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“This is the fruit of free labor. It is able to create more wealth for everyone than slave labor once provided for the masters.”     Ludwig von Mises,    Liberalism

March 30, 2009

Obama Encourages Corporate Malfeasance

by tarran

The trainwreck that is the Obama administration continues with his support for caps on executive pay. This bad idea has been tried before, and had the disastrous result of enhancing the power corporations wield over their employees, particularly with upper and middle management. It contributed to many of the instances of corporate malfeasance.

The problem is that the Obama administration is attempting to cap executive compensations at below market rates. Whenever the government does this, people come up with alternate forms of compensation to offer in lieu of the salaries or bonuses that are now illegal. A company may, instead of paying its management a high salary, offer them a lower one and buy them a house. It will buy them health club memberships, or give them no-cost vacations at company-owned resorts. The end result? People who don’t own their homes, but are dependent on their employers for their housing, their memberships, or even their kids’ schooling.

Many corporate scandals progress until someone is brave enough to blow the whistle. When blowing the whistle merely only the loss of a paycheck, people are still reluctant to do it.  A loss of a paycheck and the loss of one’s home, one’s social circle, access to the kids’ schools etc, and the incentive to turn a blind eye to criminal behavior, or even to participate in it is heightened.

One would think that one of the major lessons of the current meltdown would be do decentralize economic power by reducing the competitive advantage handed by the regulatory environment to large, hide-bound companies. Instead, the Obama administration is attempting to tilt the playing field further in their favor. Assuming that he is sincere in attempting to curb malfeasance and dereliction of duty amongs corporate officers, this bill is definitely an own goal.

I thought it would be many decades before we saw an administration as incompetent as that of George Bush. I was wrong; it took no time at all to get one that was even more incompetent.

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4 Comments

  1. Tarran,

    Do you have any specific examples of when and where this was tried? I’d certainly like to read about it.

    Comment by Justin Bowen — March 31, 2009 @ 10:09 am
  2. FDR tried in 1942 when he tried to tax income over $25,000 at 100%. That’s like $300,000 today. He didn’t get that but he did get 94% and it stuck for a while.

    Comment by John — March 31, 2009 @ 1:05 pm
  3. During the era of a 95% top tax rate, many companies compensated employees by supplying them with vehicles, country club memberships etc. None of these perks were subject to the income tax.

    The result, well, Grisham’s The Firm catches the spirit resulting corruption quite well.

    Comment by tarran — March 31, 2009 @ 4:15 pm
  4. There are always unintended consequences from actions like this by the government.

    Today, health insurance in America is most commonly linked to a person’s employer, rather than purchased directly like other insurance. If you try to purchase health insurance directly, you’re competing against employer group rates. This came about as an unintended consequence of wage freezes during World War II. Wages were frozen, but in 1942 the War Labor Board ruled that fringe benefits were exempt from the freeze. Employers shifted to competing for employees using fringe benefits like health insurance, and this arrangement became the normal expectation.

    This distortion of what should simply be another portable insurance option for the consumer (like auto insurance or home insurance) is indeed the kind of adaptation likely to arise.

    Comment by Akston — March 31, 2009 @ 6:48 pm

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