Monday, May 17, 2010

Hauser's Law - As Reliable as the Law of Gravity

The Wall Street Journal had an op-ed by David Ranson today entitled "The Revenue Limits of Tax and Spend." In it he shows why, using what he has dubbed as Hauser's Law, the government will never be able to raise tax revenues above 20% of GDP. I linked to an earlier op-ed in which he also referenced Hauser back in July 2008. In that post I also cited ASU economist Ed Prescott.

Here is what I said then:

It is pretty well accepted that raising taxes retards GDP growth and if GDP growth is already very low, as it is right now, then you could get negative growth, i.e. shrinkage. The definition of when the economy is in recession is two consecutive quarters of negative GDP growth. Raising tax rates at this time, as the Democrats want to do, could very well tip us into a recession. If the Democrats get into the White House and increase their majority in Congress, raising taxes is what they have promised to do, telling their voters that it will only affect "the rich", however they are defining that term today as they pander to wealth-envy and promise "free" goodies. To think that it won't affect them is demonstrably wrong, as the work of another economist, Nobel prize winner Ed Prescott has shown.

"Here is a somewhat startling fact: Based on labor market statistics from the Organisation for Economic Co-operation and Development (OECD), Americans aged 15-64, on a per person basis, work 50 percent more than do the French. Comparisons between Americans and Germans or Italians are similar. What’s going on here? What can possibly account for these large differences in labor supply? It turns out that the answer is not related to cultural differences or institutional factors like unemployment benefits, but that marginal tax rates explain nearly all of this difference. " [my emphasis]

If the Democrats follow through on their promises then we will have a recession. That is definitely a change you can believe in.

How accurate do you think my prediction was? I definitely recommend reading both today's Ranson piece and the one I linked to from my earlier post. Hauser's Law appears to be as reliable as the Law of Gravity. Attempt to defy it and you will fall.

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