Incentives for Decline

Consider two worlds:

In World 1, the people who run companies have their annual pay tied heavily to their company’s stock price and there are low taxes on capital gains and low marginal taxes on high incomes.  The natural incentive is for an executive to come in, do whatever is needed to pump up the stock price in the short run, reap massive bonuses, pay dividends to shareholders to keep them happy and continue to keep the price up, and then bail out before anything bad happens.  This is like giving someone a golden ticket that says “do this for three years of your life and you’ll never have to work again, plus you’ll be a ‘made man’ in a circle of increasingly wealthy and powerful capital owners.”  Who cares if the company is still around in 10 years or if it still makes anything useful as long as you and your new friends have already made out?  Rinse and repeat for decades and you have an increasingly unhealthy private sector that must continually increase leverage, off-shore or de-unionize labor, and consolidate operations in order to squeeze more profit out of the next cycle.  These incentives lead to decline.

In World 2, the people who run companies receive a standard pay rate with little or no bonus and little or no stock exposure.  There are high taxes on capital gains and high marginal taxes on large incomes, plus executives will have to retire on the same plan as their employees–something like a fixed rate pension.  The natural incentive for these executives is to make sure that the company will still be around when they retire and that it will remain solvent throughout their retirement.  Without the golden ticket, they must plan for the long term.

It’s simple:  If you tell someone that they can be set for life with just a few years’ worth of work by engaging in systemically harmful and unethical behavior, many people will take the opportunity.  Especially if their peers are all doing it.  If you deny them this possibility and tie their future livelihood to that of the company and its workers below them, they will have to care about its continued survival and health.

We now live in World 1.  If we want some form of actually working capitalism, we have to go back to World 2.  Or forward to World 2–I’m not clear that we ever truly lived there before, though we may have been kind of close in the 1950s and 1960s.

The easiest route to fix things is to hike taxes on the rich and introduce tariffs to “on-shore” labor again.  Another way is to quietly devalue all that stock by supporting people from the bottom up through something like a basic income scheme–create a solid base layer to the economy that no longer needs to be subjected to the Game of Capitals and the whole thing might just deflate.  A basic income changes the dynamic from one where people must choose to either work or die to a regime where companies must either attract workers or die.

This post inspired by the article at this link.

A similar point about executive compensation has been made repeatedly over many years by Ian Welsh and others.

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