Political Calculations
Unexpectedly Intriguing!
June 29, 2012

Can anyone trust the U.S. entertainment industry to be honest with the business numbers they make public?

We've all heard of Hollywood's accounting frauds, where even those small movies with tiny production budgets that unexpectedly go on to become huge blockbusters making millions and millions of dollars at the box office somehow never generate a profit.

But what about the other things the moguls of the entertainment industry say about their business? Things like the number of jobs and the amount of money they say are lost every year in their industry because of the damage done by copyright piracy?

Rob Reid takes on the entertainment industry's "©opyright Math™" in the following TED presentation (HT: Barry Ritholtz):

Some quick notes:

  • The diameter of a penny is 0.750 inches (19.05 mm). It takes a lot of pennies to get to Mars!
  • If Hollywood and the music industry are hurting in their pocketbooks from copyright piracy, it isn't showing up in the amount of GDP they generate in the U.S. every year. See the Congressional Research Service report below....
  • Wyden Memo from CRS on Movie Industry
  • Nor does it seem to be affecting the government's count of the number of people who work in the motion picture and sound recording industry in the U.S. each year in any meaningful way.

All in all, it appears that the answer to the question we asked at the beginning of this article is simply "No."

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June 28, 2012

A team of Japanese physicists and mathematicians has developed a mathematical equation for predicting whether or not a movie will become a hit at the box office!

Detailed in their article, "The 'hit' phenomenon: a mathematical model of human dynamics interactions as a stochastic process" in the June 2012 edition of the New Journal of Physics, the new model replaces the traditional method of forecasting the likely revenue for a movie, which incorporates aspects such as advertising budget, strength of word-of-mouth, star power, quality, et cetera.

These aspects still have a role, but the innovation in the Japanese physicists approach is to incorporate data from social network systems, such as blogs, to quantify the less tangible aspects of the factors that influence whether or not a movie will become a blockbuster, at least at the Japanese box office.

One of the more remarkable findings of the research is that the number of positive blog posts about a movie can be used to project its revenue:

Daily blog postings for a movie are a very important signal to measure the movement of purchase intention among persons in the society. We measure the daily data of the number of posts for movies using the site Kizasi, which is a service for observing blog postings in Japan. We measure the number of blog posts for 25 movies in Japan in order to compare this information with the box office gross income for each movie in Japan....

Blog postings for each film can be distinguished into positive, negative and neutral opinions. A positive opinion means that the blogger wants to watch the film or judges the watched film in a positive way. In figure 10, we show that more than half of the blogs show a positive opinion for several movies. Moreover, we find that the ratio of positive, negative and neutral opinions is almost constant during the duration of the movie opening. Thus, the observed blog posting counts can be considered to be proportional to the counts of positive blog posts.

According to this observation, we propose to use the daily number of blog posts as the daily 'quasi-revenue.'. Quasi-revenue is very useful for analysis, because it can be defined even before the opening of the movie. We can observe the increase in anticipation of a movie.

And because they've worked out how to use the data from social networking systems to measure the anticipation for a movie, they can do very well in predicting whether a movie will actually become a hit, as well as what kind of longevity it might have if it does!

If only Hollywood had thought to do that before releasing John Carter. Or Battleship. Or Rock of Ages. Or any of these movies!

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June 27, 2012

Have you ever wanted to know where the average price of a gallon of gasoline in the United States was headed next?

If so, our latest tool was designed with you in mind! Building on James Hamilton's regression analysis of oil prices and U.S. gasoline prices from 2000 through the present, the main thing you need to know to predict where the price of gasoline in the U.S. is the price of a barrel of Brent crude oil, which if you're accessing our site directly, appears in the upper right corner of this post (via Oil-Price.Net)!

All you need to do is enter that current price in our tool, and we'll estimate how much the average price of a gallon of gasoline will be in the U.S. within the next several weeks.

Crude Oil Price Data
Input Data Values
Price per Barrel of Brent Crude Oil
Future Price of Gasoline in U.S.
Calculated Results Values
Average U.S. Price per Gallon

Hamilton explains the main factors behind the math:

The price of gasoline and price of Brent turn out to be cointegrated, meaning that any permanent change in the price of Brent eventually shows up as a permanent change in the price of gasoline. The coefficients of the above relation are very much what you'd expect. A barrel holds 42 gallons, and the estimated coefficient (0.025) is 1/40. The intercept (0.84) captures an average state and federal tax of 50 cents per gallon plus a bit over 30 cents in markups and other costs.

Hamilton: Predicted vs Actual Gasoline Price per Gallon in U.S., 2 January 2000 - 15 January 2012

With Brent on Friday at $91.50 and an average retail gasoline price about $3.47, we'd thus expect gasoline prices to come down another 35 cents a gallon or so from where they were on Friday. Historically those adjustments usually come pretty quickly. For example, last December U.S. gasoline prices temporarily fell about 25 cents/gallon below the long-run relation, but by March they were right back on track.

The default data for our tool is taken from Hamilton's Friday, 22 June 2012 data point described above. If you know the difference between the excise taxes per gallon of gasoline that apply in your state (visualized here) and the national average listed above, you can adjust our tool's results accordingly for your area.

One other factor to consider is the volatility in the price of Brent crude oil. Here, frequent fluctuations in the market price for a barrel of Brent crude oil means that it will be difficult to pin down a specific price for a gallon of gas in the U.S. at a specific point in the future.

But in general, our tool should put you very close to being in the right ballpark for where the price of gasoline is going in the U.S., and if Hamilton's chart is any indication, that's a pretty impressive achievement in itself.

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June 26, 2012

China's economy entered into recession in December 2011.

That's very old news to readers of Political Calculations, a little-read blog that somehow managed to scoop a number of financial institutions and even the New York Times in reporting on the poor health of China's economy back in February 2012.

