Tax Lawyer's Blog

Judge Richard A. Posner writing for The Becker-Posner blog on the Obama administration’s efforts to limit the executive pay of corporations that have received federal bailout money says:

Limiting the compensation of a handful of employees at a handful of firms can’t have any effect except to benefit the firms’ competitors by making them more attractive places to work.

The limitations are a form of scapegoating designed to appease public anger over the high incomes of financiers who precipitated an economic collapse that has caused widespread suffering, much of it to people who, unlike financiers, bumbling or inattentive government regulators, macroeconomists, members of Congress, and improvident homebuyers and home-equity borrowers, bear no share of blame for the collapse.

And his blogging partner, Nobel Prize winning economist Gary Becker, agrees:

I sympathize with all the people who are upset by the very large bonuses, stock options, and other compensation received by heads of some financial institutions that ran their companies into the ground through bad investments.

However, I also believe it is a big mistake to have a pay czar, Kenneth Feinberg, impose sharp cuts over the salaries and other compensation of the seven financial institutions, like Citibank, that received the most government bailout money. The Fed has made matters even worse by proposing to implement pay controls over thousands of banks as part of its regular review of their performance.

The generous bonuses and stock options received by financial executives may often have been unwarranted, but they are being used as a scapegoat for other more crucial factors.

Democracy may be the best and most humane form of government in the world, but it isn’t perfect. And the Obama administration’s obsession with curtailing executive pay is a case in point.

Politicians who are beholden to the electorate for their jobs focus not on the most important thing, but rather on the most important symbol of the thing. For example, the public viscerally believes that a company accepting bailout money should not pay multi-million dollar bonuses to its executives. This makes it easy for politicians to foment public anger about excess executive pay.

In fact, it is precisely the kind of issue politicians look to exploit because it contains all of the required elements that make it ripe for exploitation:

• It arouses the emotions and the ire of the electorate – high excecutive pay
• It has a ready, unsavory symbol -  rich executives
• It’s symbol can be publicly punished – public admonishment and pay limits

But going after the symbol is a diversion.

In this case what is really important is that legislators understand, analyze and change those deep-rooted and pervasive conditions that combined to cause the collapse of America’s financial system. But because politicians believe (probably rightly) that the majority of the electorate has neither the desire nor the capacity to understand the more complex real issues they attack the symbol of the problem – “those greedy bastards” who benefited from the economic meltdown – rather than its substance.

Meanwhile what must get done does not get done.

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