Good Spending vs. Bad Spending

Just in case you all thought that my earlier post, "Stimulus or Spending: A False Dichotomy," indicates that I'm incorrigibly sold on the current administration's economic policies, I thought I'd come back with some comments on an area in which the Democrats are being as fatuous as the Republicans are about stimulus. This is the idea, which seems to have been foisted off on the Obama administration by the left wing of Congressional Democrats, that you should punish companies which have taken Federal dollars for spending their money in certain ways.

Money is fungible. That is, money is interchangeable. You can't tell one dollar from another. Let's say we give the health department of some third-world country $20 million, and we tell them they can't spend it on birth control. Fine, they allocate our $20 million to malaria eradication, and then they take the $20 million they had already budgeted for their malaria program, and give it to their family planning clinics. Suppose we give Israel $1 billion in financial support, and we tell them that we can't support the settlements on the West Bank. So the Israelis make a few bookkeeping entries, so that our money is all spent inside the recognized boundaries of Israel, but, in some mysterious fashion, the settlement-building budget goes up by $1 billion.

So it's just silly to say to a bank that they can't pay their management more than a certain amount, as long as they're taking taxpayer money. They will find ways, they will find means, and they will compensate their people as much as they think they need to. The government already limits executive compensation. Companies can only deduct the first $1 million in salary and direct payments to an executive as a business expense. Pay more salary, and you incur a big tax bill. But you can pay much more in bonuses. There's no limit on bonuses, as far as I know, so executives get a lot of their compensation in bonuses.

I think John Thain at Merrill Lynch handled this very badly, partly in apparently lying to his new boss, Ken Lewis. But here's the thing. Some of those bonuses were actually salary, disguised as bonuses to get around the tax code. And some of the guys getting bonuses actually earned them, even if the company went in the dumper in the second half of the year. So I don't think it's as simple as cutting off all the bonuses for employees of companies taking Federal money.

If the Federal government wants to exert that level of control on financial services companies, then they ought to go ahead and nationalize them. Then they'll have the responsibility, as well as the power.