in Hawaii was on the verge of being reached, where further increases in the state's tobacco taxes would no longer be met with rising tax revenue, but would instead be met with falling tax collections.

Here is how we predicted that scenario would play out, based on our observations of how Hawaiian consumers were adapting their behavior in response to the state's tax hikes on tobacco products, beginning with our description of what we meant when we said the state had reached a tipping point for its cigarette taxes:

By that, we mean that each percentage increase in the inflation-adjusted price of cigarettes above their 2009 level will result in a greater percentage decline in the quantity of cigarettes sold.

That result suggests then that both Hawaii and the federal government have little to gain in terms of their tax collections from Hawaiian smokers by increasing cigarette taxes at a rate faster than inflation. Which means that if these governments are counting on having higher taxes on tobacco products for funding their spending programs, they can instead count on being out of luck.

Instead, elected officials and bureaucrats in Hawaii can count upon ever-greater tax avoidance behavior on the part of cigarette smokers in the island state.

It has been nearly nearly six years since we wrote that prediction. Since, then, Hawaii has increased its taxes on tobacco products twice more, first by 40 cents to $3.00 per pack in July 2010, a month after our observations, and again by 20 cents to $3.20 per pack in July 2011, where it has stood in the time since.

Drawing from Hawaii's monthly tax collection reports going back to 2000, our first chart shows the amount of taxes that Hawaii collected from its increasing excise taxes on tobacco products over the preceding 12 months for each month since January 2000 through the most recent report for February 2016.

Hawaii Trailing Twelve Month Tobacco Excise Tax Collections, January 2000 through February 2016

In the chart, we see that after Hawaii improved its tobacco tax collection enforcement practices, which were responsible for its increased tax collections that year, the state increased its tax collections each time it hiked its excise taxes on tobacco products all the way up until those taxes peaked at $3.20 per pack on 1 July 2011.

And then, tax collections not only stopped going up, they began to reverse as Hawaiians adapted to avoid the taxes.

That hurt, because Hawaii was counting on having millions more in revenue following its most recent cigarette tax hike in 2011.

At the beginning of FY 2012 Hawaii increased its cigarette excise tax from $3.00 to $3.20 per pack to achieve an $8 million revenue gain. However, it looks like the policy backfired as Hawaii cigarette revenues skidded from $135.6 million in FY 2011 to $131 million in FY 2012. These revenues continued to shrink in FY 2013 to $120.1 million.

In reality, Hawaii's trailing twelve month total of tobacco tax collections peaked in September 2011 at $144.1 million, after which it fell by $23.4 million to bottom at $120.6 million in February 2014, before rebounding somewhat to $129.9 million in June 2015. Since that time, Hawaii's tax collections have fallen slightly thanks to the state's 2015 law to raise the legal age for purchasing tobacco products to 21, which took effect in January 2016. So we find that instead of raking in the $152 million per year in tobacco excise taxes, the state of Hawaii is regularly coming up some $32 million short in revenue it was expecting to collect through its high tobacco taxes.

The next chart shows how the equivalent number of packs of cigarettes per taxes collected in the previous 12 months changed over the period from January 2000 through February 2016.

Hawaii Trailing Twelve Month Equivalent Number of Cigarette Packs Being Taxed, January 2000 through February 2016

Since the state last increased its tobacco excise taxes on 1 July 2011, the equivalent number of packs of cigarettes being taxed has fallen by 8.7 million, from an average of 47,565,158 million in the period from July 2010 through June 2011 to an average of 39,861,992 over the last 12 months.

Here's what we find fascinating. In every other one of the United States, people seeking to avoid paying what they believe to be excessive tobacco taxes generally turn to bootlegging, where tobacco products purchased in a low tobacco tax jurisdiction are transported across state lines and sold at an extreme discount to tobacco product consumers compared to what they would pay if they lawfully purchased tobacco products at retailers in their own state.

That's not much of a viable option for Hawaii, given the state's remote location in the Pacific Ocean, where transporting goods to the state from anywhere else in the world, lawfully or not, is costly.

So Hawaiians, and particularly young Hawaiians, have adapted to the state's high tobacco taxes by changing their behavior to consume nicotine through vaping rather than through tobacco products. So much so that the growth of vaping in Hawaii has been described as "out of control" as new consumers of these nicotine-containing goods are clearly favoring vaping-related products over tobacco-related ones.