At least now we know why so many of these organizations were so far behind the curve in understanding that a large-scale slowdown in China's economy has been underway for nearly seven months now - they appear to actually rely upon the Chinese government for their economic data. The New York Times might perhaps be finally recognizing that error in judgment:

HONG KONG — As the Chinese economy continues to sputter, prominent corporate executives in China and Western economists say there is evidence that local and provincial officials are falsifying economic statistics to disguise the true depth of the troubles.

The article goes on to detail evidence of the slowdown that has shown up in recent months, mostly from an accumulation of stocks of coal, copper and other commodities, including the nation's rates of electricity production and consumption, which had previously been taken as a good measure of China's overall economic health.

But the thing that stands out to us is that they've known for decades that China's economic statistics were less than trustworthy, although for completely predictable reasons, they have become more unreliable during the past year:

Questions about the quality and accuracy of Chinese economic data are longstanding, but the concerns now being raised are unusual. This year is the first time since 1989 that a sharp economic slowdown has coincided with the once-a-decade changeover in the country’s top leadership.

Officials at all levels of government are under pressure to report good economic results to Beijing as they wait for promotions, demotions and transfers to cascade down from Beijing. So narrower and seemingly more obscure measures of economic activity are being falsified, according to the executives and economists.

"The government officials don’t want to see the negative," so they tell power managers to report usage declines as zero change, said a chief executive in the power sector.

As a result, a number of global financial institutions, who rely on China's economic data in assessing the potential for their investments in the country, were effectively caught with their pants down earlier this month:

Many Chinese economic indicators already show a slowdown this spring, with fixed-asset investment growing at its weakest pace in May since 2001. The annual growth rate for industrial production has edged below 10 percent, while electricity generation was up only 3.2 percent in May from a year earlier and up only 1.5 percent in April.

The question is whether the actual slowdown is even worse. Skewed government data would help explain why prices for commodities like oil, coal and copper fell heavily this spring even though official Chinese statistics show a more modest deceleration in economic activity.

Manipulation of official statistics would also provide a clue why some wholesalers of consumer goods and construction materials say sales are now as dismal as in early 2009.

Keeping accurate statistics for internal use by policy makers while releasing less grim figures to the public and financial markets may also help explain why China’s central bank suddenly and unexpectedly cut interest rates earlier this month.

Whoops! When the economic tide shifts, the worst thing that anyone in the financial world can be is late. Millions, and perhaps billions, of dollars are lost whenever that happens.

So how did a little-read blog manage to report that China's economy had fallen into recession over five months ago, well ahead of all these other venerable institutions?

Easy. That little read blog didn't use China's statistics to assess that nation's economic health. Instead, we used data collected and reported by the U.S. Census on the monthly value of the international trade between the two nations, which we think would be pretty difficult for Chinese officials to fabricate. As it happens, we've found that the year-over-year growth rate of that trade makes it possible to accurately diagnose the relative economic health of each nation, making this kind of analysis an excellent alternative to China's official government statistics for assessing the actual state of that nation's economy.

Speaking of which, here is what it looks like today:

Annualized Growth Rates of US-China Trade, January 1985 through April 2012

The U.S. Census will update its foreign trade data through May 2012 on 11 July 2012.

In this chart, assessing China's relative economic health may be done by examining the data series shown with the blue data points, which correspond to the year-over-year growth rate of U.S. exports to China. Here, a national economy will demand more goods and services from outside its borders when it is is experiencing strong economic growth, which shows up as a positive growth rate - the more strongly the economy grows, the higher the positive value.

But when that growth rate turns negative or is near-zero, which we'll define as growing at just single digit rates, that communicates that the national economy in question is experiencing at least a significant economic slowdown.

What we observe in our chart above is that China's economy is trudging along at a very sluggish pace. And for all practical purposes, has been since October 2011.

Meanwhile, the data series shown with the red points, which correspond to the year-over-year growth rates of China's exports to the U.S., indicate that as of April 2012, the U.S. economy has been growing more strongly than the Chinese economy.

With the U.S. economy now passing through the equivalent of a microrecession however, we anticipate the May 2012 trade data will fall back toward the zero growth line on the chart.

But then, we didn't rely on the U.S. government's official economic data to work out that the U.S. economy would be struggling at this point of time. We used an alternative data source to first make that call over a year ago....

It's just a good practice to not rely too much on "official" data reports, which can frequently be really off track. That's also a big reason why our readers our rarely surprised by sudden and unexpected economic news.

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June 25, 2012

With the national average price of gasoline in the U.S. officially set to fall below $3.50 per gallon during this week, we have discontinued running our "Good Morning, White House Staffer" feature at the top of our site, as we promised last week - we've attached it for reference to the end of this post.

With that improvement in the average gasoline price, we anticipate that the reported pace of layoffs in the United States will change somewhat for the better within the next two to three weeks, as employers adjust their employee retention plans during their next pay cycle. Here, the employer reaction will be driving by the combination of their lower cost of doing business and an effective increase in the discretionary disposable income of Americans, who will increasingly have more money to spend on things other than gasoline.

We have previously observed that the $3.50 per gallon mark in the national average price of gasoline, as measured in terms of 2012 U.S. dollars, seems to be the magic threshold at which new jobless benefit claim filings reported by the U.S. Department of Labor are affected by gasoline prices.

In practical terms, we should see the trend in the number of new jobless claims shift to a less negative trajectory, as gasoline prices will have fallen to a level where they will stop having a direct impact upon the rate at which Americans file for first-time unemployment insurance benefits.

We say "less negative" instead of "positive" because other factors will dominate the overall trend. Namely, the failing economies in both Europe and Asia, where the falling relative demand for oil expected in the future is the principal reason why global oil and gasoline prices are now falling. We anticipate that the economic situation in these nations will increasingly and negatively affect the U.S. economy into 2013.

