Budgeting 101: Don’t Forget Hauser’s Law!

 

In 1993 the investment analyst W Kurt Hauser pointed out that “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP.”  Hauser’s Law of course is really just an empirical observation which is referred to as a “law” because it has been so amazingly consistent since 1945.  Some economists use Hauser’s Law to argue that there is no sense in raising tax rates because higher rates won’t really raise additional revenue over time.  To the extent which Hauser’s Law is accurate, the only way to significantly increase tax revenue is to grow the economy faster.

However Hauser’s Law is also quite relevant in figuring out how much money the federal government should be spending in a given year.  If revenues are limited to 19.5% on average over time, then overall spending should also be approximately limited to 19.5%, or else there will be a negative balance, i.e. a deficit.  If there is a large imbalance year after year, as during the past few years, then the national debt will grow rapidly and become the huge problem that it is today.

In this respect, take a look at John Taylor’s March 17, 2013 entry in his blog Economics One entitled “An Opportunity to Contrast and Compare Budgets”.  The Republican House Budget rapidly (over two or three years) brings federal spending down below 20% of GDP and then levels it off at about 19.5% after that.  On the other hand, the Democratic Senate Budget brings spending down to about 21.5% in 2017 and then it creeps back up to 22% by 2023.  This is why the House achieves a balanced budget in ten years while the Senate budget doesn’t even come close to achieving balance.

Can there be any question as to which of these two budgets is the more fiscally responsible?  To me it is obvious but if you feel otherwise please do say so in the comment section which follows this entry.

4 thoughts on “Budgeting 101: Don’t Forget Hauser’s Law!

  1. As I have shown to you many times over, the Ryan budget is not fiscally responsible, it’s a fiscal fantasy.

    It projects to drop spending for all federal government spending aside from health care and social security from 12.5% to 3.5% GDP by 2050, a level not seen since the Coolidge administration. It assumes that unemployment will steadily drop to 2.8% by 2021, a rate lower than has ever been measured by the Bureau of Labor Statistics since it began tracking unemployment in 1948. It assumes that the cost of Medicaid and the Children’s Health Insurance Program (CHIP) will not exceed inflation, something that has never happened.

    Every one of those assumptions is wildly optimistic, in many cases assuming things that have never happened in the history of the country, but that’s not where the craziness ends.

    On the revenue side, it projects federal tax revenue to be 19% GDP, up from the 2011 level of 15.5% GDP, but calls for $4.6 trillion in tax cuts with no offsetting tax increases, other than the closing of unspecified tax loopholes.

    It is ironically comical that someone with a blog called “It Does Not Add Up” would say that the Ryan budget– one that clearly does not add up– is fiscally responsible.

    Have you actually done a critical review/study of the House (Ryan) budget? Or are you just blindly accepting it? Because nearly everyone (except you, Heritage, and the WSJ editorial page) are turning on it big time:

    http://news.yahoo.com/why-paul-ryan-star-dimmed-085610637–politics.html
    http://www.newrepublic.com/article/112654/paul-ryan-budget-2013-dc-press-corps-has-turned-him
    http://firstread.nbcnews.com/_news/2013/03/12/17282883-first-thoughts-return-of-the-ryan-budget?lite&__hstc=215845384.595f52f75596ced36513d2d778516bc4.1363897446261.1363897446261.1363897446261.1&__hssc=215845384.1.1363897446261

    Do you ever read anything like this? I somehow think I know the answer…

  2. The House budget is fiscally responsible because it leads to a balanced budget, not immediately, but over a ten year period. It shows that this can be done with very little budget cutting at all, in fact by limiting spending increases to “only” 3.4% per yer, which is actually pretty healthy growth. I have no doubt that many left leaning pundits are attacking it and trying to destroy the credibility of its author, Representative Paul Ryan. By claiming that the House budget is not realistic and should be disgarded, they are trying to build support for the Senate budget which makes no attempt to achieve balance between revenue and expenses.
    Let’s just hope that the House Republicans have the courage of their (fiscal) convictions and are successful in their efforts to put the federal government on a responsible fiscal course.

