Friday, October 23, 2009

Obama Takes On Executive Pay

The Obama administration's "pay czar," Ken Feinberg, has cut executive pay at some companies that received financial help from the government. The Federal Reserve has taken a similar action with some of the banks that it regulates.

Conservatives will argue that the government should not intervene in the free market to this extent. They're absolutely right - the government should not be setting the pay rates of top executives of American companies.

But top executives of American companies should not be asking the government for billions of dollars to save them.

One detail that seems to have been missed in the discussion of these decisions is that of the seven companies on which the Obama administration brought down the hammer, only 3 - Citigroup, Bank of America, and AIG - are straight financial companies. The other four are General Motors, Chrysler, and their respective financial companies.

The fact that four of these seven companies are really automotive, rather than financial companies, changes the picture somewhat. First, I would have no problem with many of the current top management of GM and Chrysler leaving. I think those companies could use some fresh blood. Second, Most of the best people have already left - they now work for Toyota, Honda, Nissan, BMW, and the one American car company that didn't get bailout money, Ford.

The Fe's move is target at banks, not just bankrupt icons of America's industrial history. There are technical questions about how the Fed's regulations will (hopefully) rein in excessive risk-taking. I don't quite get how that will work - that starts to get rather technical.

In political terms, with which I am more comfortable, I think this was a very good move by both the administration and the Fed. Cutting paychecks is something everyone can understand, even if there are arguments about the legitimacy or efficacy thereof. It's also a great use of political capital. No one will feel sorry for people forced to live on $200,000 a year. At least no one who votes in a Democratic primary. Democrats can now point to something Obama has done in connection with the bailout and recovery that no Republican - particularly not George W. Bush - would ever even contemplate. It puts the financial industry on notice that Obama is willing to make tough decisions that are in the best interests of the American public, rather than Wall Street.

What Wall Street apparently fails to realize is that while the massive difference between the pay of CEOs and other fat cats and the regular folks on Main Street may be the result of legitimate business activity, it is inefficient for society as a whole. Someone making $100 million a year is going to spend a fair chunk of that money inefficiently. Some of it they will donate to charitable organizations, some of it they will use to buy normal things, like cars and clothes. But a fair amount of it they will spend on luxury items that do nothing to promote economic growth. A $500,000 boat is a nice thing to have that a family can use for fishing and traveling. That's a perfectly legitimate use of wealth, and it generates other jobs. But a $50 million yacht is ridiculous. Even if it generates millions of dollars in jobs and economic activity, it still represents a great deal of waste.

This is something that conservatives have never understood: capitalism generates efficiencies for individual companies, but it creates inefficiencies for society at large. That is what we have seen with this horrible recession. Absurd pay for executives at bankrupt companies, or companies that required massive infusions of capital from the government, are a great example of capitalism generating inefficiencies in society at large. The Obama administration is just redressing these inefficiencies.

FDR, it is said, saved capitalism from itself. Obama is doing the same thing.

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