Will you be better off in four years?

Predicting the Breakeven Point for A US Government Budget Surplus

1. Summary
Will you (we) be better off in four years than you are today? This is the question before Americans as the US Presidential election is approaching and the country faces both high unemployment and unprecedented levels of debt/annual deficits. It is shown here that the breakeven point for producing a budget surplus can be determined easily by preparing a graph of Surplus (or Deficits) versus the Receipts. A review of the Surplus-Receipts-Outlays (S, R, O) data for the US Government, for all the years going back to 1901, shows that there were brief periods (19011916, 1924-1929, 1976-1979, 1992-2000) when the receipts R increased and the deficits decreased and also turned into a surplus in some cases (most recently in the Clinton years), following an amazingly simple linear relationship. In other words, the linear law y = hx + c = h(x x0) describes the mathematical relation between the receipts x and the surplus (or deficit) y. The breakeven, or cut-off, point, when the surplus or deficit is exactly zero, is, therefore, given by x = x0 = - c/h. The numerical values of h and c, for the different time periods (when the linear relations were observed) can be calculated and the change in the cut-off receipts x0 can be determined as a function of time.

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Table of Contents
No.
1. 2. 3. 4. 5. 6. 7. 8.

Topic
Summary Introduction Surplus-Receipts Diagram 1976-1984 Surplus-Receipts Diagram 1960-2001 Brief Discussion Some Quotes to Ponder List of References Appendix I: Bibliography of Related Articles

Page No.
1 3 8 10 14 17 19 21

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 2. Introduction
The question on my mind today is not Are you better off than you were four years ago?, as posed by then candidate Ronald Reagan, in his concluding remarks of the 1980 Presidential debates. This shook the nation and devastated the incumbent Carter and launched the Reagan revolution. Rather, the question that lurks in my mind and, I suspect, in the minds of many others, is Will you be better off in four years than you are today? (see also Robert Samuelson, click here). It is not the past or even the present that matters. It is the future that matters. After the near total financial meltdown experienced by the US in 2008, and the bank bailouts, and the auto bailouts, a trillion dollars is now truly beginning to sound like pocket change! The total US national debt crossed the $16T ($16 trillion) mark on August 31, 2012, just as the 2012 fall US Presidential campaign was kicking into high gear. This also got me thinking once again about the national debt and annual budget deficit and the utter hopelessness one feels about what lies ahead after the votes are indeed cast on November 6, 2012. The national debt crossed the $1T (one trillion) mark between FY1981 and FY1982 and has now experienced eight doublings, or two quadruplings, in just a little under 31 years (the fiscal year ends on Sep 30, 2012). The annual Outlays (O) of the US government crossed the $1T mark, for the first time, in 1987 and the annual receipts (R) crossed the $1T mark in 1990. During all this time, the annual deficits and the debt just kept on piling higher and deeper. Now even the annual deficits, yes, just the annual deficits, have also crossed the $1T mark since 2009. The deficit was $1.413 T in 2009 and decreased slightly $1.293 T in 2010 and to $1.299 T in 2011. All the figures given here can all be found in the Historical Tables attached to the Fiscal Year 2013 Budget of the US Government (click here, then on Section 1 to go to Table 1.1 for the receipts, outlays and deficits data and then on Section 7 for the national debt data), see also Ref. [1]. During the recently concluded Democratic National Convention, former President Clinton made the following remarks about his years in office, when he was
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speaking to the delegates from his home state of Arkansas, the day before his speech nominating the incumbent President Obama for re-election, see Ref.[2]. Then I served for eight years, and we kept bringing the deficit down. We had four surplus budgets in a row. Then what happened? We put them [Republicans] back in or rather the Supreme Court did - We had a projected surplus of $5.7 trillion and turned it into a projected debt of $5.8 trillion. I did not hear the Clinton DNC speeches but read about them the next day and the above got me thinking. If the annual deficits slowly turned into a surplus, there must be a breakeven point at which the government receipts are just equal to the outlays. A deficit will result if receipts are lower the outlays and will decrease as the receipts increase. A surplus will then be produced when receipts exceed the outlays. In other words, Surplus = Receipts Outlays Or, S = R O (1)

Equation 1 is the basic equation that describes the financial performance of the government. The implications of this equation have been discussed in recent articles available at this website, see Refs. [3-6], see also related articles on the US national debt Refs. [7-10]. Equation 1is exactly analogous to the equations 2 and 3 below which describe the financial performance of a company and the performance of a heat engine, such as the engines used in a modern automobile, locomotive, an aircraft, or a rocket engine. Profits = Revenues Costs Work = Heat In Heat Out Or, P = R C Or, W = Q1 Q2 (2) (3)

Unlike the financial data for a company, where only P and R values are available (costs are often not stated), or the performance data for a heat engine, where only the work W, or the horsepower delivered is stated, all the three quantities that enter into the performance equation, S, R, O, for each year, going back to 1901, are available for a critical study of the Government Engine is working. Quite amazingly, for the Clinton years, graph of surplus S versus receipts R is a near PERFECT straight line, see Figure 1. As the receipts x increase the deficits
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(negative surplus) y decrease, exactly as mentioned by Clinton to the Arkansas delegation, and then move into the positive territory when the receipts exceed the minimum value x0. The numerical values of the slope h and the intercept c in the equation of this straight line, y = hx + c = h(x x0), can be determined using linear regression analysis. Thus, we find that y = 0.5845x 945.04 with a linear regression coefficient r2 = 0.998. Recall that for a PERFECT positive correlation, when all the data point lie EXACTLY on the straight line, r2 = +1.000.
400 300 200 100 0

