Wednesday, February 4, 2009

The Slippery Slope of Bailouts

It was American novelist F. Scott Fitzgerald who wrote:

Let me tell you about the very rich.
They are different from you and me.

When we are deciding what, if anything, we can do about the behavior of those running the corporations we are bailing out with taxpayer money, this is something that we have to keep in mind.

For them, the multi-million dollar bonuses and the extravagant lifestyles are a normal part of their careers and lives. And until recently when it was decided that the government had to be there to bail some of these companies out, nobody was there to look over their shoulders to see how they spent their money. After all, it was their money.

But for better or worse, it was decided by almost all mainstream economists that some of the financial companies, despite the foolish way that they were run, had to be saved by government money since their demise would hurt so many other people.

What makes this so different is that the free enterprise system that we are supposed to be practicing says that the government is supposed to stay out of the affairs of businesses. So making the painful first decision to bail out businesses because of the law of unintended consequences leads to a more painful decision on whether to have the government micromanage the businesses they bail out in effect telling them among other things, how much they can pay their executives.

Right now, President Obama is proposing a law putting a
$500,000 cap on executive salaries at companies receiving taxpayer bailout money. So is this a good idea? And will it work in the way we would like? The first question is about morality. The second question is about practicality.

From a moral standpoint, it seems most unfair to reward people at the top with bonuses when the poor performance of a company doesn’t justify it. Even worse, it hurts to see regular working people laid off at a company when at the same time those at the top are being showered with money. I would have a hard time sleeping at night knowing that others had lost their jobs so that I could get those extra millions.

But as we know, there are different rules for the very rich at the top of the food chain and everybody else. When times are good, those at the top get bonuses and those at the bottom — get little more than the opportunity to keep their jobs with little or no pay raise. When times are bad, those at the top still get bonuses and those at the bottom — suffer pay cuts or lose their jobs altogether. Even worse is when people lose their jobs at companies that we are bailing out. So we not only use taxpayer money to subsidize salaries and bonuses for those at the top, but then have to use more taxpayer money to help those additional people at the bottom who are put out of work.

So in the interest of fairness, it seems like government intervention is the right thing to do. But when the government tries to meddle into how companies work, will we get consequences that are even worse than what we are trying to cure?

A $500,000 salary is for most of us, beyond our wildest dreams. That's true but it misses the point. We need to ask if companies that received bailout money limit their compensation in this way will be able to attract and keep the best talent — especially when competing with other companies not receiving bailout money? After all, we are supposedly bailing out these companies to bring them back to health. Too often, we look at salaries solely from our own perspectives as to whether they are fair. But in the free market, a fair salary is what somebody can command on the open market — even if it is a ludicrous amount of money by most of our standards.

And where do we draw the line? If bailout recipient Bank of America invests money in a Super Bowl exhibit like they did, is it wasted money or a company advertising to attract business? If a company receiving bailout money decides to have a “business meeting” for its executives at a posh resort, should we put a restriction on that? Should we tell bailed out companies how much they can spend for renovations in response to stories about over-the-top office and bathroom renovations?

Instead of all this piecemeal micromanagement of companies, perhaps the best way is for the government to at least temporarily take over the companies, which leads us to another painful decision. Is this an appropriate thing to do in a free-market economy or are we on the slippery slope to socialism as some critics charge?

There are a lot of tough questions that have no easy answers. I agree we had to reluctantly bail out these companies to save the overall economy from going into an even deeper tailspin. But we also have to be aware that taking this first step of government bailing out companies may well lead us to a slippery slope to someplace we may like even less.

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