The Laffer Curve was justly famous, even before it became the linchpin of Reagan economics. What it holds is simplicity itself. The Laffer Curve describes government income as a function of the rate of taxation. At 0 taxation there is, of course, 0 income. At 100 percent taxation, the economy is assumed to be destroyed, so there is again 0 income. Between these two points the curve rises as rates of taxation increase, reaches a maximum at some point, then declines as high rates of taxation decrease investment, modernization of equipment, etc. Laffer assumes that we are currently at a point too high on the curve. He could cut tax rates, stimulate business, and the government would take in more money, not less.
There is actually a family of Laffer Curves. The idea is a general one, related to the psychological issue of schedules of reinforcement or rewards. It is easy to see, for example, that a rate that is not rewarded will learn nothing (except hatred for lab assistants and a liking for songs about revolution). And a rat who is rewarded continuously will become satiated and begin to contemplate retirement to Monterey and Pebble Beach, rather than dutifully pressing his bar. The function between these two points, rising to maximum at the point where reinforcement is most efficient, is one form of the Laffer Curve. In honor of the rat that discovered it, it is called the Twitcher Curve.
The Giggler Curve is the most important offspring of the Laffer Curve. It deals with executive salaries. Again, it begins with the obvious end points of the curve. An executive who is paid nothing will do nothing. An executive who is paid far too much will spend all of his time trying to decide how to invest his money rather than working for his employer. Between these two points the curve rises to a maximum, then descends in an orderly way.
What makes the curve exciting is that its discoverer, an obscure academic economist, Henry Giggler, has shown that the maximum productivity of the chief executive occurs at the salary level of $33,000 for small companies, $44,000 in medimum-sized companies and $55,000 in large companies. Raising chief executive salaries above these levels, on the old naive assumption that a person who is paid more does more work, in fact decreases productivity.
From this flowed the joyous fact that stirred the stockholder revolt last year -- the way to increase executive productivity is to decrease executive pay.
Given the already established popularity of the Laffer Curve, it was not surprising that the Giggler Curve won widespread and quick acceptance. Stockholder initiatives in company after company established salary review boards. Executive salaries were cut back to levels that assured maximum efficiency. A number of executives who had previously been at much higher levels resigned rather than accept salary cuts. But when these executives started their own businesses, as most of them soon did, they found the efficiencies inherent in Giggler economics so compelling that they established Giggler salary schedules rather than the old linear "big job/big salary" systems.
Both political parties built Giggler planks into their platforms. The Republicans wrote of "the urgent necessity to make sure that every executive is paid his true worth, that point at which he will be most productive. " Democrats decried the "speed-up" economics inherent in Giggler calculations, but agreed on the necessity "to cut back bloated salaries to more efficient levels."
Perhaps the most dramatic change came not in business or government, but in professional sports. For the past several seasons, coaches, who were paid at levels on the Giggler Curve that ensured hard work, had watched in despair as their highly paid star athletes spent a lot of time with hustlers, but did very little hustling. The Giggler Curve showed them how to cure this. All athletes were immediately cut back to efficient salary levels and again began to squeeze bunts, steal bases, chase fly balls, pass off to the open man and protect the quarterback -- in short, to do all of those things that made it fun to watch sports again.
The healthy effect of Giggler economics on American medicine was also immediately apparent. As physicians' salaries were moved back to more efficient levels, they worked shorter hours but did better work. They performed fewer unnecessary operations and prescribed fewer unnecessary medicines.
Application of Giggler economics to education led to large salary increases for teachers. However, since smaller numbers of efficient teachers proved to do more work than large numbers of inefficient ones, schools cost less money to run. Since efficient teachers demanded efficient work from students, classroom teaching hours were reduced and more students did work on individual or group contracts. Committee work was almost abolished. Profits of publishers rose as students and teachers read more books.
Since teachers refused to spend valuable time filling out useless reports and questionnaires, Xerox went bankrupt. Most students over 16 moved into work-study programs, spending only two or three efficient hours in school each day rather than six or eight bored hours. Naturally, they learned more.
Henry Giggler went on leave of absence from his job as Milton Friedman Professor of Economics, at a salary of $44,000 per year. He argued that he himself would be most efficient at a salary of $55,000, which he could easily make from his books, lectures and appearances on talk shows. He wisely turned down offers to be a White House adviser (too confining) and a corporate consultant (he told them to read his books). Also, he refused to take more than $1,000 for any one appearance, and he did not accept either the Paramount Pictures offer to make a movie about his life ($25,000 for his technical assistance) or the NBC plan to do a documentary on the troubles of his early years (girls were not interested in his SAT scores, he couldn't handle the gym requirement and he had a misunderstanding with his father, who thought he ought to accumulate capital rather than write about it). Giggler planned his new life so he would work exactly 48 weeks each year, would make exactly $55,000 the first year and could take in a bit less each successive year, as the dollar increased in value.
Eventually Laffer, Twitcher and Giggler were asked to plan the world economy, but that familiar story need not be repeated here.