The Lightbulb Economy

© 2004 Steve Feinstein. All Rights Reserved.

There are certainly many points of contention between Democrats and Republicans, but perhaps none as stark—and misunderstood—as the issue of taxes. Both sides have bombarded the public with their arguments, but the Democrats, aided by their liberal mainstream media allies, have crafted by far the most memorable, neatly-capsulized soundbite: “Tax breaks for the rich.”

Despite all the studies of how each income group benefits from the lowered tax burden, the overriding message from the Democrats remains the same—Republicans only care about their fat-cat Corporate cronies, and by lowering their taxes, the Administration assures that big dollar political donations will continue to come flowing into their campaign coffers. Therefore, rather than rehashing the bracket by bracket financial analysis that demonstrates the actual positive economic impact of lowered taxes, it’s probably more useful to cast the entire subject in a more relevant, analogous framework.

In engineering parlance, there is a phrase called “Energy under the curve.” This refers to the total energy output of a device—be it a light bulb, an acoustic transducer, etc.—as measured on a graph across a range of frequencies. While every effort is made to maximize the amount of energy output from that device, in the end it’s still a finite amount. The key to best performance is getting the device to deliver energy that is usable. A light bulb, for example, may produce x lumens of energy, but it won’t do much good if its output is predominately at ultraviolet frequencies that are invisible to the human eye. An acoustic transducer (a “speaker”) can be modified to produce more or less energy at different frequencies, but the total acoustic energy produced by that specific speaker is finite. The engineers can move the energy output from one frequency region to another, but the “total energy under the curve” remains the same. The key to a speaker’s useful performance, of course, is for it to produce its energy at frequencies that are audible and useful to humans, not frequencies only audible to bats and dogs.

The concept of energy under the curve is directly analogous to an economy’s money supply at a given time. Both the energy and the money supply are known amounts. The money is going to be spent by someone (the device is going to output its energy); the key is for the money to be spent where it has the most benefit (the light bulb must produce visible light).

Engineers love efficiency. The ultimate goal is for a device to return the maximum output for the minimum input, all at manageable cost. Energy-efficient appliances, fuel-efficient cars, energy-efficient buildings—these are examples of intelligent designs, properly executed. How can an economy achieve comparable efficiency? By putting the money into the hands of economic “engineers”—the taxpayer.

Here’s another analogy regarding economic efficiency. If a person goes to a high-stakes gambling casino in Las Vegas and wins $3000 at the blackjack table, that person would probably think nothing of taking a stroll down to the gift shops and buying some overpriced designer suit or handbag they ordinarily would never purchase. After all, they’re spending house money, not their own. But tell that same person they’ve got to support their family for a month on the same $3000, and there will be a BIG change in how that money is spent. The competition for that $3000 is intense, with every potential recipient of those funds striving to offer the best product at the best value. Rent for $625. Phone for $102.33. Clothes for $79.63. Groceries for $245.67. Suddenly, in the hands of a skilled economic engineer, the same $3000 produces far better results.

The point is clear: When the Government spends house money, the effect is economic inefficiency. Right now, we are taxed when we receive work income, the companies that employ us are taxed on their earnings, our savings and investments are taxed on their interest and dividends, we’re taxed when we sell securities or real estate (capital gains) and we’re taxed when we inherit money—money that itself has already been taxed as many as four times.

Heavily-taxed societies traditionally exhibit far lower economic growth than those with lower tax burdens. There’s less active capital in the private economy of a high-tax society being spent to buy houses, food, cars, TVs, clothes, and paying for all the people needed to manufacture, sell, deliver, and service those items. According to a recent article in the Wall Street Journal, tax revenues in the EU represent more than 40% of GDP, with some of the most socialistic countries above 50%. By contrast, in the U.S., tax revenues are only around 30%. The WSJ article continues, “Higher per capita GDP in the U.S. allows the average American to spend about $9,700 more on consumption every year than the average European. So Yanks have by far more cars, TVs, computers and other modern goods. Most Americans have a standard of living which the majority of Europeans will never come anywhere near.”

So why would we want to move away from that model towards higher taxation and more entitlement programs, a position espoused by today’s Democrats and bolstered by the liberal media? Instead, if we put that same tax money into the private sector’s hands (move the energy from one part of the curve to another), the positive economic impact is far greater. The private sector will spend the same amount of money as the Government much more efficiently, spreading it around for best return, creating more jobs and business activity along the way. It’s such a simple economic truth it’s really amazing that more people don’t (or aren’t allowed to) understand it: Acting in your own self-interest, you’ll make your own money go farther, to much better effect, than if a disinterested third party spends your money on your behalf (often on things with which you vehemently disagree). That’s the end result of lower taxes—a more productive, more efficient, higher-employment economy, controlled by the individual wage-earning engineers who created it. What a bright idea.