Thursday, May 20, 2010

Why The Numbers Are So Big

R. David Ranson, President and Director of Research for H.C. Wainwright & Co. Economics Inc. recently (May 17, 2010) had a Wall Street Journal opinion piece on Hauser’s Law.


It’s a graph showing that federal revenue from taxes in the United States (vertical axis) has never exceeded 20% of GDP (horizontal axis) since World War II. It dramatically points out that there is an upper limit to the amount a government can tax its people.

Consider the impact: Ever since the Federal Reserve has been managing the money supply, there has never been an instance when our government was able to extract more than 20% of GDP (Gross Domestic Product) from taxpayers. That’s almost 100 years, in periods of inflation/deflation, high/low marginal tax rates, peacetime and war. It is an “Economic Law.”

I thought of this in the context of a presentation last night (May 19, 2010) by Jack Arrowsmith, the Clerk and Recorder for Douglas County here in Colorado. Mr. Arrowsmith held a town meeting, and went over the performance of his department for the last few years.

One thing that stood out was that he sets a budget and then meets that budget, year after year.

While his budget varies from $4,000,000.00 to $6,000,000.00 per year (depending on election costs), he watches over that budget and uses it as a management tool. He is a good steward of taxpayer funds.

Americans can relate to a million dollars. We see it in the context of lottery payouts and game show winnings. It is a large number, but has meaning (particularly to our local governments).

Our federal government deals in trillions of dollars. That is a million times a million dollars. If you think of a million dollars as one millionth of a trillion, you see how $1,000,000.00 gets lost in the rounding. It becomes insignificant.

And that’s the power of the “Big Numbers.” They are so big that we don’t want to deal with them; we make them an abstraction. We rely instead on our emotions to guide us, and on what our leaders teach us to believe.

While our political leaders depend on our trust, they often use the Big Numbers to deflect our attention. Political favoritism then gets lost in the overall package.  Earmarks become “insignificant.” Political dreams are used to conceal fiscal reality.

Hauser’s Law is like Jack Arrowsmith’s budget. It must be dealt with and is “real.” When we are told to expect the future to take care of us, we accept this belief at our own personal risk.

As we attempt to tax our way out of these difficult times, it will be fun to see how much room there is in Hauser’s Law.

Then again, it might not be “fun” at all.

UPDATE 5/23/10:
Linked by Left Coast Rebel.  Thanks, Tim!

UPDATE 11/26/2010:
Mr. Hauser himself weighs in to let everyone know that his law is still intact!

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1 comment:

  1. Great post Howard. I'll link this tomorrow :).

    ReplyDelete