This past weekend, my four children asked to watch one of the classics: Ferris Bueller's Day Off. I know this isn’t the most intellectually stimulating movies ever written and produced, but it is a great two hour get away of humor and fun. My middle son Luke said, “Hey Dad. What is the Laffer Curve?” We just finished watching a comedy and my 9 year old wanted to know about the Laffer Curve. I couldn’t help myself and I asked, “Luke, where did you hear that phrase?” He looked at me as if I wasn’t really watching the movie, “Dad, Ferris’s teacher was talking about the Laffer Curve the day he wasn’t in school. What is it?” I realized in that moment that Ferris Bueller’s Day Off wasn’t simply a knee slapper or an escape from reality, but also educational and relevant in today’s financial world.

When I was studying economics nearly 25 years ago at U.C. Davis, I remember a lecture that started with us discussing Nixon’s and Carter’s tax plan. If I remember correctly, my professor said: “The 1970s were characterized by government taxation and inflation which discouraged innovation and business growth”. The more we looked at the economics of the 1970s we learned that in the monetary policy was exceptionally loose. The government was essentially inflating the currency, the purchasing power of money was quickly declining, and both inflation and excessive taxation were seen as threats to the American Dream because they hindered economic growth. The top income tax rate in the US was 70% prior to the election of Ronald Reagan in 1980.

It was beautifully orchestrated how our professor was able to give us all of this rich information, draw us in to the underpinnings of the US government and economic principles, and then draw on the blackboard the Laffer Curve. All of this history to teach us about the simple principle found in our textbook.  How did this illustration accurately depict the economic condition of the world?

What is the Laffer Curve?

 The theory of the curve is most easily understood at the polar extremes—O% income taxation and 100% income taxation. At one end, no income taxation means that the government

receives zero income. On the other extreme, 100% taxation, the government still receives zero income. This is because the taxpayer has no incentive to work because there is no way of avoiding paying taxes, thus they receive nothing.  The curve dictates the optimal level of work incentive and taxation is 50%. The win-win balance.

 Most advocates of the Laffer Curve are those wanting the government to reduce tax rates. Thus it is believed that “a reduction in tax rates will actually increase government revenue and not need to be offset by decreased government spending or increased borrowing” (www.wikipedia.com)

 We have all heard, read, and watched president-elect Obama discuss his plan to increase taxes for those making over $250,000 a year and decreasing taxes for those on the lower end of the spectrum.  Ironically if Ben Stein, the teacher in Ferris Bueller’s Day off, was part of Obama’s financial advisory team, he might remind Obama about the Laffer Curve. Raising taxes may not be the answer to our current economic situation. Those falling into the higher income tax brackets, may not have the incentive to work. It is an interesting quandary.

 In addition to the Laffer Curve lecture, one can’t forget about the 1961 Ferrari 250Gt SWB California Spyder featured in the movie. It is a great car. In 2004, we wrote an article entitled “Sometimes Investments are Found in the Cupboard” and in 2006, an article entitled “The Living Michealango.” These articles discussed how antiques, collectables, and hobbies can be great investment opportunities. These ideas still hold true today. A1961 Ferrari 250Gt California Spyder (the same type of car from the movie) was sold in May 2008 for a record price of 10.8 million dollars at a car auction in Maranello, Italy (www.autoblog.com). While I’m not paid to be an expert on the classic car market, I can't help but think this sale was the result of people putting their investment income into artwork, collectibles, and travel over putting their income into the financial markets like real estate or the stock market, which moved money away from financials.

  The classic car market will start declining at some point. Investment sectors have their ups and down, positive growth, and rapid declines. The point isn’t about the ever changing economic conditions,  however we are at pivotal economic times. We might be faced with fears of inflation, taxation, money moving in and out of predictable markets. I understand why Ferris Bueller took a day off. We all sometimes need a break from Laffer Curves, lectures, stress, and the unpredictable, thus we run to things like a 1961 Ferrari to escape reality for a series of moments.

 At a glance, the movie Ferris Bueller's Day Off may appear to be simply a nice 2 hour escape from reality, but the themes and subthemes of the movie are also profound insights into the ever changing financial world. Next time you decide to sit down, drink a latte, and watch a movie, you might learn more than you expected.

 *Valentine Capital Asset Management is an SEC Registered Investment Advisory Firm doing buiness in the State of California. John Valentine, Founder and President.