Understanding Data in the News

Corporate Income Tax: Too Much or Too Little

2011-11-04T12:53:00.000-07:00

The last few days, there has been much reporting on the bi-partisan group of 100 in Congress that has encouraged the Super Committee to "go big" in looking for debt reduction ideas. Maybe they read my 8/22/11 posting on this subject! Since I raised the point of Corporate and Individual income tax receipts at the end of my 8/17/11 posting "Best and Worst Presidents Relative to Debt Growth", I wanted to look into this a bit deeper since the 100 have recommended a "balanced approach". Balance has been reported as needing to include increased tax receipts which I want to now investigate.

Again, using the historical spending reported in the OMB 2012 Budget, there are two striking graphs on Government Receipts as a Percent of GDP that caught my eye.

As you can see, Individual Income Tax Receipts as a Percent of GDP rose dramatically in 1944 from around 1% to 7.3% during the war and then remained relatively flat at 8% level. Since 1944, the top Individual Tax Rate steadily dropped from 94% to the current 35%. The lowest Individual Rates went from 23% in 1944 and bounced around until hitting the current rate of 10% in 2002. In spite of these reductions, the ratio of has remained around 8%. However, the Corporate Tax shows a very different picture.

As with Individual Tax Receipts, the Corporate Tax Receipts as a Percent of GDP rose in 1944 from about 1% to near 5% during the war. In 1951 it bumped up to 6% but then began a steady decline over the next 30 years down to a stable average near 1.8%. The top Corporate Tax Rates over this timeframe went from 53% to the current 15% while the lowest rates went from 29% to 15%. (The Effective Corporate Tax Rate is near 13% which is 5th lowest among OECD countries, as reported by the US Department of Treasury based on an average from 2000 to 2005.)

Since the Corporate rates dropped less than for Individual rates but the Corporate Receipts as a Percent of GDP dropped while Individuals did not, it must mean that Corporations started making much less profit while individual incomes must have risen relative to GDP from 1950 to 1980! This does not seem plausible! So another explanation is that Corporations began to get many more tax breaks (loopholes?) than Individuals did. Therefore, the news reports of taking away tax loopholes for corporations could be an appropriate way to increase Government Receipts, especially if this were to return the Corporate Tax Receipts as a Percent of GDP back to the post war level of 5% - 6%. This would be an increase of receipts of 3.5% of GDP which would help reduce the annual deficit by $500B / year or $5 Trillion over the next 10 years in the ballpark the Super Committee has been asked to deliver by the 100.

But another side of the debate has been how high the current Corporate Tax Rates are relative to the rest of the world. It is true, that with federal, state and local included, the Corporate Rate in the US the second highest, behind Japan. However, Corporate Tax Receipts as a percent of GDP in the US are the SECOND LOWEST of the OECD countries. The lower tax rate countries have closed tax loopholes in their countries while we have created them! To be precise, as reported by the Government Accountability Office, tax loopholes, deductions, credits and subsidies reduced tax reciepts in 2010 by $1 Trillion for both Corporate and Individuals. So it seems that the Corporate Loopholes are about half of this $1 Trillion total.

For reference, in 2009, here is the US ranking (highest tax is a high rank) among the OECD countries in taxes as a percent of GDP:

Total Taxes: 26 out of 28 (second lowest) Note: Taxed Enough Already......don't think so!
All Income Taxes: 19 out of 29
Personal Income Taxes: 15 out of 26
Corporate Income Taxes: 25 out of 26 (second lowest)
Social Insurance Taxes: 18 out of 28
Consumption Taxes: 29 out of 29 (lowest)
Property and Wealth Tax: 4 out of 28 (fourth highest)

All of this information seems to support that we, as a nation, should be able to afford an increase in taxes to Corporations and even Consumption (Sales Tax Plans!).

Social Security Disability Fund is Going Broke Too

2011-08-22T14:45:00.000-07:00

The news media is reporting today that the Social Security Disability Fund will go broke in 2017 due to the sudden increase in claims by people disabled and out of work. Sorry to say, that this is NOT new news! The 2012 Budget estimates projected this same catastrophe months ago, but it is only making the news now. Here is the forecast of the Social Security Disability Trust Fund Balance through 2018, when it was forecasted to be a negative balance.

As you can see, the Disability Trust Fund started shrinking at a rapid pace starting in 2008, so the crisis in this Trust Fund started three years ago.
The news today reported that claims are exptected to rise by as much as 50%. Should this occur through 2012, this fund will go negative in 2012! Why is this important to us?? Last time the Disability Trust was in trouble, is was rescued by the Social Security Trust Fund. In my post of May 23, 2011 titled "Social Security and Medicare Cost per Person", I projected the Social Security Trust Fund would last through 2050. The fact that payroll taxes have been cut for 2011 and likely through 2012, will certainly change this 2050 date, but it appears that Social Security supporting the Disability Fund is a low risk option in the short term. However, now this makes me want to update my Social Security and Medicare cost per person forecasts based on the low GDP growth expected over the next several years.

