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Thursday, February 05, 2009
Salary caps could be extended
Yesterday Terrence Watson posted on Obama's announcement that he would cap salaries of executives at companies receiving taxpayer support at $500,000.
Some say that very high salaries don't necessary guarantee the best executives and that these companies had it coming if they had decided to ask for government aid. These arguments are seductive, but flawed.
It's true that having high salaries doesn't guarantee the best executives, but it's also true that having access to medical care doesn't guarantee good health. Taking away the ability of companies in trouble to attract those likely to have the talent to get them out of the mess they're in will lead to little other than dependence on tax dollars becoming endemic to that company.
In the US, companies in trouble would be stupid, at this point, to not go after a bailout as an alternative to overhauling their organizations or declaring bankruptcy. There's money being thrown all over the place and only the completely naive should be surprised at the enthusiasm with which businesses are taking up the government on its offer of handouts. It's completely believable, then, that the government should want to do something about all the money being thrown around.
But if the purpose of the salary cap is to discourage companies from taking advantage of the bailouts, then why have them at all?
To shed some light on this perplexing question, Barney Frank, House Financial Services Committee Chairman, said today that Congress will consider extending the $500,000 salary cap to executives of all financial institutions and perhaps to all U.S. companies. “There’s deeply rooted anger on the part of the average American,” the Massachusetts Democrat said at a Washington news conference today. He said the compensation restrictions would apply to all financial institutions and might be extended to include all U.S. companies. The provision will be part of a broader package that would likely give the Federal Reserve the authority to monitor systemic risk in the economy and to shut down financial institutions that face too much exposure, Mr. Frank said.
Get ready to watch investments run as fast and far from the country as they can if this is the kind of legislation that's going to pass in the United States. I have a hard time believing anyone is actually stupid enough to not see what would happen under this type of proposal, but I never count out the possibility that politicians will find a way to lower the bar.
Posted by Janet Neilson on February 5, 2009 | Permalink
Comments
Barney Frank is stupid enough, Janet.
Obama, I'm not sure about.
Posted by: Terrence Watson | 2009-02-05 3:08:05 PM
Well with Barney Frank you can't really get any lower ...
Posted by: Charles | 2009-02-05 3:16:47 PM
Get ready to watch investments run as fast and far from the country as they can if this is the kind of legislation that's going to pass in the United States.
Posted by Janet Neilson on February 5, 2009
And where exactly are they going to run to?
Posted by: The Stig | 2009-02-05 3:25:37 PM
"And where exactly are they going to run to?"
Answer: Anywhere that doesn't cap salaries. It will probably be stuffed under the mattress as well. It seems some people still do not know that shortages are created when prices are capped below market levels. Oh well ...
Posted by: Charles | 2009-02-05 3:41:16 PM
Answer: Anywhere that doesn't cap salaries.
Posted by: Charles | 2009-02-05 3:41:16 PM
You still haven't said where the investments are going to go to.
Posted by: The Stig | 2009-02-05 4:18:06 PM
These are the kind of radical changes in the economy that are to be most feared from the Obama-Pelosi-Reid regime.
We know that not long ago, Obama believed in a much more redistributionary state to achieve "economic and social justice" (http://westernstandard.blogs.com/shotgun/2008/10/audio-in-obamas.html). Although he has moderated since then, we also know that Obama ran to the economic left of any Democratic presidential candidate in the last few decades. Throughout the campaign and to this day he engages in unrelenting protectionist rhetoric (bashing China, pushing "fair trade" etc.) As Matthew Johnston has noted, Obama's energy and climate change policies could be similarly disastrous. I can only hope that the Clintonites, DLC-types and people like Volcker and Larry Summer he has surrounded himself with indicates that he does not intend to make these sorts of structural adjustments to the economy, or at least that they will be able to talk him out of doing so.
If this is the sort of "change" that might be imposed by the Obama regime, watch for a crippling big-D Depression which will last for years.
Economist and historian Robert Higgs called it "regime uncertainty" when these sort of changes were sprung on the the people by Roosevelt, and gives significant attribution to this phenomenon for the length and severity of the Great Depression:
"In my conception, regime uncertainty pertains above all to a pervasive uncertainty about the property-rights regime — about what private owners can reliably expect the government to do in its actions that affect private owners’ ability to control the use of their property, to reap the income it yields, and to transfer it to others on voluntarily acceptable terms. Will the government simply take over private property? Will it leave titles in private hands, but strip the owners of real control and profitable use of their properties? These questions fall under the rubric of regime uncertainty.
Between 1935 and 1940, this matter attained prime importance. So many businessmen and investors lost confidence in their ability to forecast the future property-rights regime that few were willing to venture their money in long-term investments. They constantly sought clarification of the government’s designs, but President Roosevelt merely continued to rage against “economic royalists” and to blame a “strike of capital” for the economy’s ongoing troubles, including the depression of 1937-38, which played havoc with the general public’s confidence in the New Deal. Treasury Secretary Henry Morgenthau tried repeatedly to persuade the president to make a public statement that would reassure investors, and as the president continued to reject his entreaty, Morgenthau became so frustrated that in a 1937 cabinet meeting, he blurted out to his boss: “What business wants to know is: are we headed toward Socialism or are we going to continue on a capitalist basis?” "
http://www.independent.org/blog/?p=635
Posted by: Kalim Kassam | 2009-02-05 4:38:53 PM
Janet said, "companies in trouble would be stupid, at this point, to not go after a bailout as an alternative to overhauling their organizations or declaring bankruptcy. There's money being thrown all over the place and only the completely naive should be surprised at the enthusiasm with which businesses are taking up the government on its offer of handouts". THAT KIND OF RENT-SEEKING, WHORE-MONEY MORAL EQUIVALENCE IS THE PROBLEM (and alive and well within the corporate world). That's the reason that Milton Friedman stated that businessmen and academics are the two biggest threats to Capitalism. Barney Frank is either a f.....g moron or consciously evil and is the product of a society without a rational and moral backbone. CEOs ethically hollowed-out enough to go after stolen loot deserve to be humiliated not rewarded.