In the short term however, we anticipate that the U.S. economy will see a bit of improvement from the current quarter, which we've previously described as effectively being in a microrecession.

Enjoy it while you can!


Good Morning, White House Staffer!...

The Future Unemployment Rate
Enter: Today's Average USA Gasoline Price
U.S. Unemployment Rate In Two Years*
* If High Gas Prices Are Sustained.... See you tomorrow!
Average Gasoline Price Trends for Washington D.C. and USA

Washington D.C. Gas Prices Provided by GasBuddy.com

"Good Morning, White House Staffer" is a special feature we run whenever the average U.S. national retail price for gasoline rises above $3.50 per gallon!

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June 22, 2012

All noise events end. It's only ever a question of when.

For the U.S. stock market, the noise event that began on 6 June 2012 came to a sudden end on 21 June 2012, as investors suddenly realized that the window of time in which effective central bank and government-backed actions to bail out out ailing financial institutions and troubled national economies had closed, as signs of a global economic slowdown could no longer be ignored. Even CNBC's Jim Cramer noticed:

Interestingly enough, though, the market didn't fall Wednesday even though Fed Chairman Ben Bernanke said the economy is much slower-than-expected. The stock market seemed to ignore that commentary, Cramer noted. It reacted with the vengeance to every bit of bad news released Thrusday, though, and Cramer said he understands why.

"It's in a sour mood about this country where, despite Ben Bernanke's best efforts, Washington is doing nothing to create jobs, build new buildings, or even give us clarity on taxes for next year," Cramer said. "The mood is justified."

After all, the stock market had been going up on the belief that policymakers would take action to fix the economy. If they aren't doing anything, then Cramer thinks the market is in trouble.

But then, that's not a surprise, is it?

The final note on our chart above is significant, because as of 6 June 2012, the level of noise in the stock market has significantly spiked upward, largely on the combined speculation that the European Central Bank will act to bail out Spain's failing banking institutions, and that the Federal Reserve in the U.S. will attempt to shore up the U.S. economy, which has fallen into something of a microrecession (side note: as expected) in the second quarter of 2012.

And today, China's central bank has announced a surprise interest rate cut, which stands to further boost the central bank intervention-driven noise event that succeeded in pushing stock prices up so dramatically on 6 June 2012, as the markets recorded their best day to date in 2012.

We should note that these events are not taking place in a vacuum - the actions described are being coordinated among the world's major central banks and financial institutions, largely because they perceive that the global economy is nearing the event horizon of a global depression. They are considering these steps and taking action now largely out of that fear.

What we will see then in the market are stock prices being elevated far above where their expected future dividends per share would place them, as the market enters into a phase where noise, rather than fundamentals, drives it.

Unfortunately, all noise events end - it's only ever a question of when.

As we saw, when turned out to be 21 June 2012, as the latest short-lived noise event in the stock market came to its inevitable end. Without the noise from the world's central banks to distract from the market's underlying fundamentals, stock prices had only one place to go - back to where those fundamentals would have set them in the first place, as the future changed back to what it was, and really has been all along.

The only real question now is the reason why the central banks didn't act more effectively when the market was signaling that their actions would be welcome - is it because they've chosen not to act, or is it because they can't?

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June 21, 2012

Why does the following chart, which spans 50 years of data for the United States in the post World War 2 era, look the way it does?

Ratio of U.S. National Average Wage Index to GDP per Capita, 1951-2010

In this chart, we observe that the ratio of the U.S. National Average Wage Index starts off at a level 127.3% of the U.S.' GDP per Capita in 1951, slowly rises to peak at 137.8% of GDP per Capita ten years later in 1961, then falls steadily for the next three decades until 1994 when it flattened out at around 88.3% of the U.S.' GDP per Capita.

Since then, it has been as high as 91.3% of GDP per Capita in 2001, and as low as 86.2% of GDP per Capita in 2006. In 2010, the ratio of the U.S. National Average Wage Index to GDP per Capita is 88.6%.

What we can't explain is why these patterns exist. How can the average wage earned by individuals in the U.S. go from being as much as 37.8% higher than the U.S.' GDP per Capita over forty years ago to being steadily 11.4% below that quantity three decades later. What factors caused this ratio to first rise, then fall, then stabilize?

Our next two charts visualize the source data behind our ratio calculation. The first shows the National Average Wage Index, as reported by the U.S. Social Security Administration, which at this writing, only covers the years from 1951 through 2010 (they will add the data for 2011 sometime in October 2012):

U.S. National Average Wage Index, 1951-2010

The second shows our calculation of the U.S.' GDP per Capita, where we've extracted the data for the years of 1951 through 2010 from our tool, The U.S. Economy at Your Fingertips:

U.S. GDP per Capita, 1951-2010

For us, the best part is that we have absolutely no idea what the answer(s) are. We have some hypotheses based upon other patterns or trends that have taken place over the years, but need to put together the data to put them to the test.

In the meantime, you're more than welcome to beat us to the punch - we don't have a timetable for coming up with a coherent explanation that accounts for all that's going on in that first chart. Just drop us a line with a link to what you find and can back with hard data, and we'll be happy to point our readers in your direction!

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June 20, 2012

How big of a problem do plastic shopping bags pose to the environment?

Since the elected supervisors of Los Angeles' City Council recently voted to ban plastic shopping bags at the city's retailers, largely in response to "clean-water" advocates, who argue that the bags "pollute the ocean and the city's waterways", we thought we'd get a sense of just how big that problem really is.

Our chart below presents the answer, which refers to data that those who support bans on plastic shopping bags frequently cite in advancing their agenda:

Plastic Shopping Bags: The Scope of the Environmental Problem...