Surplus, y [$, billions]

Clinton years y = hx + c = h(x x0) = 0.5845x 945.04 = 0.5845 (x 1616.93) r2 = 0.998

2000 2001

x0
-100

1994
-200 -300 0 500 1000 1500 2000 2500

Receipts, x [$, billions]

Figure 1: The US last enjoyed a budget surplus, for four consecutive years, under President Clinton. As the government receipts increased during the Clinton years, surpluses also increased, following a simple linear law as shown here. Deficits disappeared when receipts exceeded the cut-off level x0 = - c/h = $1616.93 billion. The linear Surplus-Receipts relation deduced for the Clinton years can therefore be used with a great deal of confidence to estimate the cut-off, or minimum, revenue x0 = -c/h, at which Receipts = Outlays, or Surplus = 0, exactly. The cut-off

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minimum equals $ 1616.93 billion or $1.6T (1.6 trillion) which is very nearly equal to 10% of the US national debt as of August 31, 2012. The governments receipts for 2010 and 2011 were $2.163 T and $2.303 T, respectively. Yet, instead of a surplus, as implied by linear extrapolation, deficits in excess of a trillion dollars were observed. The deficit for 2010 was $1.293 T and for 2011 it was $1.299T. This clearly means that the costs for the governments operations, the minimum receipts needed x0, has increased between 2000 and 2011. Although the receipts R have increased, the outlays O have increased even more. Do we have a spending problem, as President Reagan said famously, i.e., are outlays out of control? Or, do we have a revenue problem, i.e., insufficient receipts? This is the question that has dominated the political discourse on this topic ever since President Reagan said, We do not have a revenue problem, we have a spending problem. We dont have a trillion dollar debt because we havent taxed enough. We have a trillion dollar debt because we spend too much. - President Reagan, on March 28, 1982, addressing the National Association of Realtors in Washington (click here and here). Going back to Figure 1, we notice that the receipts dropped, even during the Clinton years, between 2000 and 2001. This trend has continued since then as can be seen from Figure 2 in Ref. [4] and the fuller discussion offered in Ref.[5]. The main purpose here is to show how the cut-off receipts x0 (the minimum receipts or the maximum outlays to produce a surplus), has changed as a function to time to rise to the level of $1616.93 billion observed in the Clinton years. The review of all of the (S, R, O) data, from 1901 to 2011, indicates that a budget surplus was produced for only 30 of the 111 years for which data is available; see Table 1 in Ref.[3]. And, following the definition of the thermal efficiency of a heat engine, which is defined as the ratio = W/Q1, we can define the efficiency E of the Government Engine as the ratio E = S/R. The efficiency E varies widely with a low value of 0.33% in 1960 and the highest value of 28.8% in 1927. For the
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Clinton years, the efficiency varied between 4% in 1998 to a maximum of 11.7% in 2000. More interestingly, the Surplus-Receipts (S-R) diagrams show the same linear trend that we observe in Figure 1, but only for brief periods. As receipts increase deficits decrease and turn into surplus.
40 20

x0

Surplus, y [$, billions]

0 -20 -40 -60 -80 -100 -120 -140 -160 0 100 200 300 400 500 600 700 800

1979 1976

y = 0.1997x 133.3 = 0.2 (x 667.2)

Receipts, x [$, billions]

Figure 2: The Surplus (Deficits)-Receipts diagram for four consecutive fiscal years 1976-1979 (Ford-Carter terms). Although no surplus was reported, the trend of decreasing deficits (mathematically equivalent to increasing surpluses) is obvious. Extrapolating the straight line joining the data for 1976 and 1979 suggests that further increases in the receipts should produce a surplus when the receipts exceed the cut-off, or minimum value of x0 = $667.2 billion. We observe this, for example, during the early years 1901-1916, which cover the period from the McKinley presidency to the first term of the Wilson presidency, see Ref. [5]. Also, of interest is the linear trend observed from 1976-1979, see Figure 2 which will serve as the starting point for our discussion. The graphical representation of the (S, R, O) data in the Figures 1 and 2 reveals that the estimated
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cut-off receipts x0 was $667.2 billion based on the US economy in 1976-1979 but was up to $1616.93 billion in the 1994-2000 period. We will now consider how this transition occurred using the S-R diagrams.

3. The Surplus-Receipts Diagram for 1976-1984

The Surplus-Receipts data for the years 1960-1984 is plotted in Figure 3. The earlier years are included to gain a bit of a historical perspective, which starts here with the beginning of the Kennedy presidency in 1961 and the now well-known

50.000 0.000

A0

Surplus, y [$, billions]

-50.000 -100.000 -150.000 -200.000 -250.000 -300.000 -350.000 -400.000 -450.000 0 100 200 300 400 500 600 700

B C

Receipts, x [$, billions]

Figure 3: The Surplus (Deficits)-Receipts Diagram for the years 1960-1984. Between 1976-1979, we observe deficits decreasing with increasing receipts, as in the Clinton first term, following a nice linear relation. The straight line labeled A joins the data for 1976 and1979 and will serve of the reference for our discussion.

