Ostensibly, the purpose of the rules is to reduce “systemic risk.” Allegedly, by having government regulators determine the pay of bankers, those bankers will no longer have the incentive to make risky loans to individuals and corporations.

Such a policy evades the fundamental cause of that risky behavior, namely government policies that fostered artificially cheap credit and mandated risky loans. The Fed itself is the author of these policies. It flooded the economy with cheap credit and 1% interest rates in 2003-2004, which fed the orgy of subprime borrowing. The Fed also enforced the Community Reinvestment Act that forced bankers to meet quantitative targets of loans to uncreditworthy borrowers. Moreover, Fannie Mae and Freddie Mac, two government-sponsored enterprises, guaranteed mortgages against default, thus ensuring that bankers would have no incentive to monitor credit risk.

The government’s subsidies, guarantees against default, and promiscuously cheap credit created an atmosphere in which private bankers were rewarded for taking excessive risks, and made to look like suckers if they prudently restrained themselves.

Yet the government blames the bankers for this mess and now wants to control their pay.

Over the past year we have seen Barney Frank (October 2008) call for a moratorium on Wall Street bonuses and President Obama (February 2009) call for limiting the bonuses of CEOs to $500,000. At the time, I warned that when government arrogates such a power to itself, do not assume that it will be confined to a few Wall Street executives. Now we see the Fed claim for itself the power to control the pay of tens of thousands of employees at every banking institution across the land.

Government fostered the financial crisis by violating the rights of private citizens through its reckless policy of subsidy and cheap credit. Now it proposes to “solve” the problem by further violating rights, including the right of employer and employee to voluntarily agree on the terms of employment.

The end game of this dangerous grab for power should be obvious. The government will not stop until it has taken complete control of the commanding heights of the economy. And it has already largely succeeded. With its progressive takeover of banking, government is now assuming control of the most important sector of the economy. The banks are fundamental in economic importance because their lending and capital raising decisions directly affect the growth of all other industries. Now the government, through its control of banking, will decide whether a particular company or industry is to receive credit, and succeed or fail.

Do not doubt that the government will use this power. Recently, for example, the Wall Street Journal reported that former Vice President Al Gore used his influence to steer two $500 million federal loans to cronies planning to make expensive “environmentally friendly” cars. Imagine what Al Gore or others will be able to do when the Fed controls the salaries of thousands of private bankers. To whom will they be able to direct loans, and for what type of quid pro quo?

Statist governments operate under a rule. They always seek to control the commanding heights of the economy. Statists know that if they control the key industry upon which all others depend, they can control all industries. Our government is seizing the commanding heights of our economy right before our eyes.

The only good thing about the prospect of automakers going into bankruptcy was that it was a chance for the government to un-do the damage it did by coercing them to meet the unsustainable terms of the auto unions. They could have removed the debts to the unions and called it a day.

Instead, they pretty much did the opposite, which neatly sums up what this administration is all about. Everyone but the unions was left holding the ball, and the government took over with their fascist “car czars.”

As you can see, with Chrylser it is going down in exactly the same way.

The automaker’s current majority owner, Cerberus Capital Management, is relinquishing its entire stake in the company.

The new majority owner will be Chrysler’s union retiree health fund, which would receive a 55 percent stake in the new company. Fiat would get a 20 percent stake, with its share potentially rising to 35 percent over time based on performance. The United States would take 8 percent, while the Canadian government, which is also providing financing, would receive 2 percent.

Chief executive Robert L. Nardelli, who was installed by former owner Cerberus, is stepping down, and Fiat’s leadership will take over. Chrysler’s board will include four representatives named by the U.S. government, three by Fiat, one by the union’s health trust fund, and one by Canada.

The unions are given the spoils, allowed to keep their unreasonable terms of operation, and the government is given seats on the board. And they didn’t even need to take a pesky vote on the matter – these days the bankruptcy courts can simply declare major corporations to be under the control of the government.

