TARP & Executive Pay

I was going to write a brief post on Obama’s proposal to limit executive pay for companies taking TARP money, but Dan Mitchell did a post on National Review’s blog page, The Corner, that says everything I was going to say.

I have mixed feelings about President Obama’s proposal. Government-imposed pay restrictions are a very bad idea. We have 40 centuries of evidence showing that price controls always undermine economic performance.

But in the case of executives who came begging to the feds after mismanaging their companies: Sorry, guys, you asked for it.

Any government interference gets me very nervous, especially since it may lead to further meddling by politicians, but there is a silver lining.  Bailouts are a major threat to the economy’s long-run dynamism, so we should discourage companies from sticking their snouts in the public trough. And if pay restrictions convince some of these CEOs that they should try to make money by serving the interests of consumers rather than hiring the slickest lobbyists in Washington, that creates a win-win situation for taxpayers and the economy.

The best option, of course, is to stop bailing out incompetent companies. But if we are forced to choose from second-best options, there is no ideal answer. Some argue, quite compellingly, that restricting pay for incompetent corporate executives of private companies is not a proper role of government (by definition, successful corporate executives do not need bailouts). On the other hand, companies mooching off the taxpayer are no longer private concerns. Corporate chieftains who run their companies into the ground should not be allowed to simultaneously shift the burden of their mistakes to taxpayers and expect multi-million dollar pay packages. Unless, of course, we think Fannie Mae and Freddie Mac are good role models.

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