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Kennedy-Johnson tax cuts which are now widely believed to have invigorated the economy (at least this is the opinion of those who believe in the benefits of such tax cuts, see Refs. [11-22]). The straight line labeled A is our reference, and joins the data for 1976 and1979, as in Figure 2. Notice that the (S, R) data starts deviating from line A after 1979. Also, the data for prior years is deviating from another line labeled A0 and approaches the line A. What we witness here is like a transition between the parallels A0, A, and B. Line A0 : y = 0.222x 64.6 = 0.22 (x 290.85) joining 1971 to 1974 Line A: y = 0.1997x 133.3 = 0.20 (x 667.2) joining 1976 and 1979 Line B: y = 0.229x 345.3 = 0.23 (x - 1508.5) joining 1983 and 1987 Line C: y = 0.232x 382.7 = 0.23 (x 1648.8) joining 1985 and 1989 The equations of these lines were deduced from the actual (S, R) data. The Lines B and C are indeed PERFECT parallels with identical slopes. The slopes of the other lines differ only in the second decimal place. We see, therefore, a movement of the data, or a cascading of the surplus, to lower and lower values (deficits increasing) along these parallels even as the receipts increased year after year. More importantly, this means that the cut-off revenue x0 varies as a function of time and is NOT a constant. This is a complex system whose behavior we are trying to understand using the simplest of all possible mathematical models.
Gerald Ford (seen receiving a kiss from his wife, Betty) was the 40th vice president (1973-1974), serving under President Richard Nixon. He was appointed to the office after Agnews resignation, the first person to be named vice president under terms of the 25th Amendment. Fords name at birth was Leslie King Jr. His parents separated and he later took the name of his mothers second husband, although he was never formally adopted.

http://img3.catalog.photos.msn.com/Image.aspx?uuid=5bcd672c-c35f-47e6-86e41985453c4a96&w=628&h=498&so=2
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30.00 20.00

B0 x0
1960 1969

Surplus, y [$, billions]

10.00 0.00

A0
1968 1967

1962
-10.00 -20.00 -30.00 -40.00 -50.00 0.00

x0

y = 0.222x 64.6 = 0.22 (x 290.85)

50.00 100.00 150.00 200.00 250.00 300.00 350.00

Receipts, x [$, billions]

Figure 4: An expanded S-R diagram for the years 1960-1974 (Kennedy-Johnson to Nixon-Ford) years. Deficits also turned into a surplus moving along the line labeled B0, Figure 4, with the equation y =0.119x 19.02 0.12 (x -159.67), joining the 1962 and 1969 data points. This is not a movement along parallels but the trend of cascading down to higher deficit levels is similar. The solid blue dots are the cut-off receipts.

4. The Surplus-Receipts Diagram for 1960-2001

The movement along parallels that is evident in Figure 3 (see also Figure 5 which includes the data for subsequent years, through 2001) also has another and more interesting implication and seems to provide empirical evidence for what might be called the economic work function. This is analogous to the work function W introduced in physics by Einstein, in 1905, to explain the puzzling (and equal complex) phenomenon called photoelectricity. This has been discussed in Refs.[3Page 10 of 28

6] and the reader is referred to those articles. It is sufficient to note here that Einsteins photoelectric law, K = E W = hf W, is also a linear law which can be written as y = hx + c = h(x x0) where x is the frequency f, h the Planck constant and hx = E the energy of a photon, y = K is the energy of the electron (produced when light shines on the surface of a metal, light being a stream of photons all having the energy hx), c is the negative of the work function W and x 0 = -c/h = f0 = W/h is the cut-off frequency, the minimum frequency above which electrons are produced (or a minimum photon energy W = hx0 = hf0 that must be exceeded).
400 300

A
2000 2001

Surplus, y [$, billions]

200 100 0 -100 -200 -300 -400 -500

C
1981

1985

1989 1992

500

1000

1500

2000

2500

Receipts, x [$, billions]

Figure 5: The Surplus (Deficits)-Receipts Diagram for the years 1960-2001. Here we consider the data going beyond 1984 all the way through the Clinton years. The same three lines A, B, C are included here as in Figure 3. Money in economics can be treated just like energy in physics (and vice versa) and the above means that the US economy, at different times, is behaving like light shining on different metals with different values of the work function W. Each metal is different and has very different number of electrons in what is called the
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valence shell. (We are using the simple model of the atom with a nucleus and electrons in orbit in different shells, the outermost being the valence shell.) How electrons are bound to the metal is therefore different and this changes the work function W. The K-f graph for the photoelectric effect is a series of parallels each having the slope h equal to the Planck constant and an intercept c = - W on the y-axis and an intercept x = x0 = f0 on the x-axis. It appears that we are witnessing similar changes here the economic environment is like the complex environment in which electrons exist in a metal. As it changes, the economic work function changes and the system cascades down the parallels until it meets another. The data for 1983 and 1984 indeed fall on or close to parallel line B with the data for the intervening years representing a transition. We also see the same type of a transition between the lines A0 and A. Recall that the line A0 joins the data for 1971 and 1974. If the US economy had continued along this line a surplus would have reported once the receipts exceeded the cut-off x0 = $291 billion. The receipts for 1976, $298.060, were slightly in excess of this cut-off. Alas, no surplus was observed! The explanation lies in the fact that the economic work function had changed, i.e., x0 (the cut-off revenue) had increased due to the changed economic environment. Considering Figure 5, we see the data for 1983 and 1984 on the parallel B and the data for 1985 and 1989 on the parallel C. Between 1981 and 1982, the national debt crossed the trillion dollar, and so it is that President Reagan said on March 28, 1982, see Refs.[14-16], We dont have a trillion dollar debt because we havent taxed enough. We have a trillion dollar debt because we are spending too much. Then, in 1989-1990, the annual receipts crossed the $1T mark, and now the annual deficits have also crossed the $1T mark (in 2009). It is also of interest to note that the cut-off revenue x0 deduced from the 1985 to 1989 data, the equation for Line C, equals $1648.8 billion. If the (S, R) data had continued along line C, a surplus would be observed only when receipts exceeded $1.65 trillion. In other words, the seeds for the debt-deficits problems that we are witnessing today were sown a long time ago. (We can appreciate this further, from the discussion to follow.)
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Instead of moving up the parallel C, the (S, R) data kept cascading down further until we see a dramatic change in the slope starting with FY 1992. (One could readily visualize straight lines with a negative connecting the data for the transition years.) This marks the second half of the senior Bush term and the trend of both increasing receipts with decreasing deficits continued through 2000. The slope of the S-R line changed from a negative value to a positive value (see Figure 2 in Ref. [3]) and a surplus was reported when the receipts exceeded $1616.93 billion.
500 400

