Friday, 20 March 2009

Limiting bonuses for executives in bailed-out institutions

Does this passage from today's Washington Post make sense?
Some bank executives warned yesterday that the government is forcing them toward a disastrous choice between accepting restrictions on compensation that could cripple their ability to compete with rivals, or returning billions in federal aid, which could retard lending and damage the economy.
The executives claim their institutions cannot afford to grant bonuses merely in the hundreds of thousands of dollars or low millions, instead of the tens of millions, during a single recessionary year. They claim the result of such small bonuses would be that critical staff would be hired away by competitors who are still willing to pay bonuses in the tens of millions.

Who, exactly, are these healthy competitors? They are make-believe. Remember, many competitors also received government money. And, even if healthy competitors existed, and were willing to pay tens of millions to steal talent from the bailed-out institutions, is it wise public policy for the government to say, "No, there is a compelling national interest in keeping these financial talents in failing institutions rather than allowing them to move to healthy institutions"?

By any standard except the U.S. standards, I would be considered a dogmatic free market economist. I think it is fabulous to live in a country where everybody respects the power of markets, where labor markets are competitive, and talent is rewarded. It makes total sense to me that financial wizards get paid many times what ordinary working people are paid even in a recessionary year when they are being bailed out by the government. Five times as much. Ten times as much. Fine!

But, I just don't believe the incentive structure is really going to fall apart if the federal government prevents these bailed-out institutions from paying 100 times as much as ordinary people make, while at the same time giving these institutions billions of dollars in bail-out money from taxes on those same ordinary people.

Am I missing something?

This isn't U.S. Food Policy, and it isn't my area of expertise. But, in the current environment, all government policy depends on the success of financial recovery policy. I am sure, if I make some newbie mistake, somebody will correct me in the comments.

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