Mussolini would be proud. Welcome to the New America.

“Since January, corporate America has been a pariah in Washington. Business executives are saddled with the blame for the nation’s collapse, and no one in charge is much interested in hearing their ideas for fixing things. Corporate chiefs are the new disenfranchised class.

“They’ve been steamrolled by the popular express,” says Lou Anna Simon, president of Michigan State University.

And that’s a tragedy. Because there were some solid, common-sense solutions for reviving America put on the table this week in Detroit. The brain power gathered in the RenCen’s silos could have moved a mountain, if anyone had been listening.
“

Well, all true. But why hasn’t Mr. Finley’s editorial pages been championing those ideas and fixes? If the auto execs have been ‘steamrolled’ by the popular press, well, isn’t his Detroit News part of that press? And if nobody is listening, well, why aren’t they? Could it be all those past editorials claiming that some taxes, some emission regulations, some fuel economy regulations, some labor regulations and other government mandates were noble and virtuous goals, but we mustn’t over do it by trying to be too noble and virtuous. Could it be that people no longer believe that it’s virtuous to take poison with their food? He laments further:

“Business doesn’t matter in the upside-down world in which we live. Government has all the answers, all the money and all the muscle. Critical decisions are being made about the future of industry without the input of industrialists.

In a heartbeat we’ve moved from a nation that worships entrepreneurship, innovation and the freedom to succeed to one that craves the false security of an economy carefully contained by the government.”

Mr. Finley is wrong. The government doesn’t have all the answers. It doesn’t have any except the one that is available to all savages-physical force. Mr. Finley has never learned that once you give the government ‘all the muscle’, it doesn’t need answers and can counterfeit as much money as it wants (and is now doing). But what about the false security of a planned society? Who advocated that? Could it be all those editorials proclaiming Social Security, Medicare, Medicaid, and the Welfare State to be noble and well-intentioned-but we mustn’t allow ourselves to be extremely noble? Is it any wonder nobody is listening to such arguments?

I don’t know about other industries but I don’t think there are any auto CEOs who even know how to defend their industries or their rights. These guys are very submissive and ineffective now:

“The CEOs acknowledged their diminished status and the danger of making the word “corporate” as pejorative as communist was 60 years ago, particularly for a nation that must encourage its youth to become engineers, entrepreneurs and executives if it hopes to avoid becoming the servant of more enlightened economies.

“We’re (sic) got to make it cool again to be in business,” Ford CEO Alan Mulally said. “Industry is the source of all wealth creation for everybody.”

While that last sentence is profoundly true, look what Mr. Mulally is appealing to, feelings ! Never mind appealing to anyone’s mind, their reason, or their own moral and constitutional right to make the cars they want to make with the kind of fuel efficiency and emissions people are willing to pay for.
No. We must figure out a way to make life, liberty and the pursuit of happiness and the prosperity it brings, ‘cool’. In a culture where sacrificial emotions take precedence over reason, the more consistent emotionalists will prevail. That’s why Obama, Pelosi and Reid are now in charge.

Mr. Finley also has a blog where he informs that Michigan Sen Debbie Stabenow got a lesson in free markets at the summit:

“In the most polite way possible, Thomas d’Aquino, the chief executive of the Canadian Council of Chief Executives, schooled U.S. Sen. Debbie Stabenow of Michigan on how free markets work.

In their panel at the National Summit on economics in Detroit, d’Aquino warned against allowing “Buy American” sentiments to morph into protectionist policies.

Stabenow followed by saying she supports free trade as long as the playing field is level — the anti-traders’ favorite defense. Then she ticked off the list of protectionist ideas she advocates, along with a call for massive government spending on research and development.”

Again, Mr Finley doesn’t grasp that our political leaders aren’t interested in free trade but only hanging on to power over us. Auto workers have a lot more votes than businessmen so businessmen must be sacrificed for the workers. A non-sacrificial way of life–laissez faire capitalism–is alien to all our political leaders and evidently, most editors.

