CHEMOTHERAPY FOR AN AILING ECONOMY

There is no more a painless “quick fix” for the damage we’ve accrued over decades of neglect of our economy and financial institutions than there is for the wheezing health care system. Revamping our economic system will be as difficult as trying to change the lifestyle of a fast-food eating, overweight, chain-smoking cardiac patient and, unfortunately, accompanied by the same lack of guarantees of success. In addition, changes will have to occur simultaneously in the private and public (read: governmental) sectors.

Let’s start with the private side. It’s been cited over and over again how the top 5% earners pay over 50% of the taxes. This has been used by the right to argue against further tax increases. The rich corporations that pay little or no taxes are used by the left to lambaste the “greedy” right. Both sides are correct. So, why don’t we fix it? The truth is, when a problem can be defined and the solution is evident we need to look for incentives for maintaining the status quo. Although the ideology and rhetoric of the two major parties appear to be diametrically opposed, the actions on both sides of the aisle often belie the differences. Both engage in income redistribution to buy votes from the masses, and both cow-tow to the big money people to get the funds needed  for their campaigns to stay in power. The balance of these two necessary but often contradictory needs and the public face they put on it is what differs between most liberals and conservatives. What makes the new breed of Tea Party politician “radical” is that they are trying to stick to principle at the expense of preserving electability. But I digress. The first fix I would propose involves closing the tax loopholes; the complexity of tax law is a tortured reflection of the unbridled use of power in the exercise of favoritism and cronyism. The best way out of this morass, in my opinion, is to institute a flat tax (not an add-on or “value-added” tax) that is revenue neutral and provides enough of progressive component to be compassionate rather than extavagant. An example of this can be viewed here. Since this type of definitive measure is unlikely to be adopted for a long time, if ever, a good band-aid is needed immediately to close the loopholes.

Another example of corruption on the private side that has been a pet peeve of mine for years is the exponential rise of CEO salaries. As a free-market capitalist, I can see the jaws of libertarians and purists everywhere dropping. The problem with the current system is that, for publicly held companies, we have the wolf guarding the henhouse. It is the private sector equivalent of the ruling class deciding its own compensation, and it has the same corrosive effect. Time and again we see the top brass rewarding themselves extravagantly, regardless of performance. And in those cases where the companies are doing well, the rewards are not necessarily distributed where the effort dictates. It’s human nature. Now, as with the electorate on the public side, the company shareholders have the theoretical right to exercise their power at the ballot box to stop the abuse. In practice, this rarely happens. How many small stockholders have the time or incentive to study the myriad company pamphlets and know enough to vote intelligently? The largest shareholders, like the members of the governing boards that also hold sway over top management, are all participants in the elite “club” that directly benefits from the gradual escalation of salaries and perks and can’t be depended on to self-police. Over time, these artificially and grotesquely inflated numbers become the norm, and cries of “we can’t hire quality unless we pay market salaries” become self-fulfilling. Privately held companies are an entirely different issue, and the owners should be permitted to overpay themselves to whatever extent they choose, with the caveat that they are also free to fail. We should not bail out greed and ineptitude in the free marketplace. “Too big to fail” is too big to exist. More on that at another time.

So, what do I propose? Targeted federal legislation (horrors!). Yes, you heard me right. I have no philosophical beef with legislation designed to prevent abuse of the capitalist system, rather than manipulate it. In fact, the government, as I’ve maintained, needs to get out of micromanaging our lives and do what it’s supposed to—provide for the public defense. In my view, that principle involves protecting the free market economy, not just our borders. CEO salaries and benefits need to be determined by well-defined benchmarks that are easily measured, and be tied to some high multiple of the lowest-paid employee. Anything other than this is tantamount to racketeering.

Next: More “realignment” of the private sector.

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