Did Bush Spend the Peace Dividend?

I'm no fan of Bush, but I find myself arguing against certain misconceptions about his fiscal performance which continue to persist. One such misconception is that he spent an insane amount of money on the military. Nominally (that is, in raw dollar amounts) this appears to be true, but while he did increase funding relative to the Clinton administration it was still very low by historical standards.

So let's start with a picture. Here is a graph of defense spending as a percentage of GDP from 1940 to 2003.So the end of the cold war did result in a peace dividend (lower defense spending) and this situation persisted through 2003. Bush did increase funding from the low point in 2000 but only to circa 1994 levels.

After 2003 the picture is more complicated because the Iraq war spending is not reported. I took Iraq war spending numbers and combined them with reported military outlays and then divided by nominal GDP. The result is summarized in the following graphic, where I include the levels from corresponding years in previous decades for reference.

Here we can see that even in 2006 with the Iraq war in full swing we spent less on total military expenditures relative to GDP than during 1976 (with the Vietnam war fully wound down) or 1986 (at the height of the cold war). The 1990s were definitely a period of relative low military expenditures but in historical perspective Bush's spending on defense was not very high even with Iraq war expenditures accounted for (and by the way, the entire practice of keeping things off the budget is very distasteful, shame on the Bush administration for that).

In particular we can still claim a peace dividend during the 2000s relative to the cold war.

On the Record

The RIAA has released 2008 Year-End Shipment Statistics which allows us to appreciate graphically just how screwed the record industry is. Compact Disc sales are plummeting, legal digital downloads are growing and the net impact is (significantly) negative. Here are the results (adjusted for inflation, which makes the story even worse!):

One popular theory is that, like newspapers, record labels have lost pricing power because they can no longer bundle (in particular, putting one good song per album and charging $13 is a thing of the past). The RIAA (implicitly) dismisses this line of reasoning in the associated notes:

If digital singles are converted into an album equivalent (divided by ten) and added to both CDs and digital albums, the overall album unit decline in 2008 was 14 percent (635 million to 545 million).

See ... less overall units means people must be stealing music, because their demand for quality product has not decreased! Quick, pass some laws ...

However we have established that an album is not equivalent to ten good singles. Let's be generous and say an album is equivalent to 3 good singles. In this case the picture is rosier:


Viewed this way demand for music is about the same, with the difference being attributable to the economic climate. Furthermore, if two singles are considered equivalent to one good album, then demand has actually gone up.

Finally, it's amusing to note that a greatest hits album from the early 1970s is the 2nd highest selling album of all time, selling 48 million copies and therefore roughly valued at $500 million dollars. Clearly the media consumer had less capabilities in the past if they were willing to collectively pay $500 million for someone to assemble a set of previously released tracks into a single physical format.

More on the California Budget FAIL

Armed with a Bud Light, I found two papers which suggest that from a tax burden standpoint, California is on the high side but not insanely so. The Public Policy Institute of California notes the following per-capita combined 2005-2006 state and local tax burdens for several large states:

• New York: $6413
• California: $4517
  
• Illinois: $4081
• National Average: $4001
  
• Florida: $3693
• Texas: $3235

From both a tax burden and overall revenue burden standpoint, California was 10th highest in the nation. If adjusted for incomes (which are higher in California), the ranking drops to 18th. That doesn't sound that bad, although the LA times quoted a more recent study saying our overall burden was now 6th, behind New Jersey, New York, Connecticut, Maryland and Hawaii. (That LA times blog is a bit misleading as it focuses on top marginal tax rates and only mentions overall tax burden at the end of the article).

The Center for Continuing Study of the California Economy has an interesting 2007 paper about California state taxation that echoes some of the above sentiments plus provides detail about the highly progressive (and thus volatile!) nature of California taxation. It also has this cool graph showing that prior to the passage of proposition 13 California was a "high tax" state, but proposition 13 brought us in line with other states.
This suggests to me that our budget shortfall is the result of excess spending, not insufficient taxation. There is perhaps some room to increase the tax burden but real progress will only come from spending cuts. The progressive nature of our taxation does increase the sensitivity to economic downturn but one could argue this is an automatic stabilizer and should be retained.

It's always scary to agree with an organization with an Orwellian name like the Reason Foundation, but they come to the same conclusion:

"A good rule of thumb in government budgeting is that the rate of spending increases should not exceed the rate of population growth, plus inflation ... Over the entire 18-year period, state spending grew at an average annual rate of 5.91 percent, while population plus inflation grew only 4.38 percent a year, on average ... Gov. Schwarzenegger and state lawmakers won't fix the underlying budget problems until they admit the state has a spending addiction."

But addicted to spending on what, exactly? An investigation for another day.

A Brief Look at California's Budget FAIL

In a small effort to be a good citizen and understand wtf is going on with my state, I decided to make a picture of recent California expenditures and revenues. I took raw revenue and expenditure data and adjusted it for inflation and population. The result is per-capita expenditure (red) and revenue (green) in constant 2000 dollars.It looks like the budget was out of control in the pre-Schwarzeneggerian era (he assumed office Nov 2003), improved somewhat in 2004 and 2005, and then drunken sailor-esque spending kicked in while revenues trailed off.

A much more ambitious task would be to figure out on what the money is being spent ... hmmm ... I think I'll have a Bud Light instead.

There will be Confusion

The price of oil, having reached over $66 per barrel today, has the financial intelligentsia confused, and some are downright angry. This month has seen both prices and inventories rise in the face of declining demand which is counterintuitive even to OPEC. As is fashionable these days there is speculation that oil is being used by the Chinese as a store of value. The more reasonable explanation is simple contango, i.e., oil companies are being paid alot of money to store oil because the futures market is anticipating a supply crunch.

Unfortunately, higher oil prices impede economic recovery, but the silver lining is they provide the economic incentive to change our energy strategy.

Profiting from Insanity

What goes up, might come down if you wait long enough.
And I actually traded this one, starting Wednesday when the tide appeared to be turning. (I'm out now).

I have my eye on the Gap which is a similar story, namely up on a earnings report which was less than stellar. However it's still defying gravity and I don't see signs of lack of support yet.
This is just a gut feeling from watching the real-time quotes stream across my desktop while I work, but I suspect some big money is accumulating this stock.

Size Matters

My startup is focused on internet advertising, and one thing we've commented on around the office is how computer monitors used to be much smaller. So what? Well, that means internet advertising used to be a much larger portion of the screen, because of IAB standard sizes were developed in the mid 1990s.

So I decided to investigate this hypothesis by cobbling together what I could find on screen resolution and banner advertising clickthrough rates. I fit the data to a 2 parameter model where one parameter was the clickthrough rate for screen resolutions higher than 1024x768 ("high resolution"), and the other parameter was the clickthrough rate for screen resolutions at or below 800x600 ("low resolution"). Note the resolution 1024x768 does not have it's own parameter, on purpose: there are only 5 data points, so I wanted to limit the model.The parameters end up being 0.2% for high resolution screens and 0.8% for low resolution screens.

Could a factor of 4 in clickthrough rate be recovered by switching to much larger ad units?