None have learned that “In any conflict between two men (or two groups) who hold the same basic principles, it is the more consistent one who wins.”–Ayn Rand in ‘The Anatomy of Compromise’ in Capitalism: The Unknown Ideal.

As Milton Friedman correctly wrote, inflation is always and everywhere a monetary phenomenon. By extension, therefore, so is deflation — which is why, contrary to mainstream economists, we are not in a truly deflationary period at present, insofar as there is no reduction in the supply of *money* that has happened over the last two years. Rather, it is demand destruction that has been happening, and that’s a horse of a different color.

The root of the confusion is ignorance of Say’s Law. Essentially, Say’s Law says that production of goods constitutes the demand for the other goods in an economy.

If I produce a widget that others in the market find desireable, I can trade it for the things they have that I want. The more desireable my widget is, the greater the value, and the greater the demand my production represents.

“Money” is not special as far as Say’s Law is concerned. Money is a particular commodity that, by virtue of certain characteristics — durability, high value (compactness), fungibility, divisibility etc. — serves as a store of value and as a medium of exchange, and is therefore chosen as common denominator of value.

Apart from that, prices are understood as the exchange ratio between the particular commodity designated as “money”, to all the other goods in the economy, are determined by supply and demand of *each* of the goods involved in a transaction.

Where things go off the rails, is that fiat money is an artificial commodity; that is, it has no innate utility, and extremely fluid supply. Wood, for example, has utility independently of its market value; if wood were sufficiently common, it would have no market value — it’s price would be “free” — but it nevertheless retains value as construction material, fuel for fires etc. All “real” commodities have utility, including gold; this is the root of gold bugs’ claims that gold can never drop to zero value.

According to Say’s Law, if I create widgets of a given utility, I am presenting increased demand to the market. If I make a lot of them, this has two effects, each the mirror image of the other.

The first is that my increased production, qua increased *demand*, pushes up prices of all other goods in the economy; to the extent that more goods are traded for my widgets, there are less goods available to be traded for other things in the market.

The second is that my increased *supply* of these widgets, drives my price down; my profit per widget is reduced.

However, the actual utility of each widget DOES NOT CHANGE. The $10 widget of today is the same as the newfangled $100 widget of last year. (This is not accounting for innovations that increase the utility, or decrease the cost, of the widgets). The net result is that all market participants are better off for having my widget, and this is the net increase in *genuine wealth* that I have brought about by means of producing items of genuine utility; that utility is what drove demand for my product.

Fiat currency, however, while it behaves the same in the market, has no utility (apart from the physical commodities involved in coins and bills) — and that is what makes it so dangerous as a store of value.

Normally, if someone produces something that has no utility or value, nobody will want it. It adds no wealth to the economy, and so there is no market for it. This is what the government is doing — producing something of no utility: dollars.

However, it has forced the issue via legal tender laws. By forcibly inserting this artificial commodity into contracts as money — as the denominator of value — the government attempts to repudiate and subvert Say’s Law.  Legal tender laws are an attempted substitute for utility.

Now, once that is done, fiat currency can and does work just fine as money (as a means of exchange, to be specific). To the extent that each one of us trades goods or services for dollars, those dollars do in fact stand for the value of these goods and serves, *so long as the market demand for them does not appreciably change between the point of acquisition and the point of spending. That is the problem with fiat currency, which the mainstream insists is a feature, not a bug: the government has the power to radically ramp up supply of its “good” by multiple orders of magnitude more speed than the rest of us can ramp up the supply of *our* actual goods in the economy!

This has multiple consequences.

The first one is confiscation, as detailed by Ayn Rand in “Egalitarianism and Inflation”. Imagine that gold was money, but that the government had the magical ability to suck it away from you, right out of your vault. Every year, there would be 4% or so of it gone. This is what inflation is doing; when the government boosts the money supply by 4%, it comes out ahead by the amount of the wealth “purchased” by that increased “demand”, while the value of the dollars that you have in your possession shrink by the same amount.

