That Which We Hold Dear

Everyone has little things they hold dear to their hearts. A stuffed animal or a book from childhood. Old letters, souvenirs, a favorite dress or shirt. Mementos of loved ones no longer alive. Megan McArdle is merely human, and also has something that has great personal meaning and a warm, loving connotation: executive compensation.

Losers like Bank of America and GM may have to go hat in hand to Ken Feinberg, begging for handsome paychecks for their employees, but luckily for the top echelon at Goldman, which has returned its tainted government fund, they . . . well, apparently they have to go hat in hand to their shareholders, begging for handsome paychecks for their employees.

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I'm a little confused as to why Goldman Sachs shareholders would be developing sudden scruples about compensation. It's not like it just occurred to Goldman this year that every Christmastime they could shower their employees with more money than the average worker sees in a lifetime. If you hold Goldman stock, you presumably knew this was coming.

Perhaps it's just that they can.

Surely in the free marketplace of ideas and services, people are paid what they are worth. That is why executives were paid so much in the past--they took on tremendous risks, which would harm their earning potential if failure actually happened. Therefore when they fail they must earn less, or the free market isn't free and moral hazard will stalk the land, eating the the fruit of the free market and pooping the pellets of excessive risk and market failure.

And just who owns these companies anyway? The shareholders! Should the owners be told what to do by their workers? It's unionism, that's what it is. They're demanding higher pay and good benefits, which will harm the bottom line of the company, thereby risking the failure of the company. Yes, McArdle said that the investment banks must be bailed out, which would also be a moral hazard, but that was because the banks were too big to fail. Now the executives are too big to fail, and must be bailed out with higher compensation, or else the entire luxury goods market could fail. The risks to our economy are just never ending, which makes it a very good thing that McArdle is here to do the thinking for us and the public relations for investment banking executives.

Paul Krugman advanced a theory about income inequality that I found unconvincing: that a major contributor to its growth in the latter 20th century was simply cultural change; people at the top earned more because everyone thought it was okay to earn more.

I still find it pretty unconvincing. But if shareholders start voluntarily limiting investment banking compensation, to the point where it actually falls materially in aggregate, I may change my mind.

McArdle doesn't give us a reason for rejecting Krugman's theory but we're used to that. At least we know that if all executives start earning less money, McArdle will realize she was wrong. After all, she's said in the past that a cultural shift might be a factor in rising executive compensation. She might easily change her mind yet again.