February 8, 2009

Mr. President, you want to WHAT?

According to the Economist,
CREATING political theatre by cracking down on executive pay may prove to be the easy part for Barack Obama. Coming up with a sensible and effective way to compensate senior managers at companies bailed out by the American taxpayer will be far trickier—and the new president’s first effort, unveiled on Wednesday February 4th, is unlikely to be his last. 
Capping the non-equity-based remuneration of executives in companies receiving “exceptional assistance” at $500,000 a year and banning “golden parachutes” for failed executives is likely to strike most Americans as fair, or even generous, given that Mr Obama himself earns a mere $400,000 and the rules will apply only to new bail-outs. Indeed, after the outrageous payment of
billions of dollars in bonuses by Wall Street firms that had survived only because many more billions had been injected into them by the government, the executives should probably be grateful for getting off so lightly. Moreover, executives will be allowed grants of restricted stock (which they cannot sell until the taxpayer is repaid), so they may yet end up making a fortune.
The Obama administration, having had years of Democrat meddling in industries and causing problems - most notably in banking, and the auto industry, now wants to further regulate the industries that are suffering most. Unquestionably, there are elements of unscrupulous greed in the banking sector. But consider the following;
  1. The talented people whose salaries would be capped are not held hostage to the banking industry, nor to employment in American firms.
  2. Capping those who could earn more is an imposition on simple supply and demand curves and therefore will ultimately cause an imbalance that will resolve itself in other ways.
  3. Not only will this cause an exodus of these executives to elsewhere, it will therefore create a void of top talent in the industry, therefore dooming it to further erosion of quality.
  4. It opens the opportunity up for foreign banking to fill the void - by meddling Obama is doing to the banking industry what years of liberal policy managed to do (or at least substantially aid in doing) to the auto industry - hobble it and make it vulnerable to leaner, more efficient and responsive foreign competition.
Take the creative and talented executives and relegating them to substandard pay is a recipe for failure. Two obvious examples come to mind;

In Canada, there is a shortage of doctors. Wait times in hospitals and clinics are terrible. The reason - socialized medicine. Someone with a MD certification can make multiple times the income in the United States than they can make remaining in Canada. So where do the best doctors from Canada go? Take a guess. I'll give you a hint - it's south of Canada and it isn't Mexico.

The example that Democrats might prefer to point you to is sports - basketball has a salary cap for example. But the comparison is a specious one for a number of reasons. Firstly if you play basketball and are a top talent there are no alternative leagues to lay in if your salary gets capped below your market worth. Secondly the cap is at a team level, not an individual level. For comparison purposes it's like saying to a bank that if your executives number 1,000 you can pay them a combined amount of $500 million. In that case the bank could still decide to split that unevenly so not all executives would necessarily be capped at $500,000. Thirdly, the NBA has a soft cap, not a hard cap. That means there are exceptions. And frequently, many if not most teams are not under the cap during a season.

Once again Mr. President, a populist, class-warfare instigating idea that ultimately is not healthy for American banking but makes you look like a good guy, is a BAD, BAD idea. But we know you aren't averse to social engineering of any type, and I'm sure you'll proceed. After all the effects won't be fully realized until after you've left office. In fact, many will never realize at all what damage you will have caused, in this effort and in others. But remember this - the great innovations of our time, or of any time, did not come under socialist utopias like the Soviet Union or Communist China or in Michael Moore's medical utopia of Cuba. No they came in societies, including of course America, where the government's job was to ensure public safety and business job was to ensure their own profits and well being.

The government's job is not, and should never be, to ensure cradle to grave welfare of persons or businesses. Deliberately or not, you seem intent on turning the public safety net into a hammock. The thing is, a hammock needs to hang off of sturdy trees. That would be a robust economy in this metaphor, but also seem to want to chop down those trees. I for one am wholeheartedly unimpressed.

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