Rewarding Incompetence

There was quite a stir recently over a rant by Rick Santelli of CNBC on the mortgage plan produced by the Obama administration. One of the claims made was that this plan was “rewarding incompetence.”

Now without regard to context, I wouldn’t have a problem with that. Where I do have a problem is with those who would cheer these words, and yet support bailing out banks and the auto industry. If you support ideas like “saving an industry as a whole,” then it is quite easy to see the mortgage plan as a means of trying to save a particular industry, rather than as a program to save those who may have made bad decisions.

On the other hand, if one objects to saving people who have made bad decisions, then surely the executives of financial institutions and of our major auto companies qualify. What better measure of failure could one have than that the company led by a particular management team fails spectacularly and requires a government bailout. Yet even the idea of limiting compensation for those responsible meets resistance.

As general policy, I don’t think limiting compensation is nearly adequate, nor is it good policy for the government to be trying to directly set compensation. But somewhere there is a major failure when companies are crashing, and the executives managing them are not only not fired, they find defenders who think $500,000 per year is too little pay for such failures.

I’ve said it before, and I’ll say it again: I’ll be happy to run companies into the ground for much less than $500,000 per year.

And it appears it’s not even a real limit. Ed Brayton today on Dispatches points out that this limitation has considerable loopholes.

So if we’re rewarding bad decisions when we bail out homeowners, some of whom might have had excellent jobs when they signed their mortgages, but have since lost them, we are even more guilty of rewarding bad decisions in finance and in industry. I would also point out that bankruptcy is one of those risks that a lender takes, as well as a borrower. Lenders who make bad loans end up losing their money when the borrower goes bankrupt. There are two sides when a bad loan is made: A borrower and a lender. If fraud is not a question, it is not just the borrower who made a bad decision.

I don’t see much consistency in these debates. It seems that the standards change depending on who is getting the money.

Having said that, I know that I’ve written several notes in which I might not have been fully clear. So let me put it in a few words. I don’t believe in rewarding incompetence, not anybody’s incompetence. In fact, I don’t believe in the government “rewarding” at all. I do believe in economic stimulus, but the portion of stimulus that I support involves government spending more on things that ought to be done anyhow. Unfortunately this has become a minor portion of our spending, especially with all the hidden money going into the banking system.

What I mean by spending money on things government ought to do anyhow? Essentially if one looked forward at the infrastructure needs of the country over say 25-50 years, and then during an economic downturn borrows and builds several years worth of projects much faster, I would consider that a valid stimulus. If you pay money out for ordinary expenses, then all you have done is paid those expenses. If you build a bridge, you have a bridge. You do, of course, have to make sure it’s not a bridge to nowhere.

Bridges, roads, communications infrastructure, needed government buildings, military research, and many other things are valid things on which to spend. They are things that must be done sometime, and most of them will produce income into the future. If a project is a bad idea under normal circumstances, it’s a bad idea in terms of stimulus.

The problem, of course, is to bring the government off of a deficit spending spree and back to something that should be “normal.” Governments like to spend money. It’s the stopping that’s hard.