The headlines this morning were all about Obama’s intention to rein in executive pay as part of his overall plan to impose some order on the outlaw financial markets. There isn’t much detail because at the moment there isn’t much plan, but it seems pretty clear that they’re not thinking of doing much on the compensation side besides coming up with regulations that will make some lawyers rich, who will be tasked with coming up with ways of getting around them. And get around them they will.
So long as we consider the executive pay issue a problem of matching compensation with performance, we are bound to fail to address the issue. First, because that perspective demands that the problem be addressed as the Obama folks appear to want to address it: through more or less easily circumvented regulations. Second, because that perspective ignores the fundamental issue that really needs to be addressed: the rapidly rising and illogical income inequality that is threatening to destroy the middle class, and, sooner or later, our political system. It is widely recognized that raising revenue is only a secondary purpose of the estate tax. The primary purpose is to prevent the creation of an aristocracy of unearned wealth in this country. That’s why the Republican insistence on ending the estate tax is so insidious. We need to use the income tax for the same purpose. High marginal tax rates on outsize incomes are the way to go. They have the virtue of simplicity, making them all the harder to evade.
Since the plan is still in it’s formative stage, there’s also not much detail on what they intend to do about the financial instruments that got us into this mess:
An important part of the plan still under debate is how to regulate the shadow banking system that Wall Street firms use to package and trade mortgage-backed securities, the so-called toxic assets held by many banks and blamed for the credit crisis.
We can only hope that they will take a look at first principles here. Do we, as a society, gain anything by the very existence of some of these instruments? Credit Default Swaps have only been with us since 1997, meaning we managed to get along swimmingly without them for most of our history. Do we really need mortgage backed securities? Do they do anything other than make money for those who package them? They certainly appear to encourage risk on a mega-scale and were a prime factor in creating the housing bubble in the first place. We should consider treating these folks like polluters. Some types of pollution just shouldn’t be allowed into the marketplace, no matter how much it might harm the polluter’s businesses.
On another front, Geithner’s plan to clean up the toxic asset mess has come in for a lot of criticism. Brad Delong, a guy who deserves a hearing, says that it’s a good plan, and explains it here. I’m a bit dubious about any plan that creates more billionaires, but he appears to make some solid points.
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