Posted by: John Chittick | 2009-02-05 5:47:50 PM
John, that would be well and good if CEOs had been taught that taking money from the government was stealing. They haven't. Given that fact, what you're asking is for hundreds (thousands) of businesses across the country to act completely irrationally and in a way that would have the market cease working completely.
We should be angry at the incentives put in place, not at the people reacting rationally to them.
Posted by: Janet | 2009-02-05 6:17:03 PM
Actually, Janet, it probably won't have much effect on investment at all. Private investors are attracted only to companies that are doing well, and those companies are not included in the salary cap. Only companies that are in bad enough shape to require accepting the government bailout will suffer the cap, and then only until the aid ceases (unless I misunderstand the policy). Rest assured there will always be executive talent fallen on hard times willing to rebuild at a company whose future is somewhat stabilized by the promise of government help. There'll be no shortage of such talent in a quarter or two.
Posted by: Shane Matthews | 2009-02-05 6:39:45 PM
Shane,
From the post: "Barney Frank, House Financial Services Committee Chairman, said today that Congress will consider extending the $500,000 salary cap to executives of all financial institutions and perhaps to all U.S. companies."
"All U.S. companies" includes that set of U.S. companies that are doing well.
Posted by: Kalim Kassam | 2009-02-05 8:17:05 PM
We all know that these pols are keen to practise the politics of spite. Barney Frank has never impressed me as having anything worthwhile to say.
Posted by: DML | 2009-02-05 11:14:46 PM
Kalim,
Well, they'd better consider some more. Any such move would probably be unconstitutional and definitely, I agree, an unmitigated disaster. The government has no jurisdiction over the finances of private companies; it amounts to a seizure of assets without legal grounds.
Posted by: Shane Matthews | 2009-02-06 12:17:53 AM
Send the investments to China. All human rights abuses aside, the potential for growth is huge, and at the rate the US is going China will resemble a capitalist system more thant the US will.
Posted by: SamT | 2009-02-06 7:48:26 AM
Shane,
Unconstitutional? Almost certainly. But even when the Supreme Court found Roosevelts 1933 NRA and AAA unconstitutional, it was only a minor hiccup on the road to New Deal fascism.
Posted by: Kalim Kassam | 2009-02-06 8:09:48 AM
Janet wrote: "...what you're asking is for hundreds (thousands) of businesses across the country to act completely irrationally and in a way that would have the market cease working completely."
Markets always work, even in a state-distorted fashion or if driven underground by the state. What I am asking is that markets need to work free from government favour and bias. That you consider it irrational to severe the market from the teat of the state puts you possibly in the same tent as the corporate rent seekers. That these receivers of stolen loot would squeal like stuck pigs is just noise. Many corporations would gain competitive advantage if their current competitors were no longer able to seek rent as it isn't equally shared but politically distributed.
Posted by: John Chittick | 2009-02-06 11:16:44 AM
In a way Wall Street brought this on themselves, no? If they had behaved themselves the socialists likely would never have beaten John McCain
Posted by: Faramir | 2009-02-06 1:14:28 PM
Faramir,
John McCain himself may not be a socialist...but that's a moot point even if had won the Presidency.
The "system" is socialist, probably even fascist, and that isn't going to change by voting in the "lesser of two evils".
No Sir, something much more dramatic will probably need to happen, and I hope it happens peacefully due to a growing awareness of simple liberty and economics.
Posted by: JC | 2009-02-07 9:41:57 AM
"the socialists likely would never have beaten John McCain"
Faramir, I'm confused. John McCain (like Dubya) *is* a socialist.
Posted by: Kalim Kassam | 2009-02-07 12:39:42 PM
"But if the purpose of the salary cap is to discourage companies from taking advantage of the bailouts, then why have them at all?" Agreed, in a perfect world conservatives would be able to stop the bailouts. But, IF conservatives cannot stop the bailouts then conservative-minded politicians should work to include as much accountability measures into the bailout agreements, so that recipients of bailout funds can make an informed choice based on the costs and benefits of accepting the funds. Under those circumstances, I see much benefit to executive salary caps. The key is that the caps must be included as a condition for bailout BEFORE the recipients sign on the bottom line. It's wrong for the government to be bringing up salary caps now, AFTER the bailouts have already been handed out. It's also key that the condition of salary caps be applied equally to ALL recipients of government grants. Judging from Obama's speeches, some industries will have to comply with salary caps while others won't. That's simply unfair and counter-productive. Obama & Co. are using salary caps as a form of punishment, instead of honestly including them in funding agreements as a condition for receiving bailouts. The important thing here is the concept of INFORMED CHOICE.
Posted by: anonymous | 2009-02-10 11:46:01 AM
"We should be angry at the incentives put in place, not at the people reacting rationally to them." Again, I agree, which is why I argue that IF we cannot prevent these incentives, then executive salary caps should be included as an UP-FRONT condition of those incentives. If we as voters allow the government to offer market-distorting incentives, then we as voters should insist upon countervailing disincentives, and let the businesspeople make a free and informed choice at the end of the day. The way Obama & Co have gone about this salary cap idea has been nothing more than a bait & switch con, rather than a well-considered economic compromise.
Posted by: anonymous | 2009-02-10 11:53:50 AM
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