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Price — No, Wage — Controls

There has been a lot of talk about controlling the “excesses” seen in compensating executives recently, especially in those companies where public funds have been infused. Now the talk has spread to controlling how much executives can make in other companies, too.

This is perverted.

While there might be some rationale to putting a cap on salaries of companies receiving taxpayer funds, even that is short-sighted. First, do these troubled companies need the “best and the brightest” to pull out of their downturn and repay borrowed money? Or, are second-rate managers likely to get that job done? Face it: the smart people while go where they can benefit the most, leaving the “backup team” to go in face the challenges in the troubled companies. Seems to me, putting a cap on compensation just further hinders the troubled company.

All of this would be moot, of course, if the market had been allowed to handled the troubled companies. They would declare bankruptcy and/or go out of existence. No problem: bad management leads to bad results leads to NO compensation. The problem is self-healing.

But what about companies who have not received public financial support? Some in our government (and misguided citizenry) WANT those to have salary caps, too! WHERE would the government get the authority to mandate that? More important, WHY would the government want to do that? Again, the best would pursue other avenues where they can be rewarded more adequately for their abilities… and those with lesser skills will be left to manage the companies. And, I’m willing to bet, they will achieve lesser results.

Even if this plan were restricted to just the financial community, where is the justification?

Suppose a bank was in sound financial condition before all the recent problems. Bad banks have been closed, others received public funds (or guarantees) to stay afloat, but there are some that were not in trouble and are not in trouble now. If the government were to impose an across-the-board restriction on the maximum compensation allowed for ALL banks, would that be fair? In fact, it would be an unjust penalty to those banks who had been well-run all along.

Don’t get me wrong, I think it’s fine for government to maintain certain requirements of banks… reserve ratios, for example… as that helps reduce the level of risk. SOME government restrictions can be beneficial to all. But some, such as arbitrarily limiting pay, make no sense.

It is this type of broad brush legislation… and its inevitable unintended consequences… that makes government intervention a bad idea in the first place. Indeed, it seems every time the government gets involved in an activity, it finds some excuse to come back again and take further control. Where does it end?

In a salary-restricted scenario, does it make any sense that a star football or basketball player could end up making far more money than, say, the president of a major bank (who has responsibility for thousands of employees and a HUGE amount of capital)?

Price controls don’t work Neither do wage controls. They just introduce an additional incentive to “game the system”, and there’s far too much of that already.

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