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.
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.
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.
Scott Grannis’ Calafia Beach Pundit has become daily reading for me  – primarily because I’m a sucker for the charts he shares.
Take a minute to look at this one. (no worries, I’ll still be here when you get back).
Good stuff. It’s rare to see a single chart summarize our own confidence over time, let alone over my lifetime.
Yes, it was the Gay Nineties.
Yes, we did fall off a cliff in 2007 – wasn’t the first time, just the biggest.
Some of you may know you were when John Lennon was shot. Or JFK. Or when we landed on the moon.
From new babies to client projects to wondering just what the hell is happening I know where I was along each bump down that cliff. Spooky.
1. Other daily reading includes:
There’s a pragmatic optimism across these 4 sites that I find both challenging and refreshing. Plus – they’re not afraid to go deep.
If there’s a state in the union synonymous with the modern American Dream – it’s California 1.
For the past twenty years, every vocation or avocation I’ve been interested in has had a significant pull from California.
There’s now some evidence California is becoming less attractive to do business in.
“The top states gaining our businesses since January 2009 show Texas in the top spot, followed by Arizona, Colorado, Nevada, Virginia and Utah.” – Joseph Vranich in California Business Exodus Now Triple Last Year’s Rate
California’s loss is the rest of the country’s gain.
Attention: Minnesota policy makers – there’s some opportunity here. I’d like to see Minnesota on this list as well. The same business conditions that make it attractive to move here make it attractive to stay here. 😉
1. For cities, I’m sure NYC still holds the #1 position.