    • No– you don’t seem to understand the Ryan budget. You seem to assume that all he did was reduce overall spending growth to 3.4% and that’s it– it balances in 10 years.

      Not true. He reduces spending growth to 3.4% AND assumes that growth will be substantially greater than 3.4%/year for 10 years AND that unemployment will be less than 3% for 10 years, AND that revenue will come in at 19% of GDP over that 10 years. Only with ALL of those assumptions does it balance with 3.4% growth in spending.

      None of those are good assumptions. The facts are that:

      1) There has not been a 10 year period of growth substantially greater than 3.4% since the 1960’s:

      http://ablog.typepad.com/.a/6a00e554717cc98833016304dbd2a5970d-pi

      2) Unemployment has never been below 3% in the history of the country (except for a brief blip in 1953):

      3) There is not one shred of evidence that, with the proposed tax cuts, revenue will come in anywhere near 19%:

      http://www.americanprogress.org/issues/budget/news/2013/03/12/56359/rep-paul-ryans-fantasy-budget/

      Even if you put all that nonsense aside, his plans to achieve that 3.4% spending growth rate are ridiculous. To reduce spending to 3.4% growth while increasing military spending means that he is proposing to basically shut down the entire government outside of the military. That’s not coming from “left-leaning pundits,” thats straight out of the CBO analysis:

      http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/121xx/doc12128/04-05-ryan_letter.pdf

      Look at table 2; he proposes to contain all mandatory, defense, and non-defense spending within 3.5% of GDP. Romney proposed a 4% floor on military spending, there’s no way Republicans are going to allow cuts, and military spending has never been below 3% of GDP in the last 75 years. If military spending is maintained at a minimal 3%, that means that essentially the government spends only 0.5% of GDP on *everything* else! That’s down from about 5% (or so) today. If military spending is at the still very minimal 3.5% of GDP, that would leave absolutely nothing else to spend!

      Essentially the government would shut down except for the military, Social Security, and Medicare/Medicaid!

      So you’re incorrect when you say that reducing spending to 3.4% is a fairly healthy increase and that the cuts would be essentially painless. That 3.4% growth *includes* military spending, which will have to go up more than 3.4% if it is to maintain at least 3% of GDP. Thus Ryan is proposing HUGE cuts in discretionary spending outside of the military– in fact he is basically proposing to close the government all together (outside of defense).

      So now that you see what Ryan’s 3.4% growth of all mandatory, defense and nondefense spending by government actually entails, do you still advocate it? If so, would you cut the military more and risk reducing it to less than 3% of GDP, which would be the lowest since WWII? Or keep military spending at a minimal 3% of GDP and basically close down the rest of the government?

      Or do you just admit that the Ryan budget is a preposterous clown act that is completely unserious?

  3. I am focused on the over all scope of the House and Senate budgets, not their specific details which will not survive the congressional appropriations process in any event. The House budget will spend $41.7 trillion over ten years, the Senate budget $46.5 trillion, or $4.8 trillion more than the lower House budget. In other words the Senate plan would increase the national debt, over the next ten years, by almost $5 trillion more than the House budget.
    The House budget assumes that the economy will grow at a rate of 3% over the next ten years which is undoubtedly too ambitious given our anemic growth rate of 2% for the past four years. Of course, the broad based tax reform, reducing rates offset by cutting back on tax deductions, advocated in the House budget, would almost surely give a significant boost to the economy. Will the Democrats support raising tax revenue, and creating more jobs, in this way or will they revert to their usual class warfare “fairness” arguments and oppose pro-growth tax reform?
    The important thing is to get spending, and especially the growth of new spending, under strict control, in order to achieve a balanced budget in the short term. How this breaks down between defense and non-defense spending can be thrashed out between the various committes in the House and Senate on a year by year basis.

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