Amity Shlaes, best known for attempting to exculpate Herbert Hoover from any role in stewarding the Great Depression and instead blaming the whole mess on the New Deal, has written one of the stupidest columns I’ve ever read. I mean, at this point it’s hardly surprising, but here you have a Senior Fellow at the CFR making the argument that because professional baseball players get lucrative contracts despite uneven performance, we shouldn’t pass legislation allowing shareholders to make a non-binding vote on executive compensation or the SEC to ensure compensation schemes of executives are aligned appropriately with sound risk management. This is the crux of her argument:
The first assumption is that a snapshot of a highly paid executive at a failing company is proof that the executive is overpaid and that something in the company structure is broken. Rep. Barney Frank (D-Mass.), the legislation’s chief proponent, has noted that there are moments when it looks as though “the company loses money and the economy may suffer, but the decision-makers do not.”
But as baseball fans know, such snapshots get taken all the time. Buehrle got a four-year, $56 million contract in 2007. Yet this spring his company — the Chicago White Sox — was doing so poorly that Chicagoans weren’t showing up for games. “The White Sox stink,” wrote one columnist. At that point, Buehrle’s pay looked awfully high relative to what the owners and the fans were getting for their investment in the team. Yet no one said that this required a bailout for the Sox, or a hearing and a government-set pay cut for Buehrle.
And now, after that storied game against the Tampa Bay Rays, just about everyone feels like lining up behind the House members to congratulate the White Sox for their prophetic hire. No one thinks about Buehrle’s pay, even though we know it is sure to go up. That ugly snapshot no longer matters. Overall, we see, Buerhle was a good investment, for himself, for his team, for his fans and for baseball.
Shlaes conclusion is that a company’s failure doesn’t suggest an executive is overpaid, which she bases on the observation that Mark Buerhle at one point seemed overpaid but then later pitched a no-hitter. Apparently, this is also prima facie evidence that Buerhle’s compensation is not only correct, but also good for baseball (which I think we can take to mean “the economy.”) I could go on for hours on the number of ways in which the analogy makes absolutely no sense, but let’s try to stay on point. Shlaes argues that an executive’s worth shouldn’t be judged on a short-term time horizon, and therefore …we should oppose regulations that aim to align executive compensation with long-term considerations. That sort of illogic, even from someone at CFR, is pretty impressive.
Now in all seriousness, Shlaes eventually makes a decent point (albeit accidentally).
After all, people hire for the long term, not just for one recession or recovery. And talent is rarer than we tend to think. “In a world where skill is in great demand and markets are large — when a lot of money is at stake, whether it’s baseball or finance — market forces insure that those skilled people get paid a lot,” says Kaplan. Pay caps, or even too much harassment from regulators, will drive the talent to jobs where there aren’t such obstacles. The result will be fewer perfect games in the corporate world: “You pay peanuts, you get monkeys,” says Kaplan.
Let’s leave aside for the moment the fact that the financial industry collapsed while paying itself lavishly, Shlaes is right that we shouldn’t be trying to target small-bore regulations at large scale problems. After all, financial executives can always take high paying jobs as Major League baseball players. No but seriously, this is why instead of trying to regulate the pay of Wall Street executives, we should simply tax ludicrous high incomes at commensurately high rates.