Detailed Abstractions

As should’ve been expected and according to all recent news, having a Treasury Department position of paymaster isn’t working out so well for the free market.

Earlier this year, against all basic free market principles the Obama Administration through the Treasury Department started setting up compensation boards (CNN):

WASHINGTON (CNN) — An amendment in the $787 billion economic stimulus package passed by Congress Friday would severely restrict bonuses and other forms of compensation for top executives at companies receiving federal bailout money….

Due to all the negative publicity surrounding the government’s handing over billions of dollars in tax payer dollars to corporations which deserved to fell, Senator Dodd explains:

…”The decisions of certain Wall Street executives to enrich themselves at the expense of taxpayers have seriously undermined public confidence in efforts to stabilize the economy. American taxpayers deserve better,” Dodd said….

Now it might just be me, but I’m not sure Wall Street executives are allowed to vote on appropriations bills and then force the treasury to distribute the funds as they see fit.  It seems Mr. Dodd is blaming Wall Street for the government’s failure to handle the crisis correctly.

With all logic aside though, they went forward.  Not only did they seek to limit overall compensation of the highest paid, but asked for refunds from bonuses already given – one provision in the bill:

…The secretary of the Treasury must review past compensation paid to the top 25 employees of TARP recipients and seek reimbursements “if those payments were contrary to the public interest or inconsistent with the purposes of the [stimulus package] or the TARP,” according to Dodd’s statement….

& People everywhere rejoiced…. I mean complained.  In what was an obviously anti-capitalist move sure to do more damage than any political good it might bring about, people everywhere spoke up (examples here, here, & here), including NBER (abstract here – paper costs $5):

…Important facts about compensation are that: the compensation distribution is highly skewed; each year, a sizeable fraction of chief executives lose money; the use of equity grants has increased; the income accruing to CEOs from the sale of stock has increased; regardless of the measure we adopt, compensation responds strongly to innovations in shareholder wealth; measured as dollar changes in compensation, incentives have strengthened over time, measured as percentage changes in wealth, they have not changed in any appreciable way….

Even little ole me could see this as a negative and wrote about this here just a month or so ago (here):

…Even without bothering with the fact that the government is not in any position to understand what kind of compensation any single employee should have, this is still a radical and arbitrary move that if continued can work to destabilize the economy.

…this decision is an anathema to a free society breaking not only the contract rights of ordinary citizens, but also violating all individuals by pushing a blatant ex  post facto punishment….

& now we have exactly what was shown through economic analysis and basic logic to be true (@Bloomberg):

Nov. 23 (Bloomberg) — Bank of America Corp.’s board may extend its search for a permanent new chief executive officer into 2010 if directors can’t settle on a candidate in the next three days, according to people familiar with the matter….

…At least four external candidates, including Citigroup Inc. director Michael O’Neill, rebuffed approaches….

…That’s narrowing the field and giving the board “an incredibly tough job,” said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. “For people who have choices, it’s hard to figure out why someone would take this job.”…

Is it now time to stop calling obvious results  (Un)?intended Consequences…

This morning, news outlets everywhere carried recent news out of the Treasury Department.  The Pay Czar, who is certainly living up to the moniker Czar, announced today (WallStreetJournal):

The U.S. pay czar will cut in half the average compensation for 175 employees at firms receiving large sums of government aid, with the vast majority of salaries coming in under $500,000, according to people familiar with the government’s plans.

As expected, the biggest cut will be to salaries, which will drop by 90% on average. Kenneth Feinberg, the Treasury Department’s special master for compensation, also intends to demand a host of corporate governance changes at those firms….

Even without bothering with the fact that the government is not in any position to understand what kind of compensation any single employee should have, this is still a radical and arbitrary move that if continued can work to destabilize the economy.

Beyond that, this decision is an anathema to a free society breaking not only the contract rights of ordinary citizens, but also violating all individuals by pushing a blatant ex  post facto punishment.

In a free society, within reason, individuals should be able to contract for any reason they want.  In this case, you have employees who have privately contracted with their employers for certain remuneration based upon their perceived worth to the company.

I say perceived work, because obviously not all hiring decisions work out for the company even if the employee does very well at their job.  Personality conflicts, culture conflicts, and even performance problems are some of the reasons why a new hire might not work out as expected.  Unless specifically stated in the employment contract, even in these cases the employer’s general resource is firing, not taking back pay.

Adding to this is the simple, real, true fact that this is by its very nature an ex post facto punishment for perceived mismanagement.  It has been a legal tradition for centuries, a that passing laws, which retroactively punish people, is against a free in democratic society.

In fact it’s in the US Constitution and universally recognized by a number of treaties including Universal Declaration of Human Rights and American Declaration of the Rights and Duties of Man (from Wiki):

…no person be held guilty of any criminal law that did not exist at the time of offence nor suffer any penalty heavier than what existed at the time of offense. It does however permit application of either domestic or international law….

To be fair, there are some uses for ex post facto laws which have been recognized by our supreme court including allowing for Congress to grant administrative agencies the ability to do just this thing.  So legally speaking, this might be ok, however to anyone who proposes to value freedom, it should be obvious that even allowing administrative agencies this power was a massive failure of all branches of the government.  They are supposed to protect our freedoms, not remove them one at a time.

Either way – it’s intuitive that both contract rights & ex post facto laws are required for a free society.  If the government can interfere at will in private contracts and retroactively punish you for perceived wrongdoings, you have no ability to make relevant decisions for your life as you have no ability to be secure that those decisions will continue to hold true.

This insecurity is what creates instability in most third world countries today.  This lack of basic economic & legal foundation is what continues to plague most of the planet and yet we seem to be moving on the same path.

A week ago or so, a Democratic non-profit held a focus group of GOP members & Independents (here).  Among other interesting things they found, they noted how the GOP members opposed the President because they felt he was attempting to fundamentally move away from our founding principles.

They went further to note how this differed from Independents “underscoring the extreme disconnect of the conservative Republican base voters”.

I will say this move is absolute proof that the GOP members have it right.  If the administration allows this travesty, it is without a doubt a complete move away from not only our founding principles, but away from freedom in general.