February 12, 2009 Notice We will not be blogging this week.
Against the Pay Caps--Posner, February 8th.
The government has decided to impose a $500,000 ceiling on the senior executives of banks and other financial institutions that accept bailout money. This is a bad idea, though politically inevitable because of public indignation at financiers, thus illustrating a point I make in my forthcoming book about the depression--for I insist that it is a depression, and not a mere recession, that the country is in--that a depression is a political rather than just an economic event. (The book is entitled A Failure of Capitalism: The Crisis of '08 and the Descent into Depression, and will be published early in April by the Harvard University Press.)
It is a bad idea for three reasons. First, it directs attention away from the really culpable parties in the depression, who are not the financiers. They were engaged in risky lending, that is true; but the fact that a risk materializes does not prove that it was imprudent. A small risk of bankruptcy--a risk that almost every business firm assumes--can be, when it is a risk faced by most firms in an industry and the industry is financial intermediation, catastrophic. But the responsibility for preventing catastrophic risks to the economy caused by a collapse of the banking industry lies with the Federal Reserve, other regulatory bodies, and the Treasury Department. A banker is not going to forgo a risk that should it materialize would wreck the economy, because his forbearance would have no consequence, as long as his competitors continued running the risk; it is a classic case of external costs, requiring government intervention. Because the Federal Reserve under Alan Greenspan pushed interest rates too low and kept them low for too long, and because regulation of financial intermediaries had over the years dwindled and became especially lax during the Bush Administration, the bankers were allowed, and competition forced them, to take risks that could have and have had disastrous results. If the government thinks that shaming the bankers and capping their pay will prevent future banking disasters, it will be distracted from making the regulatory changes that are necessary to restore effective public supervision of a vital industry.
Second, the pay cap contributes nothing to getting us out of the depression...
Pay Controls Do Not Work at Any Level-Becker, February 8, 2009
Several big banks and other companies have badly fumbled their public relations during these difficult times, such as the big three auto makers who took their private jets to Washington to beg Congress for a bailout, or the board and CEO of Merrill Lynch that granted generous bonuses to their executives just as the company was avoiding bankruptcy through being taken over by Bank of America. However, anger, even when justified, is not a good reason for ceilings on the pay of top executives at companies receiving assistance from the federal government.
The main problem with wage (and price) controls is that they never work, although governments have imposed them throughout history. They will not work in this case either...
Comments