Best and Worst Presidents for the Economy

2011-08-22T14:23:00.000-07:00

After publishing my previous post titled "Best and Worst Presidents Relative to Debt Growth" (8/17/2011), my long held beliefs were rattled. So I decided to dig a bit deeper into the Government Data on the economy, specifically the GDP. In my investigation and analysis, I had noticed GDP numbers that I could not reconcile. I finally found the problem when I got to the Bureau of Economic Analysis. http://www.bea.gov/national/nipaweb/SelectTable.asp?Popular=Y

The bottom line is that two GDP numbers are used. The GDP (sometimes "nominal"GDP) is the value of Goods and Services, priced using each year's (or quarter's) actual prices. The Real GDP is calculated using a constant price for all years, essentially removing the effect of inflation. When a percentage change is calculated on Real GDP, it reflects the real growth in economic output by removing "growth" due to price inflation. Said another way, Real GDP is the actual volume of goods and services produced during any period. A high GDP growth driven by high inflation would not necessarily be a job creating economy. However, a high growth of Real GDP is more likely to create jobs since additional goods and services are being produced.

So I decided to look at the same Presidential Terms as were analyzed in my previous post, but this time with a focus on GDP compound growth both Real and Nominal. As an example of the technique, below are two graphs for Reagan's Term on GDP Growth and Real GDP Growth (these graphs are described in my previous post).

The table below summarizes the results for all Presidential Terms. Included is a column for the first 10 Quarters of each Presidential Term so that Obama's Term to Date results can also be included.

As you can see, the lowest GDP and Real GDP growth rates occur on Republican Terms and the highest are during Democratic Terms. This led me to calculate an average for all Democratic Terms and all Republican Terms. (Each average has a single term President). Again, the Democrats have done better in all categories when it come to Economic growth and, by inference from Real GDP, job growth as well. All this data is really getting me to rethink my political affiliation!

Best and Worst Presidents Relative to Debt Growth

2011-08-17T12:21:00.000-07:00

So much talk about the Debt lately is making my head spin and my previous posts have just created more questions. I decided to look at the COMPOUND ANNUAL GROWTH of the National Debt under each President to see how they did. This approach does not "punish" a President for what they inherited, but what happened after they took office. I used Presidential terms from the inauguration year to their last full year and I put Kennedy/Johnson together as a term and likewise for Nixon/Ford. I also generated numbers for Obama with only 2 years completed and his third year estimated, but I will present these only in comparison to the other's results.

I also evaluated each President on the GDP Growth as well as the components of Debt: Receipts (including Individual and Corporate Taxes), Outlays, Deficit, and Supplemental. As for "good" or "bad" evaluations, I am assuming higher Receipts is good and lower Outlays are good which lowers the deficit and the debt. I recognize that certain political philosophies may not support these being "good".

The President with the highest growth rate on Debt was Ronald Reagan, yes Reagan! He also had the highest growth rate in Supplemental spending. Obama would have come in second to Reagan if we used his 2+ year performance. Below is Reagan's Debt growth rate of 15.1% followed by his Supplemental growth of 46.6%

The highest growth rate of yearly deficits occurred under Bush 2 at 63.8%. The Obama growth over the 2+ years is 6.3%. Below is the Bush 2 graph for Deficits.

To summarize all this data, I created a table of all the contributors to Debt: Receipts, Outlays, Deficit, Supplemental Spending, Debt and GDP. Then identified the 2 highest growth rates and the 2 lowest growth rates and assigned a point each time a President's term appeared. Again, I used high Receipt growth and low Outlay growth as "good" and of course the converse as "bad".

The two highest point totals for "Best Debt Presidents" are: Clinton and Carter, each with 5 points. The next highest had 2 points.

The two highest point totals for "Worst Debt Presidents" are: Bush 1 with 5 points; Bush 2 and Nixon/Ford each had 4 points. The next highest had 2 points. This suggests that the Republicans are "worse" for our Debt while Democrats are "good" for our Debt. Isn't that a switch??

To note: Clinton and Carter both had higher GDP growth rates than Bush 1 or Bush 2 (5.8%, 11.2%, 4.8%, 5.4% respectively. I thought Republicans were "good" for the economy??

The entire table follows, including the Obama number for his 2+ years for compaison. Had Obama's term been included, there would be NO Change in the "Best" Presidents, but Obama would have replaced Bush 2 in "Worst" Presidents with all of them getting 4 points.

A few more comments on the internals:

Carter and Clinton had the highest growth rates on Individual Income Taxes (16.1% and 10.4%) while the highest growth in Corporate Income Tax was during Bush 2 and Reagan (16.5% and 9.2%). I would have expected all these to occur during the strongest ecomonies, or highest GDP growth but they did not. Who is business friendly again?? Who is looking out for the average american again??
Payroll tax (Social Security and Medicare) grew 3.0% faster than Individual Income Tax growth until 1990 when the Payroll Tax Rate shrank 3.8% faster. There have not been any Payroll tax increases since 1990. (Remember payroll taxes have been decreased recently while our trust funds are going bankrupt)
Only Clinton and Carter had Receipt growth higher than GDP growth by 1.3%. (Higher Taxes??) All other Presidents had Receipt growth LOWER than GDP growth. Shouldn't the government benefit from a good economy?
Government spending grew on average (per 8 year term) by 6.8% for Republicans and 5.1% for Democrats. I thought Democrats were the ones who grew the government??