The values shown in the chart above were originally reported in 2004. There are a number of points to note about the results for the first-ever worldwide cleanup of the coastal areas of the United States and 100 other countries:

  1. The use of plastic shopping bags really began taking off worldwide in the 1980s.
  2. By 2003, "environmental groups" estimate that anywhere from 500 billion to 1 trillion plastic shopping bags were being used annually.
  3. Despite never having been done before, meaning that about as many bags as could be found would be found during the Ocean Conservancy's one-day long campaign to clean up the world's coastal areas in September 2003, just 354,000 bags were collected. Most, but not all, were made of plastic.

More fascinating to us however, we've discovered that so-called "green" advocates are incredibly fond of recycling the Ocean Conservancy's 354,000 bag cleanup figure from September 2003, citing it as being a valid figure that applies year, after year, after year. We're nearly at the decade anniversary and apparently, only 354,000 bags ever get cleaned up from the world's coastal areas each year!

Either that means the problem is not getting any worse despite a great deal of economic and population growth worldwide in the intervening years, which would have greatly increased the world's consumption of plastic shopping bags, or that these environmental activists just don't care enough about the environment to bother with picking up more than 354,000 mostly plastic bags from the world's coastal areas in any given year.

The alternative possibility is that a large number of environmental activists recycle the data because updating it would take actual effort on their part. Plus, there's the little matter of how foolish they might look if they ever fail to collect at least as many as their apparent annual quota of 354,000 bags!

If only these people cared more about the environment!...

Data Reference

Lowy, Joan. Plastic left holding the bag as environmental plague. Scripps Howard News Service. Seattle Post-Intelligencer. 20 July 2004.

Previously on Political Calculations

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June 19, 2012

Good Morning, White House Staffer Snapshot, 16 June 2012 Good morning, White House Staffer!

We appreciate your daily visits, as you continue your ongoing efforts to closely monitor the U.S. gasoline price situation. We have, after all, tailored our top-of-the-page "Good Morning, White House Staffer" feature specifically to assist you in your daily task.

But we're afraid that we'll soon be taking down our feature, as the average retail price of a gallon of unleaded gasoline in the United States has fallen below $3.55 per gallon. Given the potential for volatility in that average price, we'll keep it going until it firmly drops below $3.50 per gallon, as this will help ensure that we don't discontinue our feature too early, should there be any unexpected supply disruptions in the next several weeks that might boost it back over the $3.55 per gallon mark.

That's good news for you, in the short term sense, as we expect that U.S. employers will react positively to falling fuel and transportation prices, which if our previous observations hold, will mean that the pace of weekly layoffs in the United States will change for the better within 2-3 weeks of the national average gasoline price dropping below $3.50 per gallon, which we would measure by the number of seasonally-adjusted new unemployment insurance benefit claims filed each week.

As we remarked on 31 May 2012:

If we're lucky in the short term, we'll see if the rate of layoffs that prompt new unemployment insurance claim filings shifts to a new, more positive trajectory if gasoline prices fall back below the $3.50 per gallon mark in the weeks ahead.

But then, we'll be unlucky in the longer term because that will mean that the world demand for oil will have dropped enough to make that possible, as much of the world appears headed for recession. That of course will have consequences for the U.S. economy.

In the meantime though, we continue to expect the U.S. economy will rebound a bit in the third and fourth quarters of 2012, after passing through the equivalent of a microrecession during the current second quarter. The story for 2013 will be very different, we're afraid....

That said, our previous advice to you to keep your résumé up to date still holds. We would also suggest that this summer will perhaps present the best opportunity you will have to sell your metropolitan Washington D.C. home before that real estate market changes.

And now you can't say that you weren't warned when it mattered most - when you still had time to do something about your situation!

Previously on Political Calculations

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June 18, 2012

Back in August 2010, we became concerned that the professional U.S. news media really were being caught with their pants down far too often when reporting economic news, which they were perpetually describing as "unexpected".

So, we decided to help them out. We shared how we've become able to project the future for the number of seasonally-adjusted new jobless claims each week with such a high degree of accuracy. After all, using those methods, we've been able to transform this particular economic statistic into the most easy to forecast of all economic data.

So, imagine our surprise when we decided to pay attention to their reporting of the most recent new unemployment insurance claims from Thursday, 14 June 2012 when, well, let's let Bloomberg tell the story....

Claims for jobless benefits unexpectedly climbed by 6,000 to 386,000 in the week ended June 9 from a revised 380,000 the prior week that was more than first estimated, Labor Department figures showed today in Washington. Economists projected claims would fall to 375,000, according to the median estimate in a Bloomberg News survey.

Really? Unexpected? Again?! Who exactly are these economists that keep getting surveyed who it seems really couldn't forecast their way out of a wet paper bag?

Let's try something - let's take our statistics-based analytical method and find out just how far back in time we could have put ourselves in the right ballpark for predicting last week's numbers!

For our methods, we need at least six weeks worth of data to establish whether a trend exists, and ideally ten weeks to get a decent statistical picture of it (obviously, the more data the better - these values represent the minimum values we need to put the picture together). Since we confirmed in an update on 3 May 2012 that a new trend in the number of seasonally-adjusted new jobless claims had indeed taken effect, pegging its beginning to the week ending 18 February 2012.

Ten weeks later puts us at the data report for the week ending 5 May 2012. Here is the chart with the projections that we could have generated at that time, using the BLS' revised data through 28 April 2012:

Residual Distribution for Seasonally-Adjusted Initial Unemployment Insurance Claims, 26 March 2011 - 28 April 2012

Now, let's fill in all the data that has been recorded since....

Residual Distribution for Seasonally-Adjusted Initial Unemployment Insurance Claims, 26 March 2011 - 28 April 2012, with available data through 9 June 2012

Based upon just ten weeks worth of data, we could easily have projected the range where each subsequent data point would be some 95% of the time for each week up to at least a month and a half later.

