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On Wednesday, President Obama announced new restrictions limiting executive pay to $500,000 for those corporate leaders who represent companies on the receiving end of government bailouts. The decision will not require the approval of Congress, applies only to companies receiving new aid and will not likely be applied retroactively to companies like AIG, Citigroup and GM that have already received aid. There will still be ways companies can pay their executives more than the half million dollar cap, but those options will be heavily restricted, require full public disclosure and be more stringent for companies receiving more extensive aid.
There are multiple reasons why this is a terrible idea that makes no sense economically. Among other things, it will only increase the likelihood that top notch executives will leave their failing companies for jobs in successful ones, only furthering the odds these companies will go bankrupt and all the taxpayer money will have been wasted. But even more so than being an example of poor economic thought coming from the administration, this is an example of how the need for the majority of government regulation is driven by government interference in the marketplace in the first place.
At first glance Obama’s restrictions on executive pay seem to be a government restriction designed to correct a flaw in the free market. If the almighty free market really rewards success and punishes failure, shouldn’t the CEOs of companies that would have failed without government bailouts lose their jobs or at least not receive lavish bonuses at the end of the year?
Before that question can be answered, its underlying assumption needs to be examined. Are these companies operating in a free market? The true free market champion, former President George W. Bush, answered the question pretty directly when he told CNN, “I’ve abandoned free-market principles to save the free-market system.” It would take a woefully ignorant person to blame the free market for the decisions of companies after all the bailouts and quasi-nationalization of our banking system.
After all, without the bailouts many of these companies received, many of them would have been forced to cut costs, maybe by cutting executive salaries or by going bankrupt, putting their executives out of a job with a nice blemish for their resumes as a parting gift. Funny how a truly free market works.
This is only one of many examples how government interference in the free market is the driving force behind so many supposedly needed regulations. One area where an increase in regulation is being called for in response to our recent economic troubles is the sub-prime mortgage lending market. Regulation that would be unnecessary were it not for the distortion of that market toward risky lending practices driven by none other than two federal creations, Fannie Mae and Freddie Mac.
For an example that affects your daily life more often, think about all of the troubles associated with transportation. There are many people who think we drive too much in too big of cars and don’t use enough mass transportation. Market failure? Try a huge government subsidy of car travel via the building of roads. Imagine if all of that money was freed up to be invested in a mass transportation infrastructure of trains, like a
As long as one believes government is a necessary institution, there will be a need for regulation. Governments have too much power to be allowed to act without restrictions, both on their actions and on interactions they influence. Some of these regulations are largely unavoidable, such as local restrictions on the authority of police or federal laws against fraud, like those that made Bernie Madoff’s Ponzi scheme illegal. However, so many of our regulations today are created by unnecessary and very avoidable government actions. It should come as no surprise that government is necessary to level the playing field when government was responsible for making things unfair in the first place. What our government officials at all levels ought to learn is that two wrongs don’t make a right, they usually make it worse, and that the solution to government distortions of the market ought not be more regulation but the elimination of that distortion in the first place.
Patrick McEwen ([email protected]) is a sophomore majoring in nuclear engineering.
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Here’s why it’s a good idea: it keeps companies who aren’t actually desperate away from the taxpayer trough.
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Economic sense? Whose economic sense? the excecutives? Ours? Dont like the restrcition, then dont take the gov’t money. Student loans…hell just give me the cash to buy a new car because my economic sense tells me I need a newer car than another semester of tuition
the gov’t can calll the shots if its paying the bills, Patrick.
No gov’t money? then take your billions—You’ve earned it.
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What killed the economy was lemon socialism (socialism for the rich, capitalism for the power) and Bush’s lowering of risk to the market. Companies assumed if they messed up the Gov would bail them out, and for a while they did. This is not to say all bail outs are bad ideas, but many of these were. What we need now is capital flow, and oddly if you give money to banks they store it instead of letting it flow. The fact you say Bush was a “true free market champion” ends any creditability you had, he did more to restrict the flow of capital and stop the exit of failing companies from exiting the market then any president in recent history. Bush just kept delaying the market crash till he was almost out of office. This had a snowball effect and instead of one quarter of a bad market we now have a minimum of 3 more likely 5~6. The free market and The Free Market� could not be further apart.
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Great column.
I would make a distinction, though, between regulation and laws against force and fraud. The former is a prior restraint against voluntary transactions (e.g., restricting CEO pay, hiring of employees, lending of money, etc.) whereas the latter protects individual rights.
With this distinction in mind, government should protect rights but this does not require regulation.
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URGENT MESSAGE!
President Obama has issued an urgent “Call To Service” to all Democrats, to be considered for Cabinet Level Appointments in his administration.
You must meet the following requirements: 1) Be a registered Democrat (or Socialist, Marxist, or Green Party) in good standing. 2) Have submitted and paid all your taxes for the previous 10 years, as required by federal law and IRS regulations.
If you meet these requirements, please respond ASAP to [email protected]
The need is extremely urgent! While millions of Democrats, Marxists, and Liberals have responded, none have as yet met these stringent ethical standards set down by the Obama administration.
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12:15, Judd Gregg (R-NH) applauds your ignorance.
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8:20 - “Dont like the restrcition, then dont take the gov’t money.”
The government’s money?! Where did they get this money? It’s money taken from people. It’s peoples’ money that is being taken against their will and given to others.
Also, many of the banks were forced to take money. And even the ones that weren’t, often have little choice since the Fed controls the money supply and uses force to manipulate the flow of dollars. Companies pretty much have to tow the line or go out of business.
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1:34, think about it. Don’t we have a government of the people?