CL

Surplus, y [$, billions]

300 200 100 0 -100 -200 -300 -400 -500 0 500 1000 1500 2000 2500

y= hx + c = h(x x0) = 0.5845x 945.04 = 0.5845 (x 1616.93) r2 = 0.998

Receipts, x [$, billions]

Figure 6: The regression line for the Clinton years (1994-2000, labeled CL) is added here. Because of the steeper positive slope h = 0.5845, this Clinton line intersects the parallels A, B, C and crosses the x-axis (zero surplus or deficit) at a point between the cut-off revenues deduced from lines B and C. Quite interestingly, as illustrated graphically in Figure 6, the cut-off value observed during the Clinton years ($1616.94 billion), when a surplus was finally reported, falls between the cut-off values of $1508.5 billion and $1648.8 billion deduced by extrapolation of the lines B and C.

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This is further proof of the observation made earlier that the seeds of the current debt-deficit problem that we are facing today were sown a long time ago. The following observations provide further confirmation. 1. As deficits changed to surplus, the (S, R) data following the Clinton line CL rises to a peak value just shy of the extrapolation of line A, deduced from the 1971 and 1974 data (the Nixon years). 2. When the deficits were decreasing the (S, R) data fall on or close to the lines B and C deduced from the 1980s data (Reagan-senior Bush). 3. When the receipts fell between 2000 and 2001 and the surplus decreased, the (S, R) data again lies close the extrapolation suggested by Line B.

5. Brief Discussion
The brief review of the (S, R, O) data, from 1960-2011, presented here (following up on discussions in Refs.[3-6]), shows that the Clinton-years trend, of decreasing deficits which turn into a surplus as receipts increase, has also been in earlier periods but only briefly, example 1976-1979. Sometimes this is observed with data for nonconsecutive years, although in chronological order (example the line B0 of Figure 4, for 1962-1969, with 1967 and 1968 data falling below the line). The implications of the remarkably linear Surplus-Receipts line, labeled as the Clinton line (CL) was discussed earlier, Ref.[3], using the simple breakeven model for the profitability of a company. We will consider this again here, to clarify the implications of this linear trend further. If we consider the operation of a company, with a profit motive, making and selling N units of some products, all of the revenues of the company, pN, do not appear as profits. Some of it must be given up, in the form of fixed costs, say a, and the variable costs, say bN, associated with the operation of the company. It is readily shown that the revenues x and the profits y, in this scenario, are related by the linear law, y = hx + c = h(x x0) where x0 = -c/h = ap/(p b). The detailed steps of the derivation may be found in Ref. [3]. Here a is the fixed cost, b the unit variable cost, and p the unit price. A profit will appear only if the fixed cost
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a is exceeded. Even after the fixed costs are exceeded, only the portion (pN bN) of the additional revenues will appear as profits because of the variable costs. Hence, profits appears at the breakeven x0 = ap/(p b) > a. The intercept c = -a. This is the intercept made on the y-axis (not of current interest). It is the intercept made with the x-axis (the breakeven value x0) which is of interest to us here. Fixed cost = a = -c, intercept on y-axis Breakeven x0 = ap/(p b) = a /[1 (b/p)] = a/h > a since h < 1 Likewise, as governments receipts increase, we expect the surplus to increase. However, not all of the receipts will appear as a surplus. Some of the receipts must be given up to meet the outlays, which are analogous to the costs of operation for a company. The breakeven, or cut-off, receipts x0, also equals the maximum outlays at any point in time. This cut-off receipts x0 has been going up consistently since 1901. For example, the breakeven estimated from the 1976-1979 data, when deficits were being reported, was $667.2 billion. No surplus, however, appeared when the receipts exceeded this level by 1985. A surplus was finally observed only during the Clinton years. Deficits have reappeared since then. The transition to higher and higher breakeven levels is illustrated here using the simple Surplus (Deficits)-Receipts diagrams. The budget cuts must first focus on the outlays that exceed the maximum x0, just as we must distinguish between the bare minimum necessities of life and the luxuries of life. This is the significant difference of the implications of the constants a and b in the breakeven analysis for a simple company. Both are related to costs, but in a very different manner. To increase ones savings (akin to the goal of producing a surplus) one has to focus first on reducing the luxuries. One cannot focus on cutting the bare minimum necessities that affect ones standard of living. This would be like the misguided focus on reducing the fixed cost a for a company, whereas a struggling company must first focus its attention on reducing the unit variable cost b. The second step would be to focus on reducing the fixed cost a. The same applies to the problem improving the efficiency of the government by addressing the contentious, divisive, but necessary, problem of budget cuts.
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The focus on cost-cutting by several global companies, with a focus on reducing the head count/labor costs appears to be an example of focus on a as opposed to b and this has, probably, led to the long term decline of many companies and also the overall decline of the US economy. The Einstein and Henry Ford quotes that follow are noteworthy in this context. The Reagan quote is also noteworthy and serves as a reminder that government does have a role to play, especially in times of a severe crisis; see also Greer, Ref.[18]. In summary, the linear law y = hx + c = h(x x0) provides a simple and consistent explanation for some of the key characteristics of the S-R diagrams used here to analyze the Surplus-Receipts data. The intercept x0 = -c/h has the characteristics of the breakeven costs, or the cut-off photon energy in Einsteins photoelectric law. The nonzero intercept c in the linear law can thus be treated as the economic work function. The changes in this economic work function, as a function of time, have been discussed here and can be used as a tool to learn how to design a budget that will yield a surplus year after year. To use the analogy of heat engines, many companies, and the economy, today are operating erratically like the old Newcomen steam engines, before James Watt began his studies that led to a permanent improvement in the performance of steam engines. Furthermore, as shown in the companion article (Ref.[3]) a review of all the (S, R, O) data going back to 1901 shows that the Government Engine, although working erratically, does have the potential to operating with an efficiency E = S/R in the range of 20% to 30%, which is comparable to the thermal efficiency of modern, finely tuned, engines. Typically, only a third of the heat energy released by burning of the fuel in the engine appears as useful work. Likewise, the government economists and political leaders, from the President down, who are in charge of formulating the annual budget, must learn to focus on understanding how to make the Government Engine work in a consistent manner, to launch a new era of financial efficiency in government.

