Category: Economics

What if you knew that applying more effort would only make things worse?

How would you proceed?
Would you heed the warning?
Would you stop?
Or would you continue applying effort blind to the deteriorating results?

I achieved burn out by expecting outsized results from an ever heroic effort.

At the time, I didn’t know about the Laffer Curve – an economic model for thinking about the relationship between tax rates and the maximum amount of money collected at that rates. It states that sparse revenue is collected at extremely low tax rates and extremely high tax rates – for two different reasons. Low rates encourage compliance, high rate encourage evasion. Somewhere between those two extremes is a point – or points – where both tax rates and collected revenues are both as high as they can go.

The model acknowledges maximum results (revenues) and maximum effort (rates) are not directly related and above a certain point more effort provides a worse result.

For simplicity, the Laffer Curve is depicted as a symmetrical with a single peak at 50%. That doesn’t mean it is. There could be multiple peaks, it could be wavy, or shifted to one side. The actual curve could be highly dynamic and responsive. Finding the sweet spot requires continual adjustments.

The Laffer curve isn’t just a model for taxation, it’s an effective model for thinking about any situation where you want the highest, sustainable returns.

Also, Nicholas Bate.

“…to the extent that Etsy, Kickstarter, and other platforms can disintermediate the labor economy, we should be very grateful. Not only are these platforms beneficial technologies of resistance as Reihan emphasizes, they might be generators of macroeconomic robustness.” – Eli Dourado

I encourage you to read the whole thing. I especially found the employment = bond financing , self-employment = equity financing comparison very intriguing.

One of the reasons I love economics is it’s complexity. Sure, in theory the principles are simple – their application across a global scale are awe-inspiring, and frame-shattering.

Take this passage from former Obama economics advisor Christina Romer on the terribly selfish reason China owns so many Treasury bonds:

“For years, China has deliberately accumulated United States Treasury bonds to keep the dollar’s value high in renminbi terms. The United States would export more and grow faster if China allowed the dollar’s price to fall. Congress routinely threatens retaliation if China doesn’t take steps that amount to weakening the dollar.” – Christina D. Romer

So…..China is artificially inflating their currency by pegging it against the USD and buying up Treasury bonds to keep it a float.

Romer argues that this is preventing the US economy from fully recovering – thereby postponing a more fundamental rise in the value of the USD. Thereby making it a less attractive currency – in the short term – to peg another currency against.

OMG$

A couple years ago – Pete suggested I look closer at the relationship between the stock market levels, oil prices, and the value of the dollar.

My preferred metric of measuring the strength of the US Dollar is it’s value relative to the Euro. As I write this – 1 USD = .70 Euro. While I’d prefer their values to be equal (the result being the effect of a single global currency and an interesting conversation on global pricing) – I think the USD is undervalued until it passes .80 Euro.

Over the past week, the USD has increased in value from .68 to it’s current .70.

Along the way oil, US stocks, and other commodties prices – including gold – have decreased. Basically anything priced in US Dollars and traded globally.

Fewer (strong) Dollars are needed to purchase the same quantity of these goods.

As the dollar continues to climb – it will continue to have downward pressure on these prices.

Where it gets interesting is when both prices and the USD’s value are increasing.

The earliest we could see that is this autumn.

“Government spending can’t fuel growth, because the decision makers who direct the spending are not taking risks in the hopes of generating profit.” – Scott Grannis