Note that the amount of value that you put into earning those dollars, however, did not change! You still put in 8 hours, or sold X amount of a good, to get it. The government has essentially stolen 4% of your created wealth. That is the function of fiat currency, the “back door” created by the legal tender laws.  All the supposed benefits of fiat inflation — in particular the reduction of dollar-denominated debt — is in fact the amelioration of debt and the artificial increase of market demand, at the expense of savers.

It should be noted that, since it is dollars that are being devalued, that those who are able to hold hard assets as hedges against inflation are NOT in fact coming out “ahead”.  If they saved in gold, for example, they have X ounces now, just as they did then. The price of those ounces went up, but so did the prices of whatever they can buy with those extra dollars they would realize from the sale.   This is how gold and hard assets protect wealth; they lack the “back door” of fiat currency, and are immune to confiscation by inflation. (The government has to use more overt and direct means in those cases).

The second one is just as bad; this is where Say’s Law avenges itself. This is why we are hearing all about “deflation” today, and why that is horribly wrong.

Remember that all the goods in the economy actually are goods — i.e. they are things with utility — except one: the fiat currency. The market does not acknowledge the difference (it is forbidden to do so); the fiat currency acts as an artificial commodity, as a demand factor just like all the other goods in the economy. This, however, is a subterfuge: the fiat currency, unlike all genuine goods, does not find its genesis in the creation of actual wealth. It does not, therefore, satisfy the conditions of Say’s Law. New fiat currency represents artificial demand; it masquerades as wealth, but in fact there is nothing there. The government does not create wealth when it creates money.

While market participants are legally forbidden from refusing fiat currency, they are nonetheless free to adjust to the supply changes.  Its only way to account for the loss of wealth is via inflation — i.e. by the transfer of wealth from holders of older dollars paid for by actual wealth creation, to those who hold “new” dollars created from nothing. This is the dilution that underlies inflation, and the source of the “false demand signal” that causes misallocation and misdirection of wealth in the economy.  This is why now, as in the Depression, we have the symptom which mainstream economists see as the problem: frozen wealth in the form of excess inventory of certain goods.

Now examine our current situation. What has been happening is that the bursting of the housing bubble has been destroying real wealth. Essentially, if you traded a net amount of real wealth for a house, then the value of that house dropped by half, you have lost half your net worth by misallocation — you paid too much, and half of that wealth is now “frozen” in the house (which retains its utility). Essentially, the false demand signals that came from earlier inflation by government, drove perceived value of houses far above their proper level, in regard to the actual value a house represents. Artificial demand, in the form of new dollars released by cheap credit, bid up the prices of houses, attracting a flood of both new and old dollars (which represented real wealth created by those who earned them) into the real estate market, by far the best performer at the time the new dollars entered the economy after 9/11.

When the bubble burst, while the amount of dollars around remained the same, the amount of real wealth dropped precipitously — frozen in the physical form of excess houses. Frozen wealth is essentially wealth whose utility is far less than its price — so nobody buys it; it presents no demand for any goods. This is demand destruction, the subtraction of the demand emanating from *real wealth*, from the economy.

Demand destruction is the root of the current recession; it represents the economy suddenly realizing that there is far less wealth — and therefore less real demand — than was previously thought. It is essentially a correction of the error induced by the false demand signal caused by the earlier creation of money by the government.

Because of Say’s Law, this destruction of real wealth translates into a reduction in real demand. This is why prices have not risen — and that is why mainstream economists are calling our current situation *deflationary*. Now remember that mainstream economics, unlike those of the Austrian school, do not distinguish between real wealth generation and the creation of fiat currency.

