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.