Of course, since we have more data now, why not use it? Here's what the chart looks like today based on the data reported through the week ending 9 June 2012:

Residual Distribution for Seasonally-Adjusted Initial Unemployment Insurance Claims, 26 March 2011 - 9 June 2012

And now you know what "expected" really looks like. In fact, we'll give you 68.2% odds of the data for the week ending 16 June 2012 coming in between 375,378 and 393,652, and 95% odds that it will fall between 366,240 and 402,789. At least while the current trend holds (it may not for much longer, which we'll touch on tomorrow!)

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June 15, 2012

Did you just eat something you really shouldn't have? Especially if you're trying to lose some weight?

Well, there's a pretty straightforward way to avoid taking the calorie hit to your waistline - you can boost your activity level to burn off the extra food you just took in. But how much do you need to boost it? And how?

Sure, you can go for a run, swim, bike, do aerobics, or some other fitness oriented activity, but what if you can't? Not because you literally can't, but rather, because you're somewhere where you can't dress for those activities - like work, school or just out and about during the middle of your day with hours to go before you might get home.

So you're limited. You need an activity that won't get you all sweaty, but that will help you burn more calories today than you would have had to if you hadn't decided to treat yourself to that treat. Something that you won't look too out of place doing wearing what you're wearing.

If you haven't figured it out long before now, we're talking about walking. And now, since that's really the only healthy and not out-of-place option for your situation, we need to talk about how much extra walking you're going to have to do to wash out that treat you chose to eat.


How Many Calories Were In That Treat?
Input Data Values
Calories


How Long Will It Take You To Walk Those Calories Off?
Calculated Results Values
Approximate Time

Fortunately for you, we have an app for that! Just enter the amount of extra calories you consumed, and we'll give you a good ballpark estimate of how much extra walking you're going to have to do to keep them from being a permanent addition to your waistline!

Our tool is based on back of the envelope math done by fitness expert Craig Harper, who translated the amount of time and calories consumed by various treats into the amount of time it would take a 160 pound person to walk them off at a speed of three miles per hour.

As it happens, 160 pounds is the average self-reported weight for a woman in the United States, at least as reported by Gallup, which makes this a pretty useful weight to use as a rule-of-thumb benchmark. If you weigh more than that amount, it will take you a little less time to walk off the extra calories you ate, and it will take longer if you weigh less, but the total amount of time you need to spend walking should be be pretty close.

But really, perhaps the best way to use this tool is as a guide for deciding whether you should eat those extra calories in the first place!

Image Source: National Institute of Health

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June 14, 2012

If your tax rate goes up by a lot, will the amount of taxes that you pay go up by a lot as well?

You might think so at first, but as we'll show you in this post, the answer is that your taxes will likely go up, but probably by not anywhere near as much as you might have thought, and certainly not by anywhere near as much as the politicians imposing the tax hike might like.

City Seal of Derby, Connecticut

To understand why, let's use a real world example. Let's say we're talking about property taxes, such as those in Derby, Connecticut, where the mill rate for the town's property taxes has just been jacked up from 27.9 cents to 36.6 cents per $1,000 of its assessed property value.

That increase in tax rate should, if everything else were kept equal, result in your property tax bill going up by over 31%! That result assumes that if you had a property in Derby whose assessed value was $1,000,000 last year, you would have paid $27,900 on it. With that same $1,000,000 valuation this year, with the higher property tax rate, you would pay $36,600, some $8,700 (or just over 31%) more than you paid last year.

[Yes, we know our lone reader in Derby, Connecticut is snickering at the idea that there are any million dollar homes in town, but please bear with us!]

Clearly, that would be bad news for the property owners in the Top 1%, wouldn't it? The town of Derby, Connecticut could really be sticking it to its landed aristocracy with that kind of massive property tax hike while being able to fully support the full amount of spending its civic leaders want to do, right?

But there's one major problem with achieving that result in reality - the assumption that everything else is being kept equal is false! And what actually happened with Derby, Connecticut's property taxes helps show why huge increases in tax rates don't necessarily translate into huge increases in the amount of taxes actually collected for the government involved!

What has actually happened is that at the same time Derby boosted its property tax rate, it also altered its assessed values for the properties to which it would be imposed. Here's how that affected one resident:

A house on Hawthorne Avenue near E Street total 2010 assessed value was $183,120.

$183,120 × 27.9 mills / 1,000 = $5,109 (the old tax bill)

The revaluation Gods now say that same house is now assessed at $140,280.

$140,120 × 36.6 mills /1,000 = $5,134 (the new tax bill)

$5,134 – $5,109 = A $25 increase in taxes under the spending plan proposed by the Derby tax board.

NOTE: This is only one example of one property in Derby. The revaluation Gods do not look at all assessments the same.

Here, we see the change results in an increase, but one that's just $25 higher, or just under 0.5% more than the resident's previous property tax bill. That's way less than the 31% increase suggested just by the increase in the town's property tax rate!

These kinds of dynamics are a big reason why the phenomenon of Hauser's law works with respect to the nation's federal income tax, regardless of however income tax rates have been set since the end of World War 2. To get high tax rates passed into law, politicians have to provide increased tax deductions, tax credits and provide other special channels by which paying taxes may be avoided to keep the actual amount of taxes paid from increasing to levels where people who can affect their ability to remain in power would really become upset at them.

As a result, the combination of concessions and tax avoidance strategies that develop in reaction to tax rate increases prevent them from ever generating the level of tax collections that governments hope will support their desired level of spending.

Worse, if tax rates are set too high, the amount of effort that people will go to to create special exemptions and deductions into the tax code or pursuing other tax avoidance strategies can generate lots of non-productive economic activity. If you need an example here, just think of all the things that the extremely wealthy have gotten the government to do to support hugely wasteful "green energy" projects through their funding and support of seemingly environmentally-oriented interest groups, which turn out to really be political front organizations advocating for the special interests of those in power.

If only they would learn once and for all to accept and live within their limits.

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June 13, 2012

Which is the most earth-friendly: paper bags, plastic bags or cloth bags?