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Some Quotes to Ponder in the Modern Context

If two factories produce the same sort of goods, other things being equal, that factory will be able to produce them more cheaply which employs fewer workmen i.e., makes the individual worker work as long and as hard as human nature permits. From this it follows inevitably that, with methods of production as they are today, only a portion of the available labor can be used. While unreasonable demands are made on this portion, the remainder is automatically excluded from the process of production. This leads to a fall in sales and profits. Businesses go smash, which further increases unemployment and diminishes confidence in industrial concerns and therewith public participation in the mediating banks; finally the banks become insolvent through the sudden withdrawal of accounts and the wheels of industry therewith come to a complete standstill. (Albert Einstein, 1934)Source: Albert Einstein, Quotes on Government, Politics, and Economics http://www.spaceandmotion.com/Albert-Einstein-Quotes.htm Photo: http://www.theargonauts.com/images/quotes/albert-einstein-bicyclequote.jpg My comments: Einstein describes here perfectly how we (especially in the US) got into the mess that we are in today, with high unemployment. Businesses cannot create jobs unless there is a demand for their goods and services. This means the large majority (read the middle class and the poor) must have money to spend to buy these goods and services. So, we are in a Catch-22 situation. Businesses, focused on cutting costs, especially labor costs, have done what Einstein says here, the remainder is automatically excluded. This situation can only be corrected by Government stepping in; see also Refs. [12,18].
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The Federal Government should only do what the people cannot do for themselves or through their locally elected leaders. - President Ronald Reagan, Address Before a Joint Session of the Alabama State Legislature in Montgomery, March 15, 1982. Source: http://www.freerepublic.com/focus/news/838536/posts See under Government.
Nearly everything in this country is too high priced. The only thing that should be high priced in this country is the man that works. Wages must not come down, they must not even stay on their present level; they must go up. And even that is not sufficient of itself -- we must see to it that the increased wages are not taken away from the people by increased prices that do not represent increased values. Henry Ford, New York Times, November 22, 1929 (5.0% unemployment) Source: http://www.friesian.com/sayslaw.htm Photo: http://s1.aecdn.com/images/news/legacy-of-the-ford-model-t-100-yearsafter-1380_2.jpg

It is often overlooked that, going beyond the well-known innovations in automobile manufacturing that he introduced, Henry Ford did FOUR remarkable things: a) increased the wages of his employees, b) increased the demand for his Model T c) decreased prices and d) increased the revenues and the profits of Ford Motor Company.
I am convinced that the larger incomes of the country would actually yield more revenue to the government if the basis of taxation were scientifically revised downward.

President Calvin Coolidge, State of the Union message, December 3, 1924.

