October 22, 2009

Wage controls for high earners

Filed under: Economics, Politics, USA — Tags: , , — Nicholas Russon @ 12:44

As if the government hadn’t inserted itself into too many things already, they’re now retroactively deciding that some corporate executives need a pay cut:

The Obama administration plans to order companies that have received exceptionally large amounts of bailout money from the government to slash compensation for their highest-paid executives by about half on average, according to people familiar with the long-awaited decision.

The cuts will affect 25 of the most highly paid executives at each of five major financial companies and two automakers, according to the sources, who spoke on the condition of anonymity because the plan has not been made public. Cash salaries will be cut by about 90 percent compared with last year, they said.

Oh, this is going to go just great, because — of course — there’ll be no negative effects of this bold move, right? Nobody will make different decisions in future out of fear of the government second-guessing them after the fact and reversing or modifying the call.

Uncertainty is the worst enemy of a free economy: you have to have some confidence in the stability of the legal structure in which you have to work in order to make rational long-term business decisions. As I wrote back in March,

The economic picture is unsettled, which sharply reduces the dependability of long-term and even short-term forecasting. Businesses depend on forecasting to make investments, create jobs, increase or decrease production, and pretty much every other part of their operations. Uncertainty is normal, but high levels of uncertainty act to depress all economic activity . . . and the US government playing kingmaker with the heads of major corporations is a hell of way to create more uncertainty.

The specific merits of the Richard Wagoner dismissal are unimportant compared to the extra measure of uncertainty injected into the economy as a whole. If President Obama and his team can dismiss Wagoner, why not the heads of any bank accepting government funding? Why not other corporate officers (corporate directors have already been ousted at government whim)? At what level does the government’s self-created new power stop?

The direction the US federal government has set will do nothing to settle economic worries, and much to increase them. The clear belief on the part of the administration is that they are better able to pick the winners and losers of economic activity of which most of them have no practical experience. That is a modern definition of hubris.

Brain farts like this latest one just introduce huge amounts of uncertainty into the long-term plans of every company. This is no way to encourage recovery.

As several people have noted, if Barack Obama’s administration was determined to destroy the US economy . . . what would they have done differently?

1 Comment

  1. if Barack Obama’s administration was determined to destroy the US economy . . .

    If? If?

    What is this if of which you speak?

    Comment by Lickmuffin — October 22, 2009 @ 18:17

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