Laffer and the Portability of Knowledge

By Kevin Meyer

The Laffer Curve has received a lot of press over the past couple weeks as federal, state, and even local governments try to close huge budget imbalances by increasing taxes predominantly on the "rich."  It never works, as Arthur Laffer himself pointed out in the WSJ a few days ago.

Why doesn't it work?

The concept that politicians don't seem to understand is that capital, wealth, and therefore investment creating jobs and more wealth, are portable.  It can move across state lines, and even from country to country as we see some large corporations relocate and take their taxable revenue with them.  People and organizations expect to pay some amount to obtain access to infrastructure and services, but at some point the amount is no longer worth the value provided.  Like it or not, states and nations also operate in a form of free market competition with each other.

But you'll be happy to know that tax policy is not the point of my rant.  Money is portable… and so is knowledge.  And knowledge as we know can be far more valuable than the money often attached to it.

Let's take another look at the classic Laffer Curve profile from the perspective of knowledge and knowledge workers.  Perhaps put "knowledge retention" or "knowledge attraction" along the bottom x axis.  What could go on the y?

Keep in mind when I say "knowledge" I mean "quality knowledge"… any organization can hire a lot of brains, but you really want quality brains, or brains that can be developed into quality brains.  People that drive an organization to new heights.

So I bet one attribute on the y axis that would create a very similar curve would be policies and procedures.  Most people, and organizations, want some level of structure and common policy.  True chaos is seen as beneficial to only a small number of people.  But in many organizations the need to detail policy and procedure begins to grow out of control and eventually you have 26-page travel policies that detail every nuance except the one you need.  What happens then?  I mean besides the exponential cost to administer and manage such programs.

The smart guys, the ones who can easily find new jobs in even today's economy, the ones that fuel innovation and growth… they say "screw this" and move on.  You reach a tipping point similar to the Laffer curve, and knowledge flight takes off.

I know of another company, a very large industrial equipment manufacturer that is often considered to be on the forefront of lean thinking, that is attempting to deal with the dramatic and long-term slowdown in orders by slashing hours, wages, and even benefits… instead of laying off.  A laudable policy or foolish move?  I explored this conundrum a few months ago and concluded, much to the derision of some lean purists, that it could be foolish.

Saving jobs, and the knowledge and creativity that if lead right those jobs represent, is a good thing.  Mutual sacrifice can be a good thing… to a point.  A good friend of mine at the company I referred to above recently told me how, after over six months, the morale has gone from one of "we're in this together" to "why am I subsidizing lesser performers?"  Pretty toxic, and I bet you can guess what is happening.  The best and brightest are moving on, and there's real concern for what will remain when the industry recovers.  So on the y axis we now have "depth of personal sacrifice"… it eventually reaches a point where it is no longer worth it, and knowledge flees.

Take another look at the Laffer Curve, ignoring the original tax policy implications.  Where is your organization reaching a tipping point in terms of knowledge retention and growth?  What can you plot on the y axis?