In an article Tuesday in the New York Times, Nassim Taleb says that ” bonuses and bail-outs should never mix”. By this he means that if a bank or other financial company is so central to the economy that it might have to be bailed out, then bonus compensation within the company should be banned by law.
The first part of this proposition—don’t mix bonuses and bail-outs—is sensible. The second part—ban bonuses—is not. We should be banning the bail-outs, not the bonuses.
Taleb is a respected business school professor whose work on extreme market events, which he calls “black swans,” is respected. But consider what he is doing here. Confronted with a genuine problem, his proposed solution is to take government even further into controlling market prices. Bonuses, like other forms of pay, are a market price. The answer is not for government to do more price controlling; it is to do less. The market system is in a state of near collapse precisely because the government keeps interfering with key prices, especially currencies and interest rates, but other important prices as well.
In the early 1990’s, Congress decided to make cash compensation (salary) of public company CEO’s non-deductible as an expense if it exceeded $1 million. This price control led directly to the massive use of stock options for CEO compensation, and this in turn contributed to the Dot Com Tech bubble.
The bottom line is that government cannot set prices. Only markets can. The government’s actions will always have serious unintended consequences. By interfering with prices so much, the government is making it impossible for the economy to recover from its present malaise.
Hunter Lewis 11-8-2011