Friday, January 16, 2009

Pay Controls on Private Industries? Do We Get Color-Coded Cards to Determine Our Day Off?

NEW YORK, New York -- In a day when a plane crash-landed a few blocks from my office, the most interesting piece of news was not the fate of US Airways Flight 1549.

It was a plan to reform the finance and banking industry, put forth by former Federal Reserve Board chairman and Obama economic adviser Paul Volcker. (The plan can be accessed via a Washington Post article about it here.)

Mr. Volcker, don't overcorrect for Mr. Greenspan's failings

The plan calls for a number of regulations, but the most important and frightening is some sort of government control over executive pay. This idea, a populist measure meant to soothe the irate masses (but are they really so irate?), reeks of Bolshevism, and is the one regulation of the banking industry that I think could torpedo the economy. Here's why:

1. The banking industry, as fashionable as it currently is to despise it, has been one of the most successful segments of the US economy in recent years. In 2007, banking was responsible for 40% of all corporate profits (one of the major sources of individual wealth, along with inheritance and housing prices -- and we can forget about that one) in the US. And bankers love money. Telling them that Congress will determine their salaries is the one single measure that can actually have the effect of pushing huge amounts of money, jobs and brainpower to some unscrupulous hole like Abu Dubabi. So let's assume a migration of banking brains to Abu Dubabi. What happens? Well, Abu Dubabi has a huge new industry that we no longer do. And the same bankers doing trades there still have the same sway over the US economy. They'll still be buying shares and bonds in US markets. Finance is global; you can't wish it away or push it to another country -- nor should you.

The real threat to US businesses that politicians won't touch

I realize Congress wants to end the long run of inequality we've had and let other industries prosper. But there's no reason to cut off the nose to spite the face. Rather than punish the golden hen, why not take measures to make the less-successful industries more competitive (cough, cough, Chinese protectionism and dumping and our total lack of spine to stand up to that)?

2. Finance is essential for the normal workings of any other business. Car makers, farms and mom-and-pop stores all need loans from banks. The job of the financier is to determine who is the most creditworthy and deserves that loan -- in other words, to determine where the markets want money to go. Yes, bankers have screwed up recently, but that's not because they made loans to Target or Honda or John Deere. It's because they were trading derivatives that are a separate function of a bank altogether. Now, you tell bankers they can't by law make any more than some arbitrarily determined number, rather than what their own ability would have them earn, and nobody will want to be a banker. That puts us in a bind: I don't think we want C-students who are content with making $100,000 a year overseeing capital flows and determining what US businesses deserve to receive what amounts of money.

<-- He actually does us good

3. Limiting executive (or bankers') pay would remove one of the biggest draws of educated foreigners to the US. I know it's cool to hate on immigrants, but my God, people, that's what built (and builds) America. While you're playing Wii and feeling your friend with benefits' boob, immigrants are hard at work making money so you can find a job at Daddy's company.

4. This is just plain misguided. Regulation to make the industry less of a structural risk to the economy and push down indebtedness and sketchy credit default swaps is another question entirely; that's necessary, but it is most certainly not achieved by telling bankers that the law somehow prohibits them from making above some arbitrary number. If salaries are somehow a contributor to the problem (and they aren't compared with investors and the short-term profits they desire which put the long-term health of financial firms at risk) this is best addressed via stronger corporate governance, not congressionally mandated pay levels. Mandate independent boards of directors and forbid CEOs from serving on boards, then let enhanced corporate governance determine what a company itself wants to pay its employees, including executives.

5. Is this constitutional? I can't imagine on what constitutional grounds government can tell a private industry how much it can pay people. Why not have pay limits on lawyers, plastic surgeons, or people who lisp?

But here's a better idea: why not cap the salary of A-Rod and every other baseball player at $20,000. After all, as a monopoly, the MLB is regulated by Congress as well -- and unlike bankers they neither significantly effect the US economy nor produce anything that we've been able to export. Why the rage at bankers working 90-hour weeks year-round who make $2 million, but not at 22-year-old uneducated pitchers who make $28 million for playing a kid's game 6 months of the year, a few days a week? Let's give them mandated pay levels, too, and maybe Cuban players will stay in the Cuban leagues with their Raul Castro-mandated pay levels.

On another note, it's unbelievable how Congress (probably correctly) thinks the American people find it palatable to pay baseball players huge money to play a child's game but thinks the same American people can't stand a middle-aged, highly educated banker making much less. Do we really want Congress to make a law ensuring that the highest-paid Americans are steroid-soaked baseball players? Is that what we aspire to as a people? Hitting balls with sticks? It's an interesting philosophical/cultural/sociological point, and it's pretty damn messed up.

Lenin's rotting lips have probably curled into a smirk in the tomb. By the way, it was Lenin who gave workers color-coded cards to determine what day they would have off, since people should work on Sunday in an atheist society. Will Paul Volcker arbitrarily give us color-coded cards determining our salary?

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