We must decide that organizing government employees is illegal, and that public labor unions must be abolished. Why? Because balance of power, or balance of will, does not exist. In a corporation, if management gives in too often over an extended period and resulting work rules, wages, pensions, and benefits choke the company, there are several potential outcomes to adjust and correct. Management, recognizing the company's financial limits, convinces the union that there have to be changes and an accord is reached to keep all entities alive. Or a bankruptcy court mandates a diminishment of some provisions of the labor contracts, as well as hacking into the rights of secured debt, unsecured debt, and equity holders. Or the company fails and everyone loses.
Pavlov's experiments related a single event, a stimuli, to a dog's reactions. The ringing bell, when implemented during feeding events, eventually was of itself sufficient to initiate the dog's salivary reactions.
Humans are a little more complex and can process multiple incentives, multiple stimuli, and multiple reactions. But sometimes we're not more intelligent. I hate to keep picking on yesterday's General Motors: I wouldn't if their atrocious management practices were isolated rather than just being more-publicized examples of broad practice.
GM, Chrysler, Citi, BofA, AIG--each faced three and only three clear choices; bankruptcy Chapter 7 (liquidation of assets--meaning shutting the company), bankruptcy Chapter 11 (reorganization--a laborious legal process in which all constituencies lose something on the prospect that the company can survive), or Government rescue. Most in the public and apparently many in government don't understand the difference between 7 and 11, believing that a company going into bankruptcy is kaput! As a result there was very little governmental will to have allowed an 11 bankruptcy. Instead, the third option, Government rescue, was applied without any regard--it seems--for the meaningful and useful provisions inherent in an 11 bankruptcy. Last week I explained why BK Lite would have been a breakthrough for the government/auto industry;this week the same for the government/financial industry.
The financial industry compensation practices have instilled an amazing level of anger among the vast majority of American citizens. I've been a CEO many times; I believe in being rewarded appropriately for outstanding work, and to being demoted or terminated for lousy work. I don't believe in being rewarded for lousy work--for egregiously destroying value by the truckload. This populist outrage is well founded, but remedies need to be carefully constructed. And, as illustrated in this column two weeks ago, let's solve more than one problem for each action.
One problem-to-solve is to not reward failure. The administration has proposed a ceiling on executive compensation for any company receiving government bailout funds. That's a start and should be done, but will be of marginal impact: it won't stand up to the creative compensation experts who will find many loopholes.
And it doesn't solve the problem of, for example, a not-bailed-out hedge fund manager raking in $100M, for accomplishing nothing productive--simply manipulating financial instruments. It doesn't solve the problem of a trader within one of the bailed-out companies making $20M on mortgage security trades--again simply manipulating financial instruments. But government policy shouldn't directly impact these folks--that would be creeping socialism and contrary to the essence of a capitalist-based society which has gotten us to where we are (I mean where we have gotten long term, not referring to today's mess).
And a third problem is the enormous debt we, as a nation, are creating--a radical imbalance between revenues and outlays.
There is a solution that, as in all complex problems, is neither perfect nor complete but that does address all of these issues in the right direction. That is installing an increasing high-end tax scale, even above that which would occur if the Bush tax cuts were rescinded (as $200,000+ goes from 33 to 36%, $1M+ goes from 35 to 39.6%). Why not, in addition, go even higher: $2M+ is 43%, $5M+ is 47%, and $10M+ is 50%. My well-to-do conservative friends will always say (while they're primarily only looking at their own potential tax bill) that this will stifle investment, that these richer people won't invest when their tax bill is higher. Let's examine the argument that an investor will not make an investment if his return is taxed at 50% vs. 39.6% for the ordinary income portion. If a potential project is projected to make 30% before tax, then he only achieves--after tax--a 15 % return instead of a 18.12% return if all of the return came in the form of ordinary income. But most all projects have a significant or total capital gains component. Capital gains are taxed at 15% (going to 20%). So the impact on investment returns is essentially irrelevent.
So with this change, ultra-high earners take home a little less after tax and therefore a little less incentive to drive to higher numbers--and at least there is some additional national benefit from their high income as the treasury gets a significantly increased level of revenue.