Monday, February 09, 2009

Richard Posner and Gary Becker come out against compensation controls

Posner's reasons:
First, it directs attention away from the really culpable parties in the depression, who are not the financiers. ... Because the Federal Reserve under Alan Greenspan pushed interest rates too low and kept them low for too long, and because regulation of financial intermediaries had over the years dwindled and became especially lax during the Bush Administration, the bankers were allowed, and competition forced them, to take risks that could have and have had disastrous results.

Second, the pay cap contributes nothing to getting us out of the depression. That can be done only by an active monetary policy, by recapitalizing the banking industry, and by a stimulus program ...

Third, and worst, the pay ceiling will retard the recovery of the banking industry.

Becker says:
The main problem with wage (and price) controls is that they never work, although governments have imposed them throughout history. ... Competition, with all its defects (which I discuss later), is still the best mechanism available for setting salaries and other prices.

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