The answer to the question depends upon whether or not you really believe in science, because as they say in certain environmental activist circles, the "science is settled"! Here's the summary description of the bag found to be the best for the environment, which is defined as being the bag with the least negative impact upon the environment, as found in a very recent and thorough study on the topic:

The conventional HDPE bag had the lowest environmental impacts of the lightweight bags in eight of the nine impact categories. The bag performed well because it was the lightest bag considered. The lifecycle impact of the bag was dictated by raw material extraction and bag production, with the use of Chinese grid electricity significantly affecting the acidification and ecotoxicity of the bag.

Yes, the convential High-Density Polyethylene (HDPE) (aka "plastic") bag had the least impact upon the environment of all the bags considered in the study, which considered a number of bags made from different plastics, as well as both paper and cotton-based materials!

But that's only considering using each type of bag just once. For many eco-oriented people, the whole point is to reuse other kinds of bags to counteract the perceived environmental hazards posed by the conventional plastic bag.

Fortunately, the study revealed how many times the alternatives to the conventional plastic bag would have to be reused to overcome their own negative impacts to the environment:

Table 8.1 The amount of primary use required to take reusable bags below the global warming potential of HDPE bags with and without secondary reuse.

Here, we find that if a consumer only uses a conventional HDPE plastic bag just once (say to carry their groceries home before throwing the bag away), a paper bag would have to be reused 3 times, a heavy-duty plastic bag made from Low-Density Polyethylene (LDPE) would have to be used 4 times, a plastic "bag-for-life" made of non-woven Polypropylene (PP) would have to be used 11 times, and a cotton (or canvas) bag would need to be re-used 131 times!

The study reports that a canvas bag is expected to last for 52 trips (Table A.3.1). With that as a reference, a cotton/cloth canvas bag user does over twice the damage to the environment that a plastic bag using grocery shopper who throws away every plastic bag they get immediately after each shopping trip, as they will likely have to replace their more environmentally-destructive bag at least once long before they reach 131 uses!

However, if a consumer reuses 100% of their conventional HDPE plastic bags (say as trash bags), the number of uses needed for the other bags to have a lesser environmental impact than the conventional HDPE plastic bag rises by a factor of anywhere from 2.2 to 2.5, which we see in the table above. For example, that re-usable canvas bag would need to be used at least 327 times to be less damaging to the environment!

Which makes the eco-friendly canvas bag user over six times as destructive to the environment as the conventional consumer who simply re-uses all the plastic bags they get from the grocery store just once.

If only those anti-plastic bag advocates cared more about the environment....


Reference

Edwards, Chris and Fry, Jonna Meyhoff. Life Cycle Assessment of Supermarket Carrier Bags. Report SC030148. Environment Agency.

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June 12, 2012

How has the small nation of Estonia been able to turn its fiscal and economic situation around so effectively?

After all, Estonia had been pretty badly beaten up in the world's economic turmoil in the years since 2007, seeing its GDP per capita fall from a high of $17,810.60 (in terms of nominal, current year U.S. dollars) to $14,137.60 by 2010, an overall percentage decline of 20.6%.

But in 2011, Estonia's GDP per capita grew by 17.3% from that low point to $16,583.40.

At the same time, the government saw its fiscal situation reverse from running a deficit of 3% of the nation's GDP in 2008 to a surplus of 1% of the nation's GDP in 2011.

Estonia Government Spending and Tax Revenue per Capita vs GDP per Capita, 2000-2011, Part 2

So what exactly did Estonia do right that neither Greece, nor Spain, nor the United States has done during that same period of time?

The answer is that the Estonians did austerity right. Instead of jacking up government spending, in the hopes of stimulating their economy or in the name of bailing out failing institutions or politically-connected businesses, the Estonian government kept their spending under control. They acted to keep their spending in line with their actual tax collections, which in turn, has kept the nation on a sound financial footing as they succeeded in avoiding huge increases in their national debt.

As we've seen previously, huge increases in a country's national debt can act as a huge brake on a nation's economy. Avoiding large increases in the country's national debt has therefore helped boost Estonia's economic recovery.

At the same time, the Estonian government increased tax rates, but unlike other nations, and from the perspective of fiscal policy (usually, it's not a great idea to hike taxes during a recession), they raised the right ones and kept the size of the tax increases relatively small.

Here, instead of foolishly focusing on trying to extract an ever larger percentage of the incomes earned by the most successful Estonians, the people whose economic activities can disproportionately affect a significant share of the nation's economy, the Estonian government implemented a very broad-based tax increase through its Value-Added Tax, which spread the pain of the tax increase across the nation's entire population, as it increased its VAT rate from 18 to 20%.

At the same time, Estonia acted to ensure that its flat income tax rate would remain stable and not rise. By doing so, Estonia preserved its incentives for *all* Estonians to do the things that can generate more income. Collectively, the things that people can do to generate more income are the things that can significantly grow a nation's economy.

With that certainty in policy, the nation's economic fortunes turned toward the positive in 2010 and boomed in 2011. We project that in 2012, the Estonian economy will surpass its 2008 performance, marking a full recovery - despite the ongoing overall economic turmoil currently affecting Europe.

In fact, the economy has turned around so strongly that the Estonian government will cut its flat income tax rate from 21% to 20% in 2015 - relieving a good portion of the additional tax burden it placed on Estonians during its deepest recession years.

From a fiscal stability perspective for the Estonian government, that makes sense. One of the key lessons learned among the individual states in the U.S. during the past several years is that sales taxes (which a VAT resembles) are more stable than either personal income taxes and especially corporate income taxes. Estonia's public finances will be on an even more sound footing going forward as a result.

Quite possibly, it will be yet another lesson that the nations of the world can learn from Estonia.