What this is beginning to tell me is that political ideology may get them votes, but the results they promise (or degraded to the other) is not supported by the facts and data. Someone tell me if you hear or see any media outlets telling you this kind of information!! Rather than driving a wedge between the Parties with rhetoric, maybe, with data, we could see they have much more in common in practice.

The Super Committee Needs to Update the Budget / Debt Assumptions

2011-08-12T14:57:00.000-07:00

Although the 12 members of the "Super Committee" have now been chosen, I was reading an AP article this week by Alan Fram titled "Latest Picks for the Debt Panel Spark Some Pessimism" several comments caught my eye and triggered some other thoughts about the National Debt and the 2012 Budget. [Doesn't the term Debt Panel sound very familiar to the Death Panel in prior news reports]
http://denver.xfinity.comcast.net/articles/news-general/20110809/US.Debt.Super.Committee/
In this article and throughout the news, the phrase of "trimming $1.5 trillion in debt over the next decade" clearly is the challenge to this 12 member committee. But how misleading are these phrases. In truth, the panel's only requirement is to reduce the growth of the debt over the next decade, NOT to trim $1.5T from the current debt! Just to be clear let me state some basic facts about the debt and the 2012 US Budget.

The current National Debt is $14.5 Trillion
The estimated 2011 Government Receipts are $2.17 Trillion, with Outlays of $3.77 Trillion for a 2011 Deficit of $1.60 Trillion
Over the next 10 years, to 2021, Government Receipts total $37.93 Trillion with Outlays of $47.32 Trillion for an 10 year deficit of $9.39 Trillion.
This creates a National Debt in 2021 of $24.86 Trillion. Remember that this does not include any Supplemental Spending which I discussed in my posting 3/10/2011 titled "Annual Deficits and the National Debt"
Over the past 10 years, through 2010, Supplemental Spending totaled $3.45 Trillion which could therefore, increase the 2021 National Debt to $28.31 Trillion!
So the job of this "Committee" is to reduce the 2021 Debt to $23.36 Trillion (or $26.81T if you add supplemental spending). Again for reference, the current Debt is $14.5T.
This will only reduce the Growth of the Debt from 4.85% to 4.21% compounded annually.

For those who have interest in the source of this data, most comes from Table S-3, of the Summary Tables on the following link: http://www.whitehouse.gov/omb/budget/Overview and the historical numbers come from this same link and click "Historical Tables".

Now with this background estabished, how could a slight reduction in the debt be achieved by the committee. I would start by looking at the big ticket items in the budget which many of you may know already, but there was one surprise for me. And also note that Non-security discretionary spending represents only 9.9% of all outlays over the next 10 years!

National Defense is the largest and is part of the Discretionary or Appropriated Programs. The total Discretionary budget over these 10 years is $14.14 T of which Defense is 2/3's. So, a 10% reduction over these 10 years would just about do it! Skipping Social Security for a moment, the next largest, is Income Security. This includes Federal Employee Retirement, Unemployment Compensation, but also includes Housing Assistance, Food/Nutrition Assistance, and Other. Putting a 10% reduction on just part of this area would easily obtain the other $.10 T. JOB DONE!

But lets get real in the context of the current politics, current economic conditions, S&P downgrade and the requirement of a Balanced Budget Ammendment vote. The Democrats want to maintain all the social programs and the Republicans want to be revenue neutral. In the paragraph above, you can see that is quite possible.

But we must now put the entire 2012 Budget up against the current economic realities. What ecomonic assumptions are built into the Budget? GDP growth is forecasted to be 5.1% compounded annually for these 10 years as you can see below.

Looking at the previous 20 years from 1988 to 2008 (Great Recession), the compound GDP growth was 5.4%.

Many financial experts are now forecasting that US GDP growth will more likely be in the 2 - 3% range in the new global ecomony. This certainly will have some effect on the predcited Goverment Receipts, especially Income Tax Receipts. Below is the Individual Income Tax forecast in the Budget.

So the Budget is assuming a 9.7% compound growth in Income Tax collected when the GDP budgeted growth is only 5.1%! Has the tax growth been this high recently? In the chart below, the same period from 1988 to 2008 is evaluated.

As you can see, the compound growth over these 20 years is only 5.4%, which is very close to the GDP growth. Seems the budget is a bit agressive on these assumptions, and it is much the same for Corporate Income Tax. But, what would happen over these 10 years if the Government Receipt growth was much lower? Of course it would add to the future deficits and debt! But how much? If we grew total Receipts at only 5%, this would add an additional $9.22 T to the debt. If Receipts grew at only 3%, the debt would increase by $12.22 T!

Putting this all together, how does the country look in 2021, assuming 3% GDP growth, 5% growth in Tax Receipts (agressive), no new taxes, and an additional $1.5 T deficit reduction by the committee (plus the $.8T already done, gives $2.3T). This would produce a National Debt in 2021 of

$31.78 T (assuming no Supplemental Spending). If we held the Publicly held debt around 70%, it would produce a Net Government Debt of 111% of GDP. For reference, currently we are 72%, Greece is 152%, Ireland is 95%, Italy is 101% and Japan is 128%. For the US to stay at our 72%, the Super Committee would need to find an additional $7.80 T in spending cuts!

Lets try to quantify this $7.8T in what this would mean in spending cuts based on the current 2012 Budget spending.

