Here.
I believe the federal government has legal jurisdiction to do this given TARP rules (though, like the bailouts, I don't believe it's constitutional). The tax-payer who is part of the generation that will have to pay for this mess in me should be happy to hear this. But logic always wins out.
I think it was Thomas Sowell who said every economist (or economics enthusiast) should always ask, "then what?" Indeed, then what? This policy strikes me as a major disincentive to any current or potential talented manager who could help revive these failing companies. I mean, wasn't that the whole point of bailing them out in the first place? It's like telling the future general manager of the Pittsburgh Pirates he can only make 90% of what the market charges. For the worst job in baseball. What general manager in their right mind would take that job?
Sure, they'll score some short term political points, but what will be the long-term real effects be? If anything, the Administration should be giving potential execs and managers massive incentives to take on what seems to be terrible positions.
Now I wish Congress and the White House would get out of this situation to begin with. But if they do decide to meddle and tinker, the least they could do is demonstrate a little managing common sense.
I mean, as Alex Tabarrok points out at MR, have any of these guys even glanced at Atlas Shrugged?
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ReplyDeleteWow, read my mind. Nice post Will. I was going to write a post along the lines of, why this liberal is against pay caps.
ReplyDeleteMy reasoning was more focused on my disgust with populist pound of flesh demands, but the gist was the same. I understand it's a shrewd political move. However, I'm not 100% on board with the pay incentives (how much are the dollars at the margins worth to these execs?).
For me the issue is more about the moral and economic authority of the Federal Government to create a replacement for markets. First, the Federal Gov. stepped in to recapitalize the banks. In my opinion, a necessary and bold move, even if the banks later realized enormous profits. Without a strong statement, runs were entirely possible. But, once forcing capitalization on these institutions you can't also punish their executives. It seems like a contradiction. The company was not allowed to fail and punish the execs, or succeed and reward them by natural selection. Therefore who is to say what state the banks would be in (and who should get punished for that presumed state)?
Of course, one might argue that the banks should pay for putting the American taxpayer in a position that required their assistance, but this was less a single poor decision by a few execs than a systemic failure to manage risk from the home buyers, to the lenders, to the banks that packaged and sold the securities, to the insurers, and maybe most of all the regulators and watchdogs. You can't blame one player for the failure of that system (unless their job is to monitor the system ie. Federal regulators).
I think you are right to an extent about dollars at the margin. But what I think is truly important to note is the signal it sends to the market. If the government is going to control salaries (in what seems to be a very arbritary manner) what else will they deem "necessary to control" in the future?
ReplyDeleteNo executive with the acumen and skill to manage a large company who is constantly in demand will take that job if they can take another where they have significantly more autonomy and don't have to deal with government bureaucrats.