Regardless, the government (i.e. the people) create an environment from which wealth can exist. Money is not yours or mine or Barack Obama’s, it’s everyone’s. Without the janitor, doctor, Detroit auto worker and school teacher, our country fails to create a wealth inducing economy and “money” changes value.
Right now, job losses create more job losses, and stock losses spur more stock losses. “We the people” need to stop this problem with OUR money or else WE will fail our economy, and our economy will fail us.
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Yeah! And it’s not fair that we’re forced to live on only $500,000 a year! Give us back our multi-million dollar annual bonuses for losing millions of people’s life savings!
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Hey 1:34: Ever hear of T-bill auctions? It’s when the Fed sells debt, thereby paying for many of the country’s expenses. Your tax dollars are more likely to go towards the god-awful stimulus about to pass through congress. Lets see how many jobs are created through funding state deficits and expanding medicaid.
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“The fact you say Bush was a “true free market champion” ends any creditability you had…”
Sarcasm…. it doesn’t always come off well in print, but seriously, how could any libertarian leaning person on economic issues think otherwise?
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Aren’t taxes just our membership fee to America?
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2:56 - Money is not everyone’s anymore than the grade that I earned in school is everyone’s. Wealth has to be produced. The janitor produces the wealth he earns, the auto-worker produces the wealth he earns, and so on. It is individuals who produce the wealth and it belongs to them to trade with others.
Job losses do not lead to more job losses, etc. Jobs are a result of production. When some bright individual like Bill Gates or Sam Walton puts their ideas into action they create jobs by recruiting others to their cause. This production is made possible by the savings and investments of individuals.
The thing that stops job creation is government intervention, such as minimum wage laws which lock some people out of the workforce and laws which redistribute the savings and profits of productive enterprises to unproductive make-work programs.
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8:35 - Government debt is nothing more that deferred taxation. There’s no getting around the fact that wealth has to be created by individuals. All government spending has to be expropriated from productive individuals either now or in the future.
7:19 - America is not a country club (pun intended). America is not “owned” by the government, it belongs to individuals who owns parts of it. Government is the institution that should protect the rights of its owners: individual citizens. Government has no right to charge a “membership fee” for something that does not belong to it in the first place.
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Jim Allard, you can only produce the wealth that your country allows. Fortunately, America has provided a nice environment to create wealth through MASSIVE spending on its military. Without the military spending, your earning potential changes. If 25% of America is unemployed, your earning potential changes.
Again, Jim, you seem to be unaware of the real world with regard to taxes. We pay taxes for services, not like a country club, but like an annual subdivision fee. Personally, I like infrastructure, military protection, public education that works, modern electricity grids, broad band internet, and high speed rail. If I were to start a country de novo, it would have all these things. Money is worthless in your pocket or locked in your bank’s safe; it’s the difference between potential energy and dynamic energy.
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Man, I am LOVIN’ this! Three cheers for Patrick McEwen! It’s about time we got some clearheaded economic discussion outside the classroom on college campuses!
Bryce
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“Personally, I like infrastructure, military protection, public education that works, modern electricity grids, broad band internet, and high speed rail. If I were to start a country de novo, it would have all these things.”
Yes, but these are not all yes or no questions. There are many levels of services and when the government decides a certain level and pays for it through taxes it forces you to purchase those levels of these particular services. If these services were left up to the free market to provide, everyone could purchase the level of each of these services that they preferred as opposed to being forced to buy into the government monopolies.
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Free market? You mean “capitalism on the way up, socialism on the way down” or do you mean the Fed’s currency manipulation? Which free market fairytale to you believe in? There’s no free market.
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4:12 wrote: “Personally, I like infrastructure, military protection, public education that works, modern electricity grids, broad band internet, and high speed rail. If I were to start a country de novo, it would have all these things. Money is worthless in your pocket or locked in your bank’s safe; it’s the difference between potential energy and dynamic energy.”
America was started de novo and the people who started it did not have all these things. Why? Because they had to be created. Who created them? Individuals who came here to better their own lives under a system that allowed them the freedom to produce. Infrastructure, education, transportation, electrical grids, etc. were all created by individuals until gradually being taken over by the government.
Services and products were provided by individuals - the fact that government has forcible taken over and monopolized many areas just means that individuals are now prohibited from freely providing such products and services.
Money put in a bank account including savings and profits is dynamic. That money does not sit in some bank safe, it is lent to borrowers who use it to fuel production.
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The state should just confiscate all income and all property, and then just dole it out. Wait, has that already been tried?
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Although I agree with the basic principal that the government should not be dictating the salaries of these executives, there has to be some accountability for these people who caused the problem in the first place. There seems to be no shame in these financial institutions and auto companies to go ask the government for help. There needs to be some consequence to their actions, you cannot privatize profit and socialize the risk when things don’t work out. General Motors has been heading for problems for several years, they were bleeding money even when the economy was relatively good. Given the failure of a lot of money based institutions and the current market conditions, $500 K per year may be the best that some of these people can do. If they were such geniuses, they would have avoided these problems in the first place. The only true way to increase the wealth of a society is to make something that is worth more than the inputs required to make it. Ultimately, moving money around and having everyone taking a cut cannot support a strong economy
Unfortunately, there is a lot of private enterprise in this country living off of failed government policies- too many industries spend money lobbying in Washington DC to get the government to make rules favorable for them instead of really competing in the open market place. There seem to be very few globally competitive an innovative companies based in the US anymore, Apple and Intel are the only ones that come to mind quickly. GE has moved away from manufacturing and we see that GM is failing badly in a globally competitive world.