Free Markets, Free People
David Brooks has an article today in which he takes on the concept of a “pay czar” and opines that human arrogance is about to play into the law of unintended consequences in a huge and, most likely, unwanted way.
Arnold Kling takes the opportunity of the Brooks column to change the subject slightly and point out that while what Brooks says is true, the “pay czar” nonsense is really a diversion to keep us fr-om looking and focusing on one of the most serious problems in the financial meltdown – the government’s Freddie Mac and Fannie Mae:
The further into this crisis we go, the greater the share of subprime loans and mortgage losses are turning out to be located at Freddie and Fannie. Even one year ago, if you had asked me, I would have told you to expect at least 2/3 of the losses to be at companies like Citi and Bear, with less than 1/3 at Freddie and Fannie. It now looks quite different. Conservatively, 3/4 of taxpayers losses will be at Freddie and Fannie. Perhaps as much as 90 percent of taxpayer losses will be there.
Given the large role of Freddie and Fannie, it makes sense for politicians to create as large a diversion as possible. Hence, the brouhaha over bonuses at bailed-out banks.
Remember what supposedly started this meltdown was subprime loans. As Kling points out, guess where most of them are located? And, given the government role in these institutions (not to mention the “why” for such loans in terms of policy and incentives fr-om government) it isn’t at all surprising that -as it tries to convince us that government is the best choice for running health care- government tries to divert our attention fr-om its huge role in the meltdown to a group that may have only had a limited role but is a very unsympathetic group in the public’s eyes.
I am not sure if I wrote this on my blog, but I did write in a chapter of the forthcoming Fr-om Poverty to Prosperity (with Nick Schulz) that none of the major regulated institutions was involved in subprime.
But they are indeed the focus of the public’s ire thanks to the government’s demonization of them. Meanwhile, Freddie and Fannie escape both scrutiny and blame.
Which, Kling says, is similar to what is going on in the health care debate concerning the pubic option:
Incidentally, the debate over the “public option” in health reform also can be viewed as an exercise in symbolic politics and diversion. The point is to divert attention away from the bankruptcy of Medicare.
Absolutely correct. It is the point I continue to wonder about and see nowhere in any of opinion or fact based pieces concerning this subject. We are talking about turning over the rest of our health care to an institution that has run the piece it has had for decades into 52 trillion dollars of future debt. Yet we’re being told, by them, that they can run it more efficiently and for less money than private insurance. And, even in the face of evidence that it’s not true, a good portion of us have chosen to believe them.
It boggles the mind.
It floors me when people who have an inkling of how markets work warn what will happen if pay restrictions are imposed on some of the companies in an industry, but not all, and those warnings are disregarded. And no, I’m not campaigning for all companies to come under the “pay czar’s” control. Instead, what is clear is the “pay czar’s” unilateral pay cuts are now hurting the very companies you and I (and our grandchildren’s grandchildren) unwillingly bailed out. And while I mostly agree with MichaelW’s thoughts on the subject, I also understand that the way it is being done does not help make their profitability (that’s how they’re going to pay back the bailout money) better. In fact, it stands a much better chance of hurting profitability:
Many executives were driven away by the uncertainty of working for companies closely overseen by Washington, opting instead for firms not under the microscope, including competitors that have already returned the bailout funds to the government, according to executives and supervisors at the companies.
“There’s no question people have left because of uncertainty of our ability to pay,” said an executive at one of the affected firms. “It’s a highly competitive market out there.”
It would be a bit like the government getting its hands on an NFL franchise for whatever reason that was failing. After “saving” it with your tax dollars, the powers to be decide that one of the things they need to do is severely limit the salary of players, because, you know, in relation to Joe Six-Pack, what the players make is obscene. So they unilaterally put salary caps on what players can make that are well below industry standards.
Any guess what happens when free agency rolls around? Any idea of how many drafted players are going to say “no” and remain unsigned when their salary demands aren’t met? Why?
To quote the executive, “It’s a highly competitive market out there”, and there are teams more than willing to pay the price for that talent. Why? Because the talent has proven themselves or have tremendous potential (as in the case of high draft choices).
So if it is blindingly obvious what would happen with an NFL franchise if the same thing was done there, how do these people who are doing a very populist political thing endemic to identity politics, think what they’re doing will be the exception?
They’re unilaterally limiting the talent pool in financial institutions we’ve paid to bail out which puts in jeopardy the ability of those companies to pay back the bailout money.
That doesn’t hit me as very bright. But then, a lot of things that have been done recently fall into that category, don’t they?
Final as in the last thing I’m thinking about when I go to bed. I’ve been toying with the idea of doing a bit of a brain dump at the end of the day, instead of writing about the hottest topic du jour, so consider this a flagship post (N.B. even though my not-so-well-thought-out-or-composed trial balloon was pretty much a flop).
I have very mixed feelings about the announcement from the Pay Czar today that 7 of the firms receiving TARP money would have their salaries dictated to them, resulting in as much as a 90% pay cut (although I’ve also heard 90% was the average).
On the one hand, I figure if you dance with the devil, then you can’t complain when he calls the tune. And since in my estimation these firms should have been allowed to fail in the first place, I’m not exactly shedding any tears over their lost compensation. If they wanted to have control over their businesses, then they shouldn’t haven’t gotten involved with the government in the first place. Whatever Paulson said in that room that fateful day, the decision-makers still had a choice. That they chose poorly is really not my problem, and I don’t feel one bit sorry for them.
Yet, I have no way of knowing if any of those salaries being cut would be going to mismanagers or saviors of the bailed-out firm. Clearly if these firms are going to survive (and the taxpayers are going to have any chance of getting their money back), then we would want the smartest, most industrious, and capable workers in there plugging away, whether it’s in the mail room or the board room. But how is that supposed to happen if these people aren’t getting paid their market rate? Why wouldn’t they go somewhere else, or start their own private companies?
More importantly, what sort of precedent does this set? I understand that the Pay Czar’s actions are legitimized by Congress in the statute setting up the TARP program, but what constitutional authority ever gave any of them the right to dictate pay? The Commerce Clause? The General Welfare Clause to which Congress is now hitching its hopes on forcing people to buy health insurance? The answer to that question only raises much deeper and frankly hair-raising questions.
If Congress can constitutionally give the Executive Branch the power to dictate the pay of those who receive federal funds, what else can it do to those being subsidized? If the federal government is picking up the tab for any portion of your health insurance or health care, for example, what limits can it place on the way you live your life? Can it force you not to smoke? Not to drink? Maybe you won’t be allowed to go skiing or rollerblading without a special permit. Would motorcycle riding still be allowed? How about eating fatty foods of any sort? What happens to student loan recipients? Will their classes be decided for them? Their future employment?
Scoff if you must, but if the government can dictate what your intellectual and physical efforts are worth, then why can’t it also dictate what your actual life is worth? And don’t be confused into thinking that decisions concerning how much the government will pay for your health care, or what you will do to earn a living, are anything but a determination of how much your life is worth.
Like I said above, I’m ambivalent about the Pay Czar actions. While I’m not crying over some Wall Street fat cats having the their lucre cut off, I am worried about the seeming ease with which Americans are taking this news and their apparent lack of interest in what it could mean for them (and me!). Governments are dangerous, no matter what goodies you think you might personally get from them. A government that exercises control over any of our lives with fanfare from the constituents, or worse, with their apathy, is by far the most dangerous. Which government and which polity do we have now?