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 7. List of References
1. Fiscal Year 2013 Budget of the US Government, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist.pdf 2. Bill Clinton Speech at the Democratic National Convention: GOP Built the National Debt, Amanda Terkel, aterkel@huffingtonpost.com, Sep 4, 2012, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist.pdf 3. The Efficiency of Government Compared to the Thermal Efficiency of a Heat Engine, Sep 18, 2012, http://www.scribd.com/doc/106220758/TheEfficency-of-Government-Compared-to-Thermal-Efficiency-of-a-Heat-Engine 4. The Amazing US Government Surplus (Deficits)-Receipts Relation during the Clinton Presidency, http://www.scribd.com/doc/105821230/The-AmazingUS-Government-Receipts-Surplus-Relation-during-the-Clinton-Presidency, Published Sep 13, 2012. 5. A Brief Review of the Historical US Government Receipts-Surplus (Deficit) Relation, http://www.scribd.com/doc/106003088/A-Brief-Review-of-theHistorical-US-Government-Surplus-Receipts-Relation , Published Sep 15, 2012. 6. The Clinton Budget Surpluses, http://www.scribd.com/doc/105819500/TheClinton-Budget-Surpluses-Treating-Government-like-a-Business, Published Sep 13, 2012 , Google financial data for early years may be found in Table 2. 7. From Debt-free to $16T: Lessons to be learned, Sep 11, 2012, scribd.com, http://www.scribd.com/doc/105651734/From-Debt-Free-to-16T-Lessons-to-belearned 8. The US National Debt Growth Rate: The Clinton-Bush-Obama Transitions, Sep 6, 2012. www.scribd.com < http://www.scribd.com/doc/105058946/The-US-National-Debt-Growth-RateThe-Clinton-Bush-Obama-Transition > 9. The Rate of Growth of the National Debt: The Obama versus Bush years, Sep 4, 2012. www.scribd.com < http://www.scribd.com/doc/104803209/TheRate-of-Growth-of-the-National-Debt-The-Obama-versus-the-Bush-years > 10.Is Taxing the Rich an Option for Budget Deficit Reduction?, Sep 2, 2012. www.scribd.com < http://www.scribd.com/doc/104661297/Is-Taxing-the-Richan-Option-for-Budget-Deficit-Reduction
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11.Two of the All-Time Greatest Successes in Cutting Taxes and Spending, by Jim Powell, forbes.com, August 10, 2011 http://www.forbes.com/sites/realspin/2011/08/10/two-of-the-all-time-greatestsuccesses-in-cutting-taxes-and-spending/ 12.Econ 101: How do Tax Cuts Work? By Gary Wolfram, Nov 11, 2006, mrc.org, http://www.mrc.org/node/29589 13.Success of Tax Cuts, By John R. Hendrickson, Oct 2006, insideronline.org, http://www.insideronline.org/archives/2007/winter/chap7.pdf 14.Contemporary Quotes on Are Tax Cuts Good for the Economy? Intellectual takout.org, http://www.intellectualtakeout.org/content/contemporary-quotesare-tax-cuts-good-economy 15.Quotes Ronal Reagan, March 28, 1982 fightthebias.com http://www.fightthebias.com/quotes/ronald_reagan.htm 16.Its Not a Revenue Problem, its a Spending Problem, Tracing the history of a GOP talking point, David Weigel, April 18, 2011, slate.com, http://www.slate.com/articles/news_and_politics/politics/2011/04/its_not_a_rev enue_problem_its_a_spending_problem.html 17.GOP on Message, Revenue Not the Problem, Spending Is, foxnews.com, Nov 7, 2010, http://www.foxnews.com/politics/2010/11/07/gop-messagerevenue-problem-spending/ 18.The Biggest Engine of Economic Growth?, By Colin Greer, newwf.org, March 19, 2012, http://newwf.org/blog/2012-03-19-the-biggest-engine-ofeconomic-growth 19.Laffer Curve, http://www.investopedia.com/terms/l/laffercurve.asp 20.Arthur Laffers Ant-Stimulus Curve Ball is a Foul, David Futrelle, August 9, 2012, business.time.com, http://business.time.com/2012/08/09/arthur-laffersanti-stimulus-curve-ball-is-a-foul/ 21.The Laffer Curve in the 1980s, by Mark J. Perry, mjperry.blogspot.com, Jan 26, 2008, http://mjperry.blogspot.com/2008/01/laffer-curve-in-1980s.html 22.The Laffer Curve, http://en.wikipedia.org/wiki/Laffer_curve 23.Sixteenth Amendment to the United States Constitution, Wikipedia article, http://en.wikipedia.org/wiki/Sixteenth_Amendment_to_the_United_States_Con stitution http://www.shmoop.com/constitution/16th-amendment.html 24.Woodrow Wilson, Congress and the Income Tax, March 16, 2004, wilsoncenter.org http://www.wilsoncenter.org/sites/default/files/ACF18.pdf
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25.The Effect of Hikes and Cuts in the Tax Rates on Government Receipts in the Wilson-Harding-Coolidge terms, To be Published. 26.The Question Is: Will we be better off in four years?, Robert Samuelson, http://www.dispatch.com/content/stories/editorials/2012/09/10/the-question-iswill-we-be-better-off-in-four-years.html ***********************************************************