Since the state imposed its high excise taxes on tobacco in part to cope with the expensive health problems that result from the consumption of traditional tobacco products over a prolonged period of time, whose health hazards are largely caused by other ingredients that are not shared by vaping-related products, the state should benefit from the behavioral adaptation through dramatically lower public health expenses realized through a lowered risk of susceptibility to the kind of ailments that are strongly associated with long-term tobacco product consumption.

In fact, that's the kind of social benefit that is supposed to be provided through the kind of sin taxes first proposed by economist Arthur Pigou, which goes something like this: tax a bad thing, and you'll get less of the bad thing because you make it more costly.

But what happens when a state becomes dependent on the revenue it gets from taxing the bad thing and then it succeeds in getting less of the bad thing being taxed? In fiscally troubled Hawaii, state government officials would seem to believe that the stream of revenue they obtained under the pretense that it was necessary to cover some of the state's portion of the costs for treating the health ailments of poor tobacco consumers is instead absolutely vital for supporting their other priorities. Priorities that include funding their own pension benefits at the top of the list.

That is why the state's legislators are currently looking to impose similarly high taxes on vaping-related products, despite lacking evidence that they are similarly bad. They are simply desperate for the money.

The alternative option of restraining the growth of their promised spending on state government employee pensions so that it can be made permanently sustainable is apparently not being seriously considered by the state's officials. That greed then explains why Hawaii's state officials are seeking to snatch failure from the jaws of their success in motivating the state's consumers of tobacco products to consume far fewer harmful tobacco products.


April 27, 2016

In the first quarter of 2016, the preliminary monthly data for the number and value of new home sales throughout the United States indicates that the growth of the U.S. new home market has stalled out with respect to the previous quarter.

This is true when we look at the trailing twelve month average of the market capitalization of all new homes sold in the U.S. in nominal U.S. dollars.

Trailing Twelve Month Average New Home Sales Market Capitalization, Current U.S. Dollars, December 1975 - March 2016
And it is also true when we adjust the nominal values to account for the effect of inflation to be in terms of constant March 2016 U.S. dollars, as measured by the Consumer Price Index for All Urban Consumers in All Cities.

Trailing Twelve Month Average New Home Sales Market Capitalization, Constant March 2016 U.S. Dollars, December 1975 - March 2016

What that means is that the new home market has not grown enough in the first quarter of 2016 to make much of a positive contribution to the nation's GDP, as compared to the level that was recorded at the end of the fourth quarter of 2015.

In terms of constant March 2016 U.S. dollars, the trailing twelve month average of the market capitalization for the U.S. new home market stood at $14.73 billion dollars at the end of December 2015. Three months later, the preliminary data stands at $14.74 billion dollars, suggesting that the entire U.S. new home market grew at annualized rate of just 0.28% during the first quarter of 2016.

By contrast, the inflation-adjusted annualized growth rate of the market capitalization of the U.S. new home market for the four preceding quarters is as follows:

  • From December 2014 to March 2015: +31.19%
  • From March 2015 to June 2015: +18.93%
  • From June 2015 to September 2015: +12.67%
  • From September 2015 to December 2015: +5.94%
  • From December 2015 to March 2015: +0.28%

That deceleration to near-zero growth is what we mean when we say that the growth of the U.S. housing industry has stalled out. If it slows down any further, the industry may be reasonably considered to be in recession, joining the U.S. oil industry in that state of distress. Based on the preliminary data, it is safe to say that it is teetering on the edge of recession.

The data for the months covering the first quarter of 2016 will be subject to revision during the next several months, so depending upon how those revisions play out, it is quite possible that the industry may already be in recession. We'll be able to make that determination after the third estimates for the quantity of new homes sold and their average value are reported near the end of June 2016.

Data Sources

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 25 April 2016.

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 26 April 2016.

U.S. Department of Labor Bureau of Labor Statistics. Consumer Price Index, All Urban Consumers - (CPI-U), U.S. City Average, All Items, 1982-84=100 [Online Application]. Accessed 25 April 2016.

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April 26, 2016

Through the end of Fiscal Year 2015, back on 30 September 2015, we estimate that the ratio of the United States' total public debt outstanding to the nation's median household income is approximately 263%. While down slightly from its peak of 267% in 2014, that figure is up considerably from the 170% of median household income that was recorded at the end of Fiscal Year 2008.

Ratio of U.S. National Debt per Household to Median Household Income, 1967-2015

The next chart reveals the evolution of the U.S. national debt per household from 1967 through 2015, presenting it in both nominal current year dollar terms and in terms of inflation-adjusted, constant 2015 U.S. dollars. Measured this way, through the end of the U.S. government's 2015 fiscal year, the amount of the national debt burden per U.S. household was $144,526.