Cut All Discretionary Spending (Security and non-Security) by 55%
Eliminate Social Security, Medicare and Medicaid (Including Receipts)
Cut all Non Security Discretionary and Medicaid Spending

I don't think this will ever happen! So what about Revenue. You could recover this $7.8 T if you DOUBLED the taxes on the top 20% of wage earners which is also very unlikely. Soooooo, it seems to me that the committee WILL have to have a balanced approach of both increasing Revenue and cutting Outlays in spite of the politics. And oh by the way, we have to vote on a Balanced Budget Ammendment being pushed by the same group that does not want to increase Revenue. This will obviously cause a combination of 1, 2 and 3 above which throws grandma under the train full of the sick and non-working driven by a terrorist!!

US Corporations Survive the "Great Recession"

2011-07-27T13:13:00.000-07:00

The recession has been often in the news with concerns about economic recovery. Although the "average person" (see previous post) probably has not yet seen much in the way of recovery, US Corporations never really felt the great recession! If you are surprised, read on......

To make this assessment, I used a database of 88 US Corporations' Revenue and Earnings per Share (EPS) which were obtained from their SEC filings on a quarterly basis (10Q Filing). Some companies are from the NASDAQ and some from NYSE, with most sectors being covered. To see a complete listing of these check out my website and the tab "Examples" http://sustainthegain.com/examples.asp?page_id=mod_companies_list

In addition to the SEC Filings, most companies also create a Quarterly Earnings Release, where using Index vs Year Ago, they try to explain the most recent results. I always wondered if any of their conclusions could be supported with sound statistical analysis of this same data. This curiosity led me to create this database for my statistical analysis of their Revenue and Earnings. We all know that these results vary from quarter to quarter, but the important question is: "Is the most recent quarter STATISTICALLY DIFFERENT from the preceeding quarters. If Revenue is up 3% from the same quarter of the previous year, the company leadership will tell you all the great things they have been doing to create this improvement. Likewise, if Earnings are down 5% from the same quarter a year ago, those same leaders will be happy to explain what misfortune has befallen them beyond their control. Never have they done the simple task of determining if this 3% up or 5% down is statically relevant, because only then is an explanation needed and meaningful. With this a backdrop, lets get on to the "Great Recession".

Most experts agree that the current Recession began 12/07 or 1/08. I fit an exponential growth line to the quarterly data of either Revenue or Earnings per Share (EPS) to determine if the result was experiencing "steady" growth. I also established plus/minus 3 sigma boundaries for this best fit line to determine if any one quarter fell outside these statistical boundaries. But the most important assessment of these graphs is to find 7 or more quarters in a row above or below the best fit growth line as this determines if there has been a SYSTEMIC change in performance, rather than a single and unsustainable "bump". To assess if any of these 88 companies were systemically impacted by the current recession, I determined if 7 or more results in a row were below the best fit growth line beginning 12/07 or later. Since each company has two reported results, Revenue and EPS, there are 176 results that were evaluated.

In the 6 years prior to 12/07, 36.4% of these 176 financial results showed a systemic drop in performance. Since 12/07, 40.3% of these results showed a drop, which is not statistically different from the 36.4%!! SO, NO CHANGE IN FINANCIAL PERFORMANCE DURING THE RECESSION. In fact, 18% of these 88 companies showed systemically better results during the recession!

Let me show you some examples. First, is Amazon that showed no change in Revenue or EPS performance during the recession.

As you can see, the Compound Annual Growth Rate (CAGR) of 29.0% for Revenue has not changed since 2003. The variation has increase along with the actual values, but the growth has been consistent.

Likewise for EPS, the CAGR of 29.1% is also unchanged since 2003. Notice that there was one quarter of Jan 05 that was uniquely high and does require an explanation. Otherwise the conclusion you reach is that Amazon is well organized to grow 29.1% EPS with no single quarter being better or worse than another since Jan 05.

McDonald's is a case of both Revenue and EPS being systemically hurt during the recession. To know if the recession caused this systemic change would require additional study, but be assured that in their Quarterly Earnings Release, the recession is front and center in their explanation!

As you can see, the quarters after 12/08 are all running below the previous best fit growth line of 7.5% (the green line). Although the actual revenue numbers got smaller, the CAGR during the recession is still 6.8% but a systemic drop none the less.

In the case of EPS for McDonald's, the systemic drop occurred 12/08 as with Revenue, and the current CAGR is a healthy 14.9% with slightly less variation than prior to the recession.

Delta Airlines is an interesting example since their results have gotten better during the recession.

Delta Revenue systemically rose on 12/08 and the CAGR increased as well to 9.7%. Remembering Delta bought Northwest Airlines, the combined Revenue began being reported 5/07, but the statistical, systemic shift did not happen until 12/08, 6 quarters later. To be clear, the recession did not HURT them!

EPS is not complicated by the merger of financials with Northwest, but you can see that a run of 11 quarters above the historical average (green line) began in 7/07, shortly after the combined financials. However, the last 8 quarters all are above the Upper Limit (blue line) which might indicate that the EPS got stronger 6/08, during the recession.

Looking at this same data by sector, Healthcare and Financials both showed statistically more "help" during the recession than all the other sectors. To note, Healthcare also show less "hurt" during the recession than the other sectors. Think of the sectors "helped" by Government stimulus! Consumer non-cyclical also showed less "hurt" and more "help" during the recession as well without Government support.

