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Executive Pay Isn't the Problem


But stealing from hard-working people is.

There are people who earn money, which is correlated to creating value in society, and there are people who earn money by creating money-making schemes, which don't correlate to real value in society.

For example, if Bob builds your house, he's paid as a symbol of the value he created for your life. On the other hand, if William creates and sells exotic (i.e. socially valueless) financial instruments, he's paid lots of money, even though, in most cases, no value has been created.

Capping executive pay is a misguided remedial effort. If a company adds real value to society, people like Bill Gates and Steve Jobs should get wealthy. Unfortunately, our economic system is overrun with barely legal scams masquerading as businesses. In those cases, we can better protect the benefits of capitalism (and capitalism itself) by preventing such thievery from happening in the first place. Otherwise, we're merely calling criminal activity by the more respected name of "capitalism".

Let's use a couple little examples which happened to screw our society at large: Enron and AIG (AIG).

The issue isn't whether Ken Lay and his financial henchmen should have had their pay capped -- by that time, the dirty bomb had already exploded in the economic subway. The issue is whether trading energy derivatives had any value other than skimming money out of the system on the back of a valueless/harmful business model. As we all learned, Enron clearly didn't do anything to add value to society. Quite the opposite.

More recently, the same adult game of smoke and mirrors occurred at AIG. Once again, prima facie criminals put on $5,000 suits, housed their scam in prime corporate real estate, and blinded their victims with big shiny logos.

In this case, the business model was to collect premiums to insure loans, yet never maintain any collateral to make good on the insurance claims. This is 100% the same as paying car insurance, having an accident, and learning the company had no money for your claim. Where does the money go in this model? The operators simply stuff it in their pockets. Skim, stuff, repeat (no time to rinse).

Coming full circle: Who cares about capping someone's paycheck midway through a giant project to hurt people who actually work for a living? While the iron is hot, let's surgically remove the cancerous businesses from our economy before we need another dose of chemotherapy. Then, we can finally see the value of capitalism as capital flows to the most beneficial uses.
No positions in stocks mentioned.
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