On Wednesday, President Obama announced new restrictions limiting executive pay to $500,000 for those corporate leaders who represent companies on the receiving end of government bailouts. The decision will not require the approval of Congress, applies only to companies receiving new aid and will not likely be applied retroactively to companies like AIG, Citigroup and GM that have already received aid. There will still be ways companies can pay their executives more than the half million dollar cap, but those options will be heavily restricted, require full public disclosure and be more stringent for companies receiving more extensive aid.
There are multiple reasons why this is a terrible idea that makes no sense economically. Among other things, it will only increase the likelihood that top notch executives will leave their failing companies for jobs in successful ones, only furthering the odds these companies will go bankrupt and all the taxpayer money will have been wasted. But even more so than being an example of poor economic thought coming from the administration, this is an example of how the need for the majority of government regulation is driven by government interference in the marketplace in the first place.
At first glance Obama’s restrictions on executive pay seem to be a government restriction designed to correct a flaw in the free market. If the almighty free market really rewards success and punishes failure, shouldn’t the CEOs of companies that would have failed without government bailouts lose their jobs or at least not receive lavish bonuses at the end of the year?
Before that question can be answered, its underlying assumption needs to be examined. Are these companies operating in a free market? The true free market champion, former President George W. Bush, answered the question pretty directly when he told CNN, “I’ve abandoned free-market principles to save the free-market system.” It would take a woefully ignorant person to blame the free market for the decisions of companies after all the bailouts and quasi-nationalization of our banking system.
After all, without the bailouts many of these companies received, many of them would have been forced to cut costs, maybe by cutting executive salaries or by going bankrupt, putting their executives out of a job with a nice blemish for their resumes as a parting gift. Funny how a truly free market works.
This is only one of many examples how government interference in the free market is the driving force behind so many supposedly needed regulations. One area where an increase in regulation is being called for in response to our recent economic troubles is the sub-prime mortgage lending market. Regulation that would be unnecessary were it not for the distortion of that market toward risky lending practices driven by none other than two federal creations, Fannie Mae and Freddie Mac.
For an example that affects your daily life more often, think about all of the troubles associated with transportation. There are many people who think we drive too much in too big of cars and don’t use enough mass transportation. Market failure? Try a huge government subsidy of car travel via the building of roads. Imagine if all of that money was freed up to be invested in a mass transportation infrastructure of trains, like a
As long as one believes government is a necessary institution, there will be a need for regulation. Governments have too much power to be allowed to act without restrictions, both on their actions and on interactions they influence. Some of these regulations are largely unavoidable, such as local restrictions on the authority of police or federal laws against fraud, like those that made Bernie Madoff’s Ponzi scheme illegal. However, so many of our regulations today are created by unnecessary and very avoidable government actions. It should come as no surprise that government is necessary to level the playing field when government was responsible for making things unfair in the first place. What our government officials at all levels ought to learn is that two wrongs don’t make a right, they usually make it worse, and that the solution to government distortions of the market ought not be more regulation but the elimination of that distortion in the first place.
Patrick McEwen ([email protected]) is a sophomore majoring in nuclear engineering.