Bottom line, the recession has not changed the financial performance of the 88 companies that I track. The percent of Revenue and EPS results that went down prior to the recession is the same as these results that went down during the recession. A conclusion you might reach from these data is that Revenue and EPS productivity went up during the recession as unemployment went up. Can this level of productivity be sustained into the future or will these companies begin to hire again soon?

Were US Businesses Affected by the "Great Recession"?

2011-07-15T14:21:00.000-07:00

I have been working on downloading SEC filings of about 85 US Companines and then statistically analyzing these quarterly results to see if during 2008, either their Revenue or Earnings were affected negatively. I did a similar analysis after the 2001 terrorist attack to see who was negatively impacted. For example, several of the airlines were already in decline prior to this event, however they wasted no time in blaming poor business performance soley on 9/11!

I have only gotten through the "A's", which is 12 companies (24 business results with Revenue and Earnings). Of these 15 of the 24 results were unaffected or improved during 2008 with one company having results dropping off in 2007. However, you can bet that Quarterly Earnings Releases are full of the difficulties confronting them during 2008 and beyond!

Hope to have the other 70 companies finished soon, so come back in a couple of weeks.

Social Security and Medicare Costs per Person

2011-05-23T15:37:00.000-07:00

In my last post May 2nd, I took a look at the payroll tax rates and income cap effects on Medicare and Social Security. Using much of this same data, I calculated a Social Security and Medicare Payout per Person, taking the "65 and over" population projections from the Census Bureau. I had become curious when I read that over an average person's lifetime, they would pay into the Medicare System $150,000 but take from this same system over $450,000 for medical care. This did not feel right to me, so I took out my Social Security Report to find that I and my employer had paid less than half of this amount, and I was in top 5% of wage earners!

Using the 2012 US Budget from the CBO, with history back to 1937, and the CBO budget projections from 2011 to 2016, I modeled the Trust Fund inflows, outflows, surplus/deficit and resulting Trust Fund Balance for the OASI (Social Security) and the HI and SMI Funds combined (Medicare). I did not do any work with the Survivor Trust Fund as it is not paid out to exclusively to those over 65. I then analyzed all this data using best fit exponential growth lines to determine the Annual Compound Growth Rates, CAGR, for Inflow, Outflow and Per Person Outflow.

Social Security (OASI Trust Fund)

From 1990 to 2009, the OASI inflow grew at 5.3% CAGR. Prior to this the compound growth was 13.1%. This recent very low growth of inflow is consistent with the payroll tax rate being locked in 1992 which I discussed in my previous post. The 2012 budget forecast for inflow is for a CAGR of 5.9%.

From 1990 to 2009, the OASI Outflow grew at only 4.4%. Prior to this the growth rate was 18.8% and the forecast in the 2012 Budget is for CAGR of 5.8%. However, I got curious about the growth of the outflow per person as this should be in line more with inflation rather than 4 and 5% numbers in the budget.

As you can see, the per person (over 65) outflow had a CAGR of 3.2% from 1990 to 2009. Prior to this time, the per person outflow grew at 15.8% and the 2011 to 2016 forecast is for growth of 2.5%. To note, the CBO Budget for 2011 and 2012 show only an increase of less than 1% each year. I bet you have not read this in the news!!

The total outflow can now be modeled past 2016 from the 2010 actual per person outflow inflated 2.5% per year then multiplied by the projected population from the Census Bureau for each year. Using this modeled forecast, the OASI Trust Fund balance continues to grow past 2050, using an inflow growth of 5.9% which is the current CBO forecast. Social Security does NOT run out. The Trust Fund inlflow would have to shrink in growth to below 3.9% (outflow at 2.5%) for Trust Fund to run out in 2050. In the previous 70+ years, the inlfow growth has never been this low!

Medicare (HI and SMI Trust Fund)

For Medicare, which began in 1966, the compounded growth rate of inflow to the Fund was 7.5% from 1990 to 2009. Prior to this the CAGR was 16.4% and the CBO Forecast for 2011 to 2016 is 7.6%. Again the effect of stable Payroll Tax Rates since 1992.

For Medicare outflow (spending), the 1990 to 2009 CAGR is 7.8% but does not fit so well as you can see. The yellow marked year in the graph above is when outflow growth increase to 9.3%. Prior to 1990, the CAGR was 16.4%. The CBO Budget Forecast for 2011 to 2016 is for a compound growth of 6.6%. Is this the effect of the Medicare Reform passed by Congress to slow the growth in Medicare spending? But I was again curious about how this outflow spending growth looked when done on a per person over 65 basis.

For the 1990 to 2009 period, the per person CAGR is 6.5% compared to 7.8% when analyzed by total outflow. Prior to 1990, the per person growth was 13.8% and the CBO 2012 Budget Forecast for 2011 to 2016 is 5.9%. This is only a slight reduction in the forecast per person growth from the current growth due to the Medicare Reform Act.

Using the same modeling technique as was used for Social Security, taking the 2010 actual Medicare spending per person over 65, and then inflating it at the CBO Forecast rate, you can then calculate a new Total Medicare Spending using the Census Population Forecast. However, under almost any possible growth rate scenarios, the Medicare Trust Funds run empty in 2017 or 2018.

