The recent moves by the Obama Administration and the Federal Reserve to "examine" what they believe is excessive pay to bank executives is yet another example of contemporary policymakers not learning the lessons of the Great Depression. Putting aside the question of whether bailed out banks have any right to complain about their sugar daddy now wanting to call the tunes, the bigger issue is whether this move will have any positive effect on the economy. A look back at the 1930s suggests that not only won't it help, it may well make matters worse.
One of the notable features of the entire decade of the 1930s was the abysmally low level of private investment. The economic historian Robert Higgs has argued that investors were hesitant because they simply were not clear what the rules of the game were. The inconsistent policy moves by the Hoover and Roosevelt Administration as well as FDR's increasingly anti-business rhetoric and policies through the mid-30s led people to not want to take chances on longer-run investments.
Evidence from survey data and bond prices in the mid-30s shows both the degree of investor concern about their property and the future of capitalism more generally, as well as their more specific pessimism about longer-term investments. They clearly expressed that FDR's policies and rhetoric were a big part of their hesitance. The result was that private investment, which was $16.5 billion in 1929, remained under $9 billion from 1931-36. Private investment never really recovered fully until after World War II, when the worst excesses of the New Deal were phased out and FDR's hostility toward business was replaced by Truman's more even-tempered approach.
Although banks who took bailout funds last fall have no real ethical grounds for now complaining about stricter government oversight of pay, it still seems that such meddling is nothing more than an attempt to satisfy some irrational need to find a scapegoat for the misguided policies of the last 20 years. The irony is that bank executives weren't the primary cause of the crisis, the very politicians and Federal Reserve who are now on their moral high horse were. Capping executive pay may make them feel good, but the consequences will be that the talent needed to restore confidence in the financial system will not see the lower pay as worth the trouble and will take their skills elsewhere.
More generally such meddling in markets sends broader anti-capitalist signal to the private sector. Other executives and investors, whether or not they were bailed out, will quite reasonably wonder "are we next?" And as they do, we may well begin to see their confidence in the system fall, leading to a broader withdrawal of financial and human capital. Obama and the Fed are playing with fire by flexing their political muscle this way. An understanding of the Great Depression suggests that they will get burned, further scorching an already crispy economy.
Steven Horwitz is Charles A. Dana Professor of Economics at St. Lawrence University. His opinions do not necessarily reflect the views of Nightly Business Report. To learn more about Steven Horwitz, read his bio.
Comments
Dr. Horwitz is dead on. Pundits on CNBC and others keep taking one glimmer of recovery and projecting it to mean the end of the recession. Talk all they want, but investors be wary. This administration is the most anti-business administration I have ever lived with. Every time one of them opens their mouths about some program or "change" in society, all it projects to me is higher taxes, less revenues, fewer jobs, less competitiveness, and a decreasing standard of living. Make no mistake - this administration is out to get the wealthy and redistribute it to the poor, and if that means the country collapses, so be it. They are doing exactly what they intend to do and if anyone believes differently, they are not paying attention.
Regulating pay is going to backfire, and they know it. How sneaky to eliminate industries by controlling pay that will mean less competent management and eventual elimination of the company by default. Just look at AIG and the revival of Hank Greenberg - he's going to leave AIG an empty shell and good luck to us taxpayers recovering our 184 billion investment by the time he's rebuilt the "new" AIG.
Until we get a business friendly atmosphere, a government not out to socialize America, and a congress that stops robbing us of trillions to cover up their mistakes, investments are going to decline, and decline severely. Mock us who are staying on the sidelines, but we'll get the last laugh before it's over. History is on our side.
the only problem with this idea is that he didn't go far enough, no banks should be allowed to give their employees a cash bonus, just stock options, and their salaries should also have to meet government approval, simply put, they have shown they can't be trusted, and therefore they need to be treated as an enemy of the state and controled, I've read the constitution many times, and never have I found that"OOPS" was a right, so stop pretending they have a right to make mistakes, they don't, the banking system is highly corrupt and needs cleaning, and I have to state, I like the chinese model for dealing with corruption, and every american should feel the same and demand the politicians follow their desire, and hold these theives totally accountable for every mistake they say they've made, and this situation wasn't a mistake, they set the world up for a fall and have been allowed to get away with it
BUT THE ONES WHO NEED A PAYCUT IS CONGRESS TILL THEY FIX THIS!!!GIVE THE PEOPLE (TAXPAYERS) THERE MONEY BACK $5,000. IN WITHHOLDING FOR ME ANYWAY AND WE THE PEOPLE WILL BRING THIS ECONOMY BACK!!!
IF YOUR COMPANY IS SO BIG YOUR FAILER IS BAD FOR THE ECONOMY , AND YOU ARE GOING UNDER YOU EXECUTIVES ARE TAKING TOO MUCH MONEY OUT, AND SOULD CUT THEIR OWN SALARIES , JUST HOW MANY CARS DO YOU NEED FOR YOUR PRIVATE USE ETC....IF YOUR COMPANY IS DOING GOOD THEN HAVE YOUR PLANES AND CARS WHEN YOUR ECONOMY IS NOT DOING GOOD DO NOT ASK TAXPAYER TO BAIL YOU OUT SO YOU CAN KEEP ALL YOU STUFF SELL SOME OF IT...
I don't see such a clear separation between politicians who made policy and the bank executives who lobbied them to make those policies (e.g. the "Mozillo's friends" Countrywide discount). Both groups are eager to revise history and whitewash their respective responsibility.
I agree that taking away financial incentive to work isn't likely to produce much. I calculated that I would have made more money over the last 12 months by collecting unemployment benefits (which have now been extended to infinity and beyond) instead of working for greatly-reduced pay. Bank executives realizing that people who work much easier, lower-presssure jobs are making more money than them because of some political stunt will no doubt feel at least half as demoralized as I do.
Words cannot express how depressing it is to realize that the goverment is giving people unlimited paid vacations that I missed out on because I chose to work for less. I hate my job and am desperately in need of my first time off in many years, but I won't get it because that goverment boon went to people who choose not to do whatever it takes to get a job. Keep on rewarding the weak and lazy while punishing the hard-working and see how long our nation survives.
"The irony is that bank executives weren't the primary cause of the crisis, the very politicians and Federal Reserve who are now on their moral high horse were." So true! Excellent post Dr. Horwitz.