Previously on Political Calculations

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June 11, 2012

We have to admit that we're pretty amused by the latest economic dispute to break out in the world of social media involving a Nobel-prize winning economist, Paul Krugman, and the President of Estonia, Toomas Hendrik Ilves. The Los Angeles Times reports:

Twitter went atwitter Wednesday over a somewhat surprising spat: The President of Estonia apparently slamming New York Times columnist Paul Krugman as "smug, overbearing & patronizing."

Estonia enjoys a budget surplus after enduring harsh austerity measures, which have been deeply unpopular across the Eurozone. Wednesday, Krugman argued in a short blog that Estonia, "the poster child for austerity defenders," had only achieved an incomplete recovery.

"Better than no recovery at all, obviously -- but this is what passes for economic triumph?" he concluded.

In response, the Twitter account used by Estonian President Toomas Hendrik Ilves snapped that Krugman was indulging in "smug & snide gloating" at Estonians' expense. One tweet dropped a profane word to sarcastically say Eastern Europeans could be insulted because "their English is bad, won't respond & actually do what they've agreed to & reelect govts that are responsible."

So what of Estonia's austerity? Has it really put the nation on a fiscally-sustainable path? Are Estonians economically benefitting from the steps their government has taken in recent years?

To answer that question, we'll employ the same kind of analysis that we've already applied to the economic situations of Greece, Spain and the United States. Our chart below taps the data on Estonia's governments spending and tax collections per capita from 2000 through 2011 from Eurostat, presenting them against the country's GDP per capita, as recorded in the IMF's April 2012 World Economic Outlook (as presented by the wonderful data site Knoema) for each of those years:

Estonia Government Spending and Tax Revenue per Capita vs GDP per Capita, 2000-2011, Part 1

Note: All values in the chart above and discussed below are given in terms of nominal (non-inflation-adjusted) U.S. dollars, rather than inflation-adjusted or Purchasing Power Parity-adjusted terms, because these nominal values corresponds to the amounts of GDP, tax collections or government spending per capita that people, including government officials, actually see in real time.

Looking at the chart, we find that as a percentage of GDP, Estonia's total tax collections were remarkably stable for the years from 2000 through 2008, as the government successfully collected approximately 36.1% of the nation's GDP, less some $66.63 per capita in each year. During that time, we also observe that Estonia regularly maintained either a nearly balanced budget or a budgetary surplus.

In 2008 however, the nation fell into recession, with government spending rising sharply and swinging the government's budget from surplus to deficit, even as its tax collections remained on the same trajectory it had been with respect to the nation's GDP per capita since at least the year 2000, the arbitrary starting point for our analysis.

Unlike the three other governments that we've previously considered however, Estonia's government acted to keep itself on a fiscally-viable path. In 2009, as the nation fell deeper into recession, the government cut its spending by 7.8% from the previous year.

Meanwhile, Estonia kept its income tax rates stable, but hiked its Value-Added Tax rate from 18 to 20% in July 2009.

As a result of the nation's higher Value-Added Tax rate, Estonia's tax collections per capita in 2009 were over 19% higher than would have been collected given the same level of GDP per capita for the tax rates that applied for the years from 2000 through 2008. Estonia's total tax collections fell from the previous year by just 4.8%, which is especially remarkable considering that the nation's GDP per capita fell by almost 20% during that year.

Such a large tax increase had negative effects however as the nation's economy continued to decline, with total tax collections falling 6.7% in 2010, falling much faster than the 1.4% rate at which the nation's GDP per capita declined, as the higher taxes consumed a greater share of the falling incomes of Estonians. That decrease in tax collections occurred even though the government increased its excise taxes on alcohol and tobacco products in 2010.

More significantly however, the Estonian government reduced its spending by 11.5% in that year, which put the nation much closer to being on a fiscally sound footing as the nation's downward economic trajectory began to reverse.

With the nation's economy now recovering, both the government's spending and tax collections have been rising, with spending in 2011 up by 10.4% and tax collections up by 12.4% as the Estonian government returned to running an annual budget surplus. Meanwhile, the Estonian economy grew by an astounding 17.3%.

So how was Estonia able to turn its fiscal and economic situation around so effectively?

We'll take on that question in our next post in this series!

Previously on Political Calculations

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June 8, 2012

Inventors spend their lives seeking to build the proverbial better mousetrap, but we're pretty sure that the best mousetrap ever was invented by James A. Williams of Fredonia, Texas and patented on 26 December 1882:

U.S. Patent #269766

Yes, it's real and it's glorious! Quoting from the abstract for U.S. Patent #269,766 (via Google's Patent Search):

My invention relates to an improvement in animal traps; and it consists in the combination of a suitable frame upon which a revolver or pistol is secured, a treadle which is secured to the front end of this frame, and a suitable spring and levers, by which the firearm is discharged when the animal steps upon the treadle, as will be more fully described hereinafter.

The object of my invention is to provide a means by which animals which burrow in the ground can be destroyed, and which trap will give an alarm each time that it goes off, so that it can be reset.

The accompanying drawing represents the side elevation of my invention complete.

But wait, that's not all! Inventor Williams identifies another use for his invention:

This invention may also be used in connection with a door or window, so as to kill any person or thing opening the door or window to which it is attached.

James A. Williams was clearly a man with whom no person or thing should ever trifle, be they a burrowing animal, or something else. We wonder what exactly the "thing" was that his invention was meant to kill if it ever opened his door or window in Fredonia, Texas....

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June 7, 2012

Things have changed for the future of U.S. stock prices! First, the data for the first several trading days in June indicates that investors have shifted their forward-looking focus from the fourth quarter of 2012 to the first quarter of 2013:

Accelerations of the S&P 500's Average Monthly Index Value and Trailing Year Dividends per Share, with Futures as of 6 June 2012

Next, let's look at how that shift in focus translates to the expected level of trailing year dividends per share through the first quarter of 2013:

Expected Future Trailing Year Dividends per Share for the S&P 500, as of 6 July 2012

The final note on our chart above is significant, because as of 6 June 2012, the level of noise in the stock market has significantly spiked upward, largely on the combined speculation that the European Central Bank will act to bail out Spain's failing banking institutions, and that the Federal Reserve in the U.S. will attempt to shore up the U.S. economy, which has fallen into something of a microrecession (side note: as expected) in the second quarter of 2012.