Finally, I was able to take Mean Income Data per household and with the actual payroll taxes in effect in prior years, and calculate an "average person's" contribution to Social Security and Medicare from Payroll Tax and then from my modeling, how much the same "average person" recieves in benefits. I made the assumption of a 45 year work life (1965 to 2010) and then a 20 year benefits span (2011 to 2030). This average person:

Paid In to Social Security (includes employer portion): $198,000

Takes Out of Social Security: $400,000 (2 times what was paid in)

Paid In to Medicare (includes employer portion): $44,845

Takes Out of Medicare: $467,000 (10+ times what was paid in)

If Medicare did not exist, and current seniors had "invested" their paid in amount, they each would be rationing their privately acquired health care with lifetime caps. Just because the Government was the "investor" or their insurance carrier, does not "free" seniors from the rationing of healthcare due to their limited financial resources.

Had Medicare been managed like Social Security, with a compound annual return 1.6%, seniors would be paid monthly for health care, for a total of about $88,000 over their lifetime and it could be spent however they please. On the other hand, if Social Security had been managed like Medicare, whenever a senior wanted a new car (new knee) or an all inclusive vacataion (100 days of nursing care), they would get whatever they wanted, without a lifetime cap!

"Democrats Deny Social Security’s Red Ink"- Going Deeper

2011-05-02T15:32:00.000-07:00

A February 25th, 2011 article on FactCheck.Org titled "Democrats Deny Social Security's Red Ink is right on target, but I would like to dig a bit deeper into the causes of our current budget and debt problems as well as some solutions. http://www.factcheck.org/2011/02/democrats-deny-social-securitys-red-ink/

As the article states, Social Security Expenditures exceeded Social Security Tax Receipts only in 2009 but the Medicare Spending exceeded its receipts back in 1975, only a few years after getting started as the graphs below attest. (Data is based on Congressional Budget Office, 2012 Budget)

Since 70% or more of the Medicare budget is spent on those over 65 as is Social Security, I decided to combine these two programs into a single number since the younger among us are those funding these programs for our forefathers! The first thing this brought to mind, was the income cap on Social Security which does not exist for Medicare and their corresponding rates, seen below.

It is very clear that rates have remained unchanged since 1990, which is almost half of the time period covered by this graph from 1966 to 2016! So, what would have happened had Congress continued to increase the payroll tax rates at the same increments as had been done for the previous 23 years. In the case of Social Security, it would have been about 0.2% every two years (3.85% to 6.20% in 12 increases over 23 years); for Medicare, it would have been about .09% every two years (.35% to 1.4% in 8 increases over 23 years). In addition to these changes, I also generated non-capped personal income from the Medicare receipts and tax rates which was then used to create the Social Security receipts from non-capped income. To note, I ignored the tax rate reductions in 1984 - 1989 and for 2011 as these reductions were made up from the General Fund and it was not clear if this transfer was included in receipts.

All of these data were then graphed with all the different scenarios on the same graph.

Medicare / Social Security Spending is the light blue line with the current budget plan from the CBO as the dark blue line. With the spending combined, these deficits began in 2002. But the more obvious problem here is that the all the lines begin to diverge around 1992. One reason this date is important is that the regular payroll tax rate increases that had been taken for the previous 23 years was DUE in 1992 but was not taken and has not been taken since.

So lets look at the different scenarios that I calculated from the CBO Budget Data (in all these cases, I used only receipts and spending, ignoring the effect of trust fund balance and interest):

Remove the income cap from Social Security Payroll Tax. This scenario is the red line in the graph and indicates that issues could have been delayed until 2008. This would be considered a tax increase even at constant tax rates, but at least it would be focused on the top 20% of wage earners!
Increase the payroll tax rates at the pre-1990 increments but keep Social Security income cap in place. This is the green line in the graph and shows that there would be a dip in receipts coincident with the recession, but then recovers in 2012 to exceed spending.
Same as #2, but with uncapped Social Security income. This is the purple line on the graph and clearly stays ahead of the spending rates.

It is clear, that the politics changed in 1992, the beginning of the Clinton Administration, but this aversion to raising the payroll tax continued through every administration since. This is just one more example of inaction by our government in leaving the problem for someone else. If we are not paying more in taxes to prevent these problems and spending is not cut, we will just pay later with financial messes like the housing collapse, recession and equity market shrinkage. I guess it is easier to blame the bankers than it is the politicians!

But what if the rates were raised next year? Could this help at all? Looking at the CBO estimate years of 2011 to 2016, the total Social Security/Medicare spending is projected to be $8.3 trillion. The current budget shows the receipts over these same 6 years to be $5.8 trillion, a $2.5 trillion shortfall. If however the Social Security and Medicare rates were increased to 8.2% and 2.35% respectively and increased every two years at .2% and .09% respectively, keeping the SS income cap, the 6 year total would be $8.3 trillion which is the same as spending so no new contribution to the debt would be seen. If the SS income cap were removed, the 6 year total would be $10.3 trillion and some help to the debt might be realized.

But alas, taxes will likely not be raised or the cap removed, so we can look forward to changes that will even more painful to the citizens, but less painful to the politicians.

Is There a Relationship Between Oil Price and Gasoline Price in the US?