This failure is why people are applying the term “deflation” — a reduction in the money supply — to what is actually a reduction in real wealth. This is why individuals across the political “spectrum”, from Reason’s Steve Chapman and Glenn Reynolds to conservative and leftists economists alike — are calling for actual inflation — an increase in the money supply. They are blind to the fact that an increase in the money supply is not an increase in real wealth, and therefore is not an offset to what they are calling “deflation”.

This is why prices must rise, and why we are in for at least a decade of impoverishment — via 1970′s inflation at a minimum. They are essentially attempting to replace real demand (from real wealth production, now lost and/or frozen) with the artificial demand of new dollars. Since new dollars have no utility, the amount of real wealth in the entire economy will remain reduced — but the apparent market demand, augmented by the new dollars, will be higher than it should. This is what started the whole thing!

Do you see the insanity now, of the make-work projects and deliberate supply reductions of the New Deal?  Do you see why the only difference between then and now, is the presence of fiat currency — that we’ll see inflation instead of depression, but the net impoverishment across the whole economy will be the same?

More dollars chasing fewer goods (because of lowered production of goods and services following from the earlier demand destruction) will boost prices, suck more wealth from savers into consumption — which is more actual wealth destruction — eventually leaving us all much poorer.

….

A final addendum, in regards to the extent that government does not inflate, it can borrow, or raise taxes.

Borrowing only serves to delay the inflation, since the fund must be repaid, eventually — and the greater debt is an added incentive to inflate. It is worth noting that the German hyperinflation of 1923 arose because of the German government’s obligations to foreign governments under the Versailles Treaty; it simply printed marks to make payments.

Taxation speeds the impoverishment up, by direct confiscation.

The end results are the same.

This is a blatant example of what Ayn Rand called “the sanction of the victim,” one of her most powerful insights into the modern businessman. In the name of making peace with their detractors, modern corporations will support and further their ends. Here MINI USA is seeking to curry favor with those who regard automobiles as a blight on the Earth, those who would have us confined to the range of our legs. Sadly, MINI is not alone in its complicity—examples abound of industries trumpeting their “greenness” even though it is directly contrary to their interests.

MINI requests that you make a pledge of how many miles you won’t motor on June 5th. Luckily, they don’t do a particularly good job of validating input so I was able to pledge -10 miles. It’s a small thing, to be sure, but at least I’ve registered a protest. They don’t have my sanction.

We’ve been down this path before. The railroads that served Standard Oil charged him a lower rate because Rockefeller could guarantee large, steady shipments of oil, which the railroads could ship more cheaply. For providing the railroads with product in a way that reduced their costs, and being charged less for providing that, Rockefeller was prosecuted.

In the same manner, a retail store that can guarantee large, steady sales of computers containing Intel chips is more valuable to Intel than a store that buys some of its chips and some of its competitor’s chips. Intel can afford to provide a discount.

Those never-to-be-denied European customers benefit from this by getting cheaper Intel chips, yet they were supposedly harmed according to the European antitrust commissioner.

But also evaded by the European antitrust commissioner is that a market for computer chips would not exist at all if Intel did not invent, develop, and constantly innovate the chips that become the brains of computers. Because of Intel’s work, each year the chips are faster and smarter. Each computer sold with those chips can do more — faster processing of material from the Internet, simultaneous handling of video and audio, and numerous other tasks — because of the relentless intellectual effort of Intel’s scientists and engineers.

That is part of what the never-to-be-denied European consumers and all others who buy Intel chips are getting.

To steal $1.44 billion from Intel is to demand that these scientists and engineers work for free. It is to steal the fruit of their effort, which we all benefit from by voluntarily buying their products that they create. As their property created by their minds, they have the right to set the terms under which we gladly buy these products, which we buy because of the great benefits they offer us.

Into all this steps the punishing European antitrust commissioner. She violates Intel’s property rights and the rights of Intel’s customers to do business with Intel on mutually agreed-upon terms. And by so doing, she ensures that Intel has $1.44 billion less in which to reward the efforts of those scientists and engineers who create the marvelous Intel chips.