And today, China's central bank has announced a surprise interest rate cut, which stands to further boost the central bank intervention-driven noise event that succeeded in pushing stock prices up so dramatically on 6 June 2012, as the markets recorded their best day to date in 2012.

We should note that these events are not taking place in a vacuum - the actions described are being coordinated among the world's major central banks and financial institutions, largely because they perceive that the global economy is nearing the event horizon of a global depression. They are considering these steps and taking action now largely out of that fear.

What we will see then in the market are stock prices being elevated far above where their expected future dividends per share would place them, as the market enters into a phase where noise, rather than fundamentals, drives it.

Unfortunately, all noise events end - it's only ever a question of when.

There is good news though, at least in the U.S.. The latest dividend futures, which now includes data through the second quarter of 2013, indicates that after rebounding in the third and fourth quarters of 2012, then nearing recession again in the first quarter of 2013, the U.S. economy looks like it will perform more robustly in the spring of 2013 than it has in any of the past few years, which we can see in the future expected level of quarter dividends per share for the S&P 500:

S&P 500 Quarterly Dividends per Share, 2009Q1 through 2012Q1, with Futures through 2013Q2

While these expectations could considerably change with the impact of a global recession upon the fortunes of the balance sheets of the companies that make up the S&P 500, much as we saw these expectations change during the period from mid-2008 through early March 2009 in the U.S. as the nation fell deep into recession, at present, they suggest that not much action is needed on the part of the Fed to prop up the U.S. economy.

We may find out as early as today just how panicky Fed Chairman Ben Bernanke is.


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June 6, 2012

Now that we've looked at the last decade's worth of data for both Greece and Spain, two nations whose deteriorating debt situations could well blow apart the European Union, we thought we'd turn our attention across the Atlantic Ocean and look at what has happened to both government spending and tax collections per capita with respect to GDP per capita in the United States in the years from 2000 through 2011. Our results are presented in the chart below:

United States Government Spending and Tax Revenue per Capita vs GDP per Capita, 2000-2011

There's a lot going on in the chart, so let's start at the beginning. In the year 2000, the U.S. government ran a budget surplus, as the nation benefitted from outsize tax collections resulting from the peaking of the Dot Com stock market bubble, which reached its maximum inflation in August of that year.

That situation reversed after the bubble burst in the following month and entered its deflation phase as the U.S. economy entered into recession. The deflation phase of the Dot Com Bubble would last until June 2003.

Without the stock market bubble to sustain them, the U.S. government's tax collections fell during this period of time, even as the U.S. government's spending increased at a steady rate. The result of this situation was to swing the government from running annual budget surpluses to running annual budget deficits instead, as the federal government's revenues from its taxes on investor capital gains plummeted.

With the end of the Dot Com Bubble's deflation phase in 2003, the U.S. economy began to grow again and the U.S. government's tax collections began to rise. This increase in tax collections occurred despite the implementation of large tax cuts in 2003.

Under those tax cuts, the U.S. government effectively taxes its economy at a tax rate of 28.1%, which we've shown with the tax revenue trendline shown in the chart for the years of 2003 through 2008. In addition, the federal government would appear to provide the nation's economy the equivalent of a $4,661 per capita tax credit.

In 2008, the U.S. economy entered into a deep recession that bottomed in 2009, which we can observe in the chart with the decline in the nation's GDP per Capita coinciding with that year. During the time since, which corresponds with President Obama's entire presidency, we see that the federal government's spending has skyrocketed while its tax collections have fallen far below where they were for the same level of GDP per Capita in the years from 2003 through 2008, opening up a wide gap between the two.

That's significant because both observed changes are directly due to policies implemented by President Obama during his term in office. In addition to significantly boosting the federal government's spending, the President has also implemented tax cuts that have contributed to the widening of the gap between the federal government's spending per capita and tax collections per capita - putting the nation onto an unsustainable fiscal path.

But you don't have to take our word for it. Here is what President Obama's re-election campaign has to say of their achievement in reducing the federal government's tax collections (or at least, what they said on their web site as recently as 2 June 2012):

President Obama has cut taxes for middle-class families and small businesses. One of the first things he did in office was cut taxes for 95 percent of working families. He has also signed 18 tax cuts for small businesses and extended the payroll tax cut for all American workers and their families, putting an extra $1,000 in the typical middle-class family’s pocket.

Since the income tax rates established in the U.S. in 2003 are still in effect, we can assume that the federal government is still capable of collecting the same 28.1% of GDP in taxes, less $4,661 per capita, that it did in each year from 2003 through 2008. However, the federal government is taking in approximately $1,339 per capita less now than it did under the nation's effective rate of taxation of its GDP that applied before President Obama's time in office, as the federal government has boosted its effective "tax credit" to the U.S. economy of $6,000 per capita.

Put more simply, the only reason the federal government is not collecting an amount of taxes equal to what it would have for the same GDP per Capita in the years from 2003 to 2008 are the tax policies specifically implemented by the Obama administration.

We find then that President Obama's claim of putting an extra $1,000 in the typical middle-class family's pocket is both a bit understated and also ignores the true cost of the impact of his policies upon the nation's fiscal situation. By shifting the burden of taxation away from where the most income is to be found in the United States in favor of forcing a much smaller number of GDP generators to bear an increasingly disproportionate share of the tax burden in the U.S., President Obama has seriously degraded the fiscal health of the United States government during his time in office, far beyond the impact of just his spending increases alone.

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