8. Appendix I Bibliography of Related Articles

Posted at this website Since Facebook IPO on May 18, 2012
The first article listed below discusses a little known mathematical property of a straight line. Figures 1 to 3 in this article provide the philosophical basis for considering the significance of a nonzero intercept c as it applies to many problems in the real world. We make observations (x and y values of interest to us) to deduce y/x, usually called rates, ratios, or percentages. 1. http://www.scribd.com/doc/102000311/A-Little-Known-MathematicalProperty-of-a-Straight-Line-Strange-but-true-there-is-one Published August 4, 2012. Financial data (Profits-Revenues) analysis and Generalization of Plancks law beyond physics. 2. http://www.scribd.com/doc/95906902/Simple-Mathematical-Laws-GovernCorporate-Financial-Behavior-A-Brief-Compilation-of-Profits-RevenuesData Current article with all others above cited for completeness, Published June 4, 2012 with several revisions incorporating more examples. 3. http://www.scribd.com/doc/94647467/Three-Types-of-Companies-FromQuantum-Physics-to-Economics Basic discussion of three types of companies, Published May 24, 2012. Examples of Google, Facebook, ExxonMobil, Best Buy, Ford, Universal Insurance Holdings
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4. http://www.scribd.com/doc/96228131/The-Perfect-Apple-How-it-can-bedestroyed Detailed discussion of Apple Inc. data. Published June 7, 2012. 5. http://www.scribd.com/doc/95140101/Ford-Motor-Company-Data-RevealsMount-Profit Ford Motor Company graph illustrating pronounced maximum point, Published May 29, 2012. 6. http://www.scribd.com/doc/95329905/Planck-s-Blackbody-Radiation-LawRederived-for-more-General-Case Generalization of Plancks law, Published May 30, 2012. 7. http://www.scribd.com/doc/94325593/The-Future-of-Facebook-I Facebook and Google data are compared here. Published May 21, 2012. 8. http://www.scribd.com/doc/94103265/The-FaceBook-Future Published May 19, 2012 (the day after IPO launch on Friday May 18, 2012). 9. http://www.scribd.com/doc/95728457/What-is-Entropy Discussion of the meaning of entropy (using example given by Boltzmann in 1877, later also used by Planck to develop quantum physics in 1900). The example here shows the concepts of entropy S and energy U (and the derivative T = dU/dS) can be extended beyond physics with energy = money, or any property of interest. Published June 3, 2012. 10.The Future of Southwest Airlines, Completed June 14, 2012 (to be published). http://www.scribd.com/doc/102835946/The-Future-for-SouthwestAirlines-The-Unknown-Story-of-Rising-Costs-and-the-Maximum-Point-onProfits-Revenues-Curve Published August 14, 2012. 11.The Air Tran Story: An Important Link to the Future of Southwest Airlines, Completed June 27, 2012 (to be published). http://www.scribd.com/doc/102832984/The-Air-Tran-Story-The-Merger-andMaximum-Point-on-Profits-Revenues-Graph Published August 14, 2012. 12.Annies Inc. A Single-Product Company Analyzed using a New Methodology, http://www.scribd.com/doc/98652561/Annie-s-Inc-A-SingleProduct-Company-Analyzed-Using-a-New-Methodology Published June 29, 2012

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13.Google Inc. A Lovable One-Trick Pony Another Single-product Company Analyzed using the New Methodology. http://www.scribd.com/doc/98825141/Google-A-Lovable-One-Trick-PonyAnother-Single-Product-Company-Analyzed-Using-the-New-Methodology, Published July 1, 2012. 14.GT Advanced Technologies, Inc. Analysis of Recent Financial Data, Completed on July 4, 2012. (To be published). 15.Disappearing Brands: Research in Motion Limited. An Interesting type of Maximum Point on the Profits-Revenues Graph http://www.scribd.com/doc/99181402/Research-in-Motion-RIM-Limited-WillDisappear-in-2013 Published July 5, 2012. 16.Kia Motor Company: A Disappearing Brand http://www.scribd.com/doc/99333764/Kia-Motor-Company-A-DisppearingBrand, Published July 6, 2012. 17.The Perfect Apple-II: Taking A Second Bite: A Simple Methodology for Revenues Predictions (Completed July 8, 2012, To be Published) http://www.scribd.com/doc/101503988/The-Perfect-Apple-II, Published July 30, 2012. 18.http://www.scribd.com/doc/101062823/A-Fresh-Look-at-Microsoft-After-itsHistoric-Quarterly-Loss Microsoft after the quarterly loss, Published July 25, 2012. 19.http://www.scribd.com/doc/101518117/A-Second-Look-at-Microsoft-After-theHistoric-Quarterly-Loss , Published July 30, 2012. 20.http://www.scribd.com/doc/103265909/A-Brief-Analysis-of-Groupon-s-ProfitsRevenues-Data Published August 19, 2012. 21.http://www.scribd.com/doc/103027366/Groupon-Analysis-of-ProfitsRevenues-Data-and-its-Business-Model Published August 16, 2012. More detailed analysis including discussion of the idea of a work function. 22.http://www.scribd.com/doc/103369016/Analysis-of-Zynga-s-Profits-RevenuesData-Maximum-point-on-the-profits-revenues-curve Published August 20, 2012.

