Sympathy for Socialists

The recent bailout of Wall Street has been enough to make even the staunchest believer in free markets reconsider. A free market should mean that a firm is free to survive or fail itself, not free to take down the entire country with it. A firm simply cannot be allowed to make such gigantic, intertwining bets that its failure could possibly take down the entire financial system of the country and lead to another Great Depression. The size and scope of these bets must be regulated.

This is just sane capitalism, not socialism. But the next issue is, should the managers of these Wall Street firms get such outrageous bonuses for making bets at taxpayer expense? If you make huge bets which succeed wildly for two years in a row, and you're paid tens of millions for each of those years, but in the third year your bets sour and the taxpayers must foot the bill, there should be some provision whereby you have to give up at least part of the money you were paid in the first two years. There are currently no such clawback provisions, and changing the rules of any game midstream seems unfair in principle, but the larger principle here is the well-being of the taxpayers.

How did we get to the point where our CEOs are so grossly overpaid? It's not just capitalism; Japan has a capitalist system and their CEOs are generally paid no more than 30 times the lowest-paid employee of their corporation. (In fact, this was true in the U.S. until the last few decades.) But now, corporate chieftains are sometimes paid 500 or even 1000 what their lowest paid employees are; this happens nationwide, not just on Wall Street. Why is this tolerated? Because virtually every CEO of a large corporation stacks his Board of Directors, so that his cronies just rubber stamp whatever salary he decides to pay himself. Sometimes an "independent" compensation firm is consulted, but they are essentially paid by the CEO, so their independence is illusory.

Most large firms don't get bailed out by the government, so it's not the taxpayers who are being stolen from. It's the shareholders. Profits that by all rights should be going to them are instead funneled into the pockets of the CEO and his top management. And what exactly is it that these guys are so skillful at which is worth so much money? Corporate climbing. This means they're good at internal politicking, backstabbing, taking all the credit and none of the blame. These are generally not the qualities which make someone good at the job he was actually hired to do. In fact, such climbers often expend so much energy on climbing that their actual jobs get neglected. After twelve years on Wall Street, I can vouch that the Street attracts more than its share of such narcissistic personalities and even sociopaths.

Note that this suggestion would not prevent a Bill Gates -- or an Edwin Land, or a Henry Ford -- from becoming fabulously wealthy. They were visionaries who formed their own companies, and were thus their own primary shareholders; this is how they got rich. It's telling that such people generally do not pay themselves princely salaries or award themselves huge stock options. (As primary shareholders, why would they want to rip themselves off?)

Here's where the socialism comes in: I heard the suggestion recently that a law be passed preventing any manager of a company from being paid more than thirty times what his lowest-paid employee is paid. As a Libertarian, I dislike unnecessary laws. But with the current situation having spun so totally out of control, such a law seems increasingly necessary.