If our computers are a little slower than they could be and our freedoms more diminished, thank Neelie Kroes, the European antitrust commissioner, and the legions of apologist economists who rationalize the pernicious doctrine of antitrust that gives her this power.

You are about to become the proud owner of a controlling interest in General Motors–well, you and tens of millions of fellow taxpayers, anyway. A deal has been struck that tries to keep GM out of bankruptcy. As I understand it, the deal is contingent on GM providing a turnaround plan that is satisfactory to its new owners–us–by June 1.

Larry Kudlow writes:

What is going on in this country? The government is about to take over GM in a plan that completely screws private bondholders and favors the unions. Get this: The GM bondholders own $27 billion and they’re getting 10 percent of the common stock in an expected exchange. And the UAW owns $10 billion of the bonds and they’re getting 40 percent of the stock.

I have one question. How is this transfer of wealth different from the Bolsheviks seizing a “bourgeois” business to give it to “the proletariat”? The legal formalities differ, and the communists were upfront and proud of what they did, whereas American politicians must work in lies and euphemisms that they know a sympathetic media will not examine too closely.

Actually, FedEx did not “threaten” to cancel the order, it was arranged in their contract to begin with.  A condition was stipulated that if the House Transportation and Infrastructure Committee approved a bill facilitating workers’ unionization within the shipping service, FedEx could simply not afford to purchase the Boeing airplanes:

“It is exceedingly unlikely that we would purchase those airplanes” should Congress change the law, said FedEx spokesman Maury Lane. “The legislation could cripple the company and eliminate the need for the extra planes,” Mr. Lane said.

Among FedEx’s 290,000 workers, only the company’s 4,700 pilots are unionized. At UPS, about 240,000 of the companies 425,000 employees are union members, mostly Teamsters.

But according to Congressman Jim Oberstar (D-MN), FedEx will stay in business “somehow”:

“That’s huffing and puffing, that’s all that is,” said Rep. Oberstar, in response to FedEx.

So FedEx should not be angry, and just smile approvingly, when a government thug forces them to hire more employees at higher wages, buy more planes, run at loss and keep everyone on payroll and benefits regardless of the loss.  Indeed, this would be an opportune set-up for a future bailout and nationalization.  

The Teamsters quip that FedEx intends to “blackmail Congress.”  Except the contract was between Boeing and FedEx, not FedEx and Congress.  They say FedEx will “fire another torpedo through the American economy.”  However, the economy does not run on the power of brute labor (or the union rajahs who collect dues), but by the exacting, long-range-thinking, value-making mind of a businessman.  The Teamsters and Congress are the ones wielding the torpedo, and FedEx needs to find a big enough moral shield to fend off the attack.

Contact FedEx and tell them they are morally right to abide by their contracts regardless of what the slave-masters in Congress or the power-lusting Teamsters say.  Kudos to FedEx if they stand their moral ground and assert their right to exist.

And what is the result of all this government central planning?  Mike Jackson, the CEO of AutoNation, the nation’s largest car dealer, spoke on this subject recently:

There are way too many Toyota Prius hybrids sitting on his car lots across America.

They stretch “as far as the eye can see,” Jackson remarked at The Wall Street’s Journal ECO: nomics conference. He estimated he had some 600,000 hybrid cars “that no one wants.

That’s what happens when businessmen do what the government wants, instead of what the market wants. And what is Mr. Jackson’s solution to this problem?

“I’m looking for a change in consumer behavior,” Jackson said.

One way to motivate consumers to buy more hybrids is a national gasoline tax that would push gas-pump prices to the neighborhood of $4 a gallon, Jackson said. This would help drive down petroleum prices, something that benefits U.S. chemical and airline companies.

This “would keep money in the good ole USA. What’s wrong with that?” Jackson remarked.

Stewart had this Republican on the ropes because he was able to control the language of their discussion and this hapless Republican didn’t recognize what was going on. Stewart criticized him for being “pro-free market” while at the same time being in favor of “regulation” of Fannie Mae and Freddie Mac. Showing how much we can trust Republicans, the man’s only response was that he was in fact in favor of “regulation.”