Total U.S. Public Debt Outstanding per U.S. Household, 1967-2015

That figure for 2015 is up from a nominal national debt figure of $85,549 per household at the end of Fiscal Year 2008, or from $94,177 per household in terms of constant 2015 U.S. dollars.

Meanwhile, the cause of the dramatic escalation of the national debt burden per U.S. household over time may be identified in the following chart, which graphs the trajectory of the U.S. national debt per household against the U.S. median household income.

U.S. Total Federal Government Spending per Household vs Median Household Income, 1967-2015

The Zero Deficit Line approximates the level of federal government spending per U.S. household that Americans can really afford, which for 2015's estimated median household income of $54,900, is approximately $23,204 per household.

Data Sources

U.S. Census Bureau. Current Population Survey. Annual Social and Economic Supplement. Historical Income Tables. Table H-5. Race and Hispanic Origin of Householder -- Households by Median and Mean Income. [Excel Spreadsheet]. Issued 16 September 2015. Accessed 9 February 2016. [Projection for 2015: 125,587,000 based on author's calculations].

U.S. Treasury Department. The Debt to the Penny and Who Holds It. [Online Database]. Accessed 9 February 2016. [National Debt at End of Fiscal Year 2015: $18.151 trillion].

White House Office of Management and Budget. Historical Tables, Budget of the U.S. Government, Fiscal Year 2017. Table 1.1 - Summary of Receipts, Outlays, and Surpluses or Deficits (-): 1789-2020. [Excel Spreadsheet]. Issued 9 February 2016. Accessed 9 February 2016.

Note: We've projected the estimates of 2015's median household income and number of households from available data. As projections, these figures will be subject to revision when the U.S. Census Bureau officially reports these figures for 2015 in September 2016.

Previously on Political Calculations


April 25, 2016

Through Friday, 22 April 2016, the pace at which publicly-traded U.S. companies are cutting their dividends is much higher than what was recorded at the same point of time during the first quarter of 2016.

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter in 2016, Snapshot on 2016-04-22

But compared to a year ago, the rate at which U.S. firms are cutting dividends is about the same, if slightly ahead of schedule on account of the way that weekends and holidays are falling in the current year.

Cumulative Announced Dividend Cuts in U.S. by Day of Quarter, 2015-Q2 versus 2016-Q2, Snapshot on 2016-04-22

In 2015-Q2, although the quarter started off sluggishly, economic conditions improved as the quarter went on, which was reflected in a slowing rate for newly announced dividend cuts. Which ideally should be the case following the immediately preceding quarters that have been characterized by an elevated number of announced dividend cuts, particularly for firms that set the amounts of their cash dividend payments independently of their earnings. Simply put, if they assess their business' outlook for the future adequately, they shouldn't need to take the painful action of announcing further dividend cuts.

One company that has announced a dividend cut in 2016-Q2 didn't pass that test: Noble Corporation (NYSE: NE), which had previously announced a significant dividend cut in October 2015. The company's owners and management had previously reduced their quarterly dividend by 60% from $0.375 per share to $0.15 per share, which has now been decreased by 87.6% from that lower level to $0.02 per share as the company attempts to improve its fiscal situation.

So far in 2016-Q2, we've acquired a sample of 18 firms announcing dividend cuts, 13 of which are unsurprisingly in the oil and gas industries, 2 in finance, and 1 each in the mining, technology and real estate investment trust sectors of the stock market. Through the same number of days of trading in 2015-Q2, we saw 15 firms announce dividend cuts a year ago, with 12 in the oil industry and 3 in the mining industry. The economic distress in 2016-Q2 is therefore still largely concentrated in the oil sector, but is more broad-based than we observed a year ago.

Meanwhile, as expected, the S&P 500 did little more that largely move sideways during the third week of April 2016.

Alternative-Futures - S&P 500 - 2016Q2 - Standard Model - Snapshot on 2016-04-22

For reference, here are the week's most influential headlines, which when combined with the expectations that investors have for the future, largely explain why the S&P 500 went mostly nowhere during Week 3 of April 2016.

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April 22, 2016

Otto Dieffenbach has made quite a reputation for himself in developing flying drones that can be modeled after fictional characters and then turned loose in the sky. Or as he might describe it, "developing aerial images for brand enhancement".

Check out a sample of his work that was used to help market The Peanuts Movie, which is maybe his team's most impressive achievement to date:

No word if there's a Red Baron in development for some proper aerial dogfighting!

Other Stuff We Can't Believe Really Exists


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