2011-03-29T12:33:00.000-07:00

With all the turmoil in the middle east, there has been a lot of talk about oil price and the resulting rise in Gasoline prices. I downloaded daily spot prices and got yearly averages from 1986 through 2011 YTD. The price categories are:

Cushing, OK WTI Spot Price FOB ($/Barrel)
Europe Brent Spot Price FOB ($/Barrel)
New York Harbor Conventional Gasoline Regular Spot Price FOB ($/Gal)
U.S. Gulf Coast Conventional Gasoline Regular Spot Price FOB ($/Gal)

As you can see in the graph below, Cushing Crude Price remained relatively flat from 1986 to 1999 at which time prices began a steady rise.

The next graph is for Gulf Regular Gasoline Price which follows a similar pattern on the same dates.

These similar patterns suggest that correlations may help to see if anything has been changing in the relationship between Crude and Gasoline prices. In the graphs below, the Cushing Crude price and U.S. Gulf Gasoline price are correlated for the period 1986 to 1999 with a resulting very strong correlation of 94% (R square).

In the table below, you will see that the correlations between the Cushing (US) and Brent (Euro) Crude price correlation weakens after 2003 while Gulf and NY Gas prices remain very strong in all three timeframes. Looking further into the correlation between Cushing Crude Price and either Gulf or NY Gas prices, you find these correlations weaken to around 70 after 2003 (highlighted in red in the table). This makes me want to look deeper into why the change in relationships after 2003.

	1986 - 1999	2000 - 2002	2003 - 2011

Cushing Crude to Brent Crude	99.0	99.4	95.8

Gulf to NY Regular Gasoline	99.4	99.8	99.8

Cushing Crude to Gulf Gasoline	94.0	96.3	70.1

Cushing Crude to NY Gasoline	99.4	97.7	69.3

Using a best fit exponential growth line to the price data, you can determine the stable and consistent Compound Annual Growth Rate (CAGR). In the graph below, the best fit growth line for Cushing Crude Price has been found, and this same technique is applied to to the 3 time periods for both Cushing Crude Price and Gulf Gas Price Growth and summarized as CAGR in the table following.

	1986 - 1999	2000 - 2002	2003 - 2011

Cushing Crude Price Growth	0.2%	-7.2%	6.1%

Gulf Regular Gasoline Price Growth	0.2%	-7.2%	10.9%

So what happened in 2003 to cause the Gasoline price in the US to grow at a rate almost twice that of Cushing Crude Price. California, in 2003 outlawed MTBE which was an additive in US gasoline in improve octane rating. This step was taken when MTBE was found in groundwater and to be carcinoginic. This lead to the use of Ethanol in gasoline to increase octane rating and finally the Federal Government's intervention (support) of ethanol production. This is claimed to help reduce our dependance on foreign oil with a stabilization in gas prices. However, the result has instead been the doubling of gas price growth relative to oil prices and the corresponding increase in corn prices to produce ethanol which in turn is driving up food prices in the US.

Annual Deficits and the National Debt

2011-03-10T09:48:00.000-08:00

With all the talk about deficits and the debt, I got curious about the relationship between the two. Currently the US Debt is about $13,528 Billion through 2010 ($14,193 Billion currently). Thinking this was the sum of the annual deficits, I decided to add up all the annual deficits since 1862, and got only $8,010! So where did the other $5,518 Billion come from??

Supplemental appropriations began in earnest in about 1950, in response to several natural disasters where the federal government stepped in to support the states who had typically covered the costs of these events. The federal government was now in the insurance business, spending non-budgeted money in support of the states recovering from these disasters. Now supplemental appropriations regularly come up outside the regular budget process. Most supplemental appropriations fall into two categories: defense supplementals, needed to fund the costs of military actions, and non-defense supplementals, almost all of which go to the cost of emergency response to national disasters like hurricanes and floods. Below is a recent graph of the Sum of Deficits along with the Sum of Supplementals from 1950 to 2010.

As you can see, this is becoming a very large contributor to the National Debt and is done outside the normal budget process. Then I got curious to see how the size of the supplementals compared to the defecit each year. Below is a graph of the supplementals as a percent of the deficit from 1960 to 2010. There are some negative numbers in those years when there was a budget surplus.

In the years from 1975 to 1996, the supplementals were 38% of the deficit. But in 2002 to 2010, supplementals now are almost equal to the deficit at 95% ! To note, in the years 1997 to 2001 (the white space between the two graph areas), the total deficit was $-536B and the total supplementals were $1,124B, for a net add to the National Debt during these 5 years of $588B. So much for the "balanced budget" years of Clinton.

Seems to me that we should be hearing some talk about the Federal budget process including ALL of the defense spending, probably requiring a war reserve, and also getting out of the disaster insurance business. Keeping all this spending as part of the budget process would put more pressure on Congress to fix the big debt creators rather than just pushing them outside the budget.

The Real "Stats" of Professional Sports

2011-03-03T14:14:00.000-08:00

Professional sports standings, playoffs and finals are often in the news so I was curious about the real statistics of the stats. I looked into MLB, NFL, NHL and NBA using the most recently completed season for each sport and their final game. I was interested to know if the winning teams were statistically better than their league competitors or was the whole season just chance, as in a coin flip! I am using a 99.7% confidence level for my conclusions or said another way, there is a 3 in a 1000 chance I could be wrong! Also remember, that in any single game where you win or loose, there is a 50/50 chance that either team will win, UNLESS one of them is uniquely better.