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General Motors Financial Data 23.http://www.scribd.com/doc/103600274/The-New-GM-A-Brief-Analysis-of-theProfits-Revenues-Data-through-1Q2011, Published May 9, 2011 and again on August 22, 2012, Discussion of the new GM data from 1Q2010 to 1Q2011. 24.http://www.scribd.com/doc/103607023/Why-Can-t-General-Motors-be-morelike-Microsoft-The-new-GM-may-just-be Published August 22, 2012. 25.http://www.scribd.com/doc/103938349/GM-Before-the-Bankruptcy-MaximumPoint-on-Profits-Revenue-Graph GM Before the Bankruptcy: Maximum point on the profits-revenues graph, Published August 25, 2012. ****************************************************************** The Unemployment Problem: Evidence for a Universal value of h in the unemployment law. 26.http://www.scribd.com/doc/100984613/Further-Empirical-Evidence-for-theUniversal-Constant-h-and-the-Economic-Work-Function-Analysis-ofHistorical-Unemployment-data-for-Japan-1953-2011 Single universal value of h for US, Canada and Japan in the unemployment law y = hx + c, Published July 24, 2012. 27.http://www.scribd.com/doc/100939758/An-Economy-Under-StressPreliminary-Analysis-of-Historical-Unemployment-Data-for-Japan, Published July 24, 2012. 28.http://www.scribd.com/doc/100910302/Further-Evidence-for-a-UniversalConstant-h-and-the-Economic-Work-Function-Analysis-of-US-1941-2011-andCanadian-1976-2011-Unemployment-Data Published July 24, 2012. 29.http://www.scribd.com/doc/100720086/A-Second-Look-at-Australian-2012Unemployment-Data, Published July 22, 2012. 30.http://www.scribd.com/doc/100500017/A-First-Look-at-AustralianUnemployment-Statistics-A-New-Methodology-for-Analyzing-UnemploymentData , Published July 19, 2012. 31.http://www.scribd.com/doc/99857981/The-Highest-US-Unemployment-RatesObama-years-compared-with-historic-highs-in-Unemployment-levels , Published July 12, 2012. 32.http://www.scribd.com/doc/99647215/The-US-Unemployment-Rate-Whathappened-in-the-Obama-years , Published July 10, 2012. ****************************************************************
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Traffic-fatality and Teen pregnancy problem 33.http://www.scribd.com/doc/101982715/Does-Speed-Kill-Forgotten-USHighway-Deaths-in-1950s-and-1960s Published August 4, 2012. 34.http://www.scribd.com/doc/101983375/Effect-of-Speed-Limits-on-FatalitiesTexas-Proofing-of-Vehciles Published August 4, 2012. 35.http://www.scribd.com/doc/101828233/The-US-Teenage-Pregnancy-Rates-1 Published August 2, 2012. 36.http://www.scribd.com/doc/102384514/A-Second-Look-at-the-US-TeenagePregnancy-Rates-Evidence-for-a-Predominant-Natural-Law Published August 8, 2012. Government and National Debt 37.http://www.scribd.com/doc/104663110/The-United-States-Postal-Service-ATest-Case-to-Understand-the-US-Government-Inefficiencies-and-Budget-CutsAhead United States Postal Service: A Test case for government inefficiencies, Published Sep 2, 2012. 38.http://www.scribd.com/doc/104833993/Are-You-Better-Off-Than-You-WereFour-Years-Ago Published Sep 4, 2012. Briefly highlights the slowing down the debt growth rate as we cross the $16 T mark. The national debt could have been as high as $19.5T on August 30, 2012 if the high rate at the end of the Bush presidency had continued. 39.http://www.scribd.com/doc/104803209/The-Rate-of-Growth-of-the-NationalDebt-The-Obama-versus-the-Bush-years Published Sep 3, 2012. The importance of the debt growth rate h = dD/dt, as opposed to the debt level D, is emphasized. The significance of the debt growth rate does not seem to have been recognized, at least in the popular discussion. 40.http://www.scribd.com/doc/104677653/The-US-National-Debt-Brief-HistoryGood-News-The-Rate-of-Growth-of-the-Debt-is-Slowing-Down , Published Sep 1, 2012. Brief summary of the historical debt data starting with President George Washington with attention being drawn to the recent slowing down of the debt growth rate. The importance of the debt growth rate, as opposed to debt levels, does not seem to have been recognized, at least in the popular discussion.
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41.http://www.scribd.com/doc/104659108/The-US-National-Debt-and-the-LongTerm, first published on June 17, 2011, and republished Sep 1, 2012. 42.http://www.scribd.com/doc/104659448/The-US-National-Debt-RetirementProgram, first published on June 23, 2011, before the debt default crisis which led to lowering of the US rating, republished Sep 1, 2012. 43.http://www.scribd.com/doc/104662291/A-Radical-Proposal-to-PermanentlyReduce-the-Unemployment-Rate, first published on October 13, 2011, republished Sep 1, 2012. 44.http://www.scribd.com/doc/104661297/Is-Taxing-the-Rich-an-Option-forBudget-Deficit-Reduction, first published on July 3, 2011, republished Sep 1, 2012.

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About the author V. Laxmanan, Sc. D.

Email: vlaxmanan@hotmail.com The author obtained his Bachelors degree (B. E.) in Mechanical Engineering from the University of Poona and his Masters degree (M. E.), also in Mechanical Engineering, from the Indian Institute of Science, Bangalore, followed by a Masters (S. M.) and Doctoral (Sc. D.) degrees in Materials Engineering from the Massachusetts Institute of Technology, Cambridge, MA, USA. He then spent his entire professional career at leading US research institutions (MIT, Allied Chemical Corporate R & D, now part of Honeywell, NASA, Case Western Reserve University (CWRU), and General Motors Research and Development Center in Warren, MI). He holds four patents in materials processing, has co-authored two books and published several scientific papers in leading peer-reviewed international journals. His expertise includes developing simple mathematical models to explain the behavior of complex systems. While at NASA and CWRU, he was responsible for developing material processing experiments to be performed aboard the space shuttle and developed a simple mathematical model to explain the growth Christmas-tree, or snowflake, like structures (called dendrites) widely observed in many types of liquid-to-solid phase transformations (e.g., freezing of all commercial metals and alloys, freezing of water, and, yes, production of snowflakes!). This led to a simple model to explain the growth of dendritic structures in both the ground-based experiments and in the space shuttle experiments. More recently, he has been interested in the analysis of the large volumes of data from financial and economic systems and has developed what may be called the Quantum Business Model (QBM). This extends (to financial and economic systems) the mathematical arguments used by Max Planck to develop quantum physics using the analogy Energy = Money, i.e., energy in physics is like money in economics. Einstein applied Plancks ideas to describe the photoelectric effect (by treating light as being composed of particles called photons, each with the fixed quantum of energy conceived by Planck). The mathematical law deduced by
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Planck, referred to here as the generalized power-exponential law, might actually have many applications far beyond blackbody radiation studies where it was first conceived. Einsteins photoelectric law is a simple linear law, as we see here, and was deduced from Plancks non-linear law for describing blackbody radiation. It appears that financial and economic systems can be modeled using a similar approach. Finance, business, economics and management sciences now essentially seem to operate like astronomy and physics before the advent of Kepler and Newton.

Cover page of AirTran 2000 Annual

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