Peeling back this dishonest language, the plain fact is that Fannie Mae and Freddie Mac are government entities. (The former congressman even said as much earlier in the discussion!) They are most emphatically NOT representative of “the free market,” and a desire to reign in the government’s entities – Freddie Mac and Fannie Mae – is absolutely not in any way a “regulation of the free market.” It is entirely the opposite.

But this utterly despicable Orwellian switcheroo of terms went completely unopposed. Therefore, “regulation of the free market” was allowed to be framed as the agreed solution to the crisis, and concurrently, the problem was implicitly allowed to be blamed on an “unregulated free market.” This is, again, a complete and utter lie, as both men knew that Freddie Mac and Fannie Mae were the government and not the free market.

Jon Stewart is far from alone in his use of this deception. I’ve heard it used by congressmen, newsmen, and even ordinary people since the beginning of this latest mortgage brouhaha. But it is incorrect, backwards, and, for those who know better, dishonest.

The truth is the exact opposite of what the “regulation” cheerleaders would have us believe: the crisis was caused by overbearing government entities such as Fannie Mae and Freddie Mac, which distorted the markets and went wild dumping billions into foolishness. The failure was of these government entities and not in any way a “free market.” What the government failed to “regulate” was not “free markets,” but rather, itself. But because the term “regulate” is traditionally used to refer to government controls, these shysters are playing a shell game of words in which they “solve” a failure of government entities by calling for more government controls on private business.

So if you ever hear anyone use the term “regulation” in this way, be sure to set them straight. Because with it, they can control – and completely reverse – the entire meaning of recent events.

-Inspector

Madoff no doubt made fraudulent claims, which somewhat mitigates the actions of his investors.  Still, when something seems too good to be true, extra care is called for.  Not lemming like behavior.

Chaos would result. When a party fails to uphold his end of the deal, he faces a lawsuit, loss of reputation, or prosecution in the case of fraud. But if the failure is government sanctioned, there is no recourse for the wronged party—he must absorb the loss and consider future contracts in the light of possible default. If he is smart, he’ll restructure the next contract so that it is beyond the government’s reach; if things are really bad and the rule of law is in question, he will forego whatever economic activity is being targeted.

Employment contracts are just like any other contract in this regard. A company hires an executive and promises to pay a salary plus bonuses, benefits, and stock options. In return, the executive promises to do whatever job he was hired for. The executive seeks the most income he can make while the company offers the least compensation it can. In the end after a process of negotiation, the two reach a mutual conclusion and a contract is inked.

The government’s role in this negotiation is to provide recourse should either party fail to live up to its obligations in the contract. It does not get to decide whether the deal is equitable. It does not get to say that the medical plan is too generous, or that there isn’t enough stock options. The only way it can inject itself into the process is with a gun.

That is, sadly, the history of employment law in America. If an employee is willing to work for $2.50 per hour and an employer can only pay that amount, the government has said that it will prosecute the employer if that contract is drawn. If an employer says that it will only hire a person if she promises not to join a union, the government will nullify that contract and fine the employer if it is discovered. And now, if a company pays its CEO millions of dollars to turn a company around, the government can deny that CEO his earned pay if it deems the CEO’s performance unsatisfactory. We now have the repellent sight of heads of companies dragged before Congress to defend their legal contracts.

People may think they know better than a corporation’s officers how much a CEO deserves, but that is wholly irrelevant. If the Board of Directors pays dearly or offers compensation untied to performance, then that is between it and the shareholders. If they don’t like executive compensation policies, they can sell their shares or replace the board. Petitioning Congress to second-guess employment contracts is fraught with peril.

The government should be in the business of enforcing contracts, not subverting them. Whether or not executives are worth their pay is not a social issue; making it one puts all contracts in peril.