NFL plays a 16 game season. There was one team that WAS statistically better that all the others, which was New England with a .875 season. Of interest, there was also a statistically poor team with a .125 record which was Carolina. All the other teams were statistically equivalent, meaning their wins and loses were just chance. (How else would the bookies make money!). But alas, the super bowl was played not by the "best" team, but just the lucky ones.

MLB plays a 162 game season, and as is typically the case, no team had a truely winning season. Philadelphia had the best record at .599, but they were not statistically better than any other team. There was a statistically poor team with a .352 record which was Pittsburgh. The World Series was played by two lucky teams and the winner was again a flip of the coin, since winning in 5 games is not statistically meaningful.

NHL plays an 82 game season, and just like MLB, there was not a superior team, statistically speaking. But, also like MLB, there was a low performer which was Edmonton with a .330 record. The Stanley Cup was played by two lucky teams with a coin flip winner as a 6 game final is not statistically relevant either.

The NBA plays an 82 game season also, but in this case there is something very different! There were 4 teams that were statistically unique, 2 in the East and 2 in the West. They were Cleveland (.744), Orlando (.720), Dallas (.671) and LA Lakers (.695), who went on to the Finals against Boston (.610). The 7 game series again did not establish a statistical winner. Also of interest is that there were 7 teams who all had statistically low seasons below .335. I would assume from these results that the bookies have a more difficult time making as much money as they do in the other sports.

So the adage of "any team on any given day" does seem to ring true, except in basketball! Watching the games sure is a pretty exciting way to watch a coin flip.

"Manufacturing's Dismal Decade" - A Look at the Numbers

2011-03-01T14:55:00.000-08:00

The US Trade Deficit has been REDUCED by 37.7% after the 2008 recession! Is this possible??

Pat Buchanan posted this column on 2/25/11, titled Manufacturing's Dismal Decade, http://buchanan.org/blog/manufacturings-dismal-decade-4612, where he used many facts and figures on the trade deficit to make several points in his column. I went to the Census Bureau http://www.census.gov/econ/currentdata/ftd/ to get US trade data from Jan 1992 to Dec 2010 to cover the last decade and more. I prefer to look at data over longer time frames to establish periods of consistent performance and when there are statistically significant changes. In this case, I looked at total Imports, Exports and the resulting Trade Deficit (Trade Balance).

In Mr. Buchanan's first 4 paragraphs, I can confirm his percentage changes in Exports and Imports versus 2009, however, he states that the total annual deficit from 2009 to 2010 rose 33% (actually 32.8%...why reduce the precision of the first 2 paragraphs?) and then goes on to say this is "the largest percentage increase in a decade". Here is another idea: compare the two years after the recession to the two years before the recession.

So why didn't Mr Buchanan tell us this: Trade deficit reduced by 37.7% after the recession rather than this is the largest percentage increase in the last decade? Mr Buchanan, if you are writing about the last decade, please use more than 2 years of data to form your conclusions. By the way, the two year US deficit has not been as low as it is in 2009/2010 since 9/01!

However, I get nervous using year on year indices to form conclusions which is a common technique in business, government and industry since it is NOT statistically sound. Since trade numbers are continually increasing over time, a better approach is to use compounding growth rates with statistical limits to ensure that your indices are not calculated using a statistical outlier. Also notice the graph above, that the last two years do not stay within the statistical boundaries. So here is a better technique applied to Exports, since the Balance of Trade is a negative number and makes compounding problematic.

This is best fit compound growth line with statistical limits for the 2009 - 2010 data and yields an annual growth of 16.0% since the recession.

The two years prior to the recession yield a best fit exponential line of 16.3% annual growth. The next highest 2 year growth rate over the last 18 years was 12%. Seems as though we are doing pretty good post recession at 16.0% compounded growth, although from a smaller base number.

In a similar analysis of the import numbers, in the two years prior to the recession, US Imports grew at 10.5% compounded annually. After the recession the two year growth of Imports was 18.5%, also from a smaller base. The good news is that growth for 2010 has slowed to 11.7% helping to slow the deficit growth. Even with these recent growth rates, it will be over 40 years before the deficit can be eliminated, so there is still work to be done in getting our products sold to the rest of the world.

Finally, in Mr. Buchanan's column, he states:

" In that decade, America ran a total of $6.1 trillion in trade deficits, more than our entire economic growth. To finance those 10 years of deficits, America had to borrow$1,533 billion every day."

First of all, the 10 year deficit was $5.6 trillion, not $6.1 trillion. In any case, dividing this $6.1 trillion by the 3,650 days in 10 years, the daily amount is $1,671 MILLION not $1,533 BILLION as is stated in the column! Pat, your article is about the trade deficit not the Federal deficit! If we import $5.6 trillion more than we export, this deficit is not paid by the Federal Government by borrowing. It is $1,542 million dollars that US consumers paid to "foreign" manufacturers more than "foreign" consumers paid US manufacturers, which they might have borrowed on their credit cards! The Feds are not involved in this deficit, other than collecting tariffs.

Do you believe everything you read?? Check it out before you act on it! If you have other data you would like analyzed, send it to me. I am planning on working on the Federal Deficit, Medicare, and Social Security soon, so come back