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July 02, 2007
Do Windfall-Profits Taxes Apply to Politicians?
Don Boudreaux
Today's New York Times reports on Sen. Barack Obama's record-breaking fund-raising spree to finance his bid for the Presidency. Last quarter Sen. Obama raised, as the Times puts it, "a whopping $31 million."
These funds, of course, are all voluntarily contributed. The fact that I, personally, do not care for much of what Sen. Obama espouses is irrelevant: lots of people like what he says. They like it enough to contribute to his campaign. The result, designed by no one, is a huge campaign chest for Sen. Obama. He will be well-financed to pursue his ambition. (In my opinion, this ambition is an especially greedy and venal one, but that's just my opinion.)
In May, however, the very same Sen. Obama called for Senate hearings into allegedly excessive pay for CEOs of corporations.
The Senator is either ethically inconsistent or intellectually inconsistent (or both). The pay of private-sector CEOs is determined by market forces. No one -- absolutely not a soul -- is forced to contribute money to fund CEO salaries. Those who pay such salaries do so voluntarily.
It's the same with those who contribute to political campaigns such as Sen. Obama's. Everyone who does so, does so voluntarily. I wonder how Sen. Obama would react to someone suggesting that his bulging campaign chest is the result of "greed" and behind-closed-doors deviousness by him and his campaign staff. I wonder if he thinks that government should hold hearings to "investigate" the unprecedented ummph and possible anti-social consequences of his fund-raising success?
And if he fails to win his bid for the Presidency, might we conclude that he, like a highly paid CEO who fails to improve the company's fortunes, is really undeserving of the largess bestowed upon him?
(I thank Dimitri Vassilaros, columnist for the Pittsburgh Tribune-Review, for the title of this post.)
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Well, in fairness the money isn't going into his own pockets (I hope!) but rather, his campaign. A better analogy might be made to criticism of corporate profits rather than CEO salaries.
Posted by: Adam | Jul 2, 2007 6:30:01 PM
Scott Ott thinks we should have a little redistributin' goin' on:
Senators Barack Obama, D-IL, and Hillary Clinton, D-NY, today turned presidential campaigning on its head when they announced that the combined $52 million in primary campaign cash they raised in the second quarter would be redistributed to less fortunate candidates like Delaware Sen. Joe Biden, Alaska Sen. Mike Gravel, and Ohio Rep. Dennis Kucinich.In a joint news release, Senators Obama and Clinton said, “The fundamental principles of the Democrat party say that the rich and powerful have an obligation to help the poor and downtrodden.”
Posted by: Patrick R. Sullivan | Jul 2, 2007 7:41:48 PM
Not that I have a problem with it, but aren't CEO compensation packages put together by the board of directors? In a larger sense, the salaries are determined by the market, but some would argue that CEO compensation is a result of overly "chummy" relationships with the board. On the other hand Obama et al.'s campaign chests are the result of tens (hundreds?) of thousands of people investing their own money to see their favored candidate win.
I think this is apples and oranges, here, though I do like the idea of encouraging them to redistribute their own campaign wealth :)
Posted by: jn | Jul 2, 2007 8:08:42 PM
In the interest of consistency, of course.
Posted by: jn | Jul 2, 2007 8:09:44 PM
Yes, CEO compensation is often determined by boards, not market forces. They are not paid based on their marginal productivity, as the textbook model would dictate.
I think libertarians tend to disregard the fact that extremely large corporations are well-insulated from serious competition. Witness Ford Motor posting a 12.7 billion dollar loss--and then rewarding its CEO with an 18 million dollar bonus. Does this mean that any CEO they would have hired for, say, 10 million less would have posted an even larger loss?
Isn't it possible that the compensation of CEOs is extremely out of line with their contribution to society because the companies that they work for possess a great deal of market power? Which, in turn, they use to curry favor with the politicians in Washington and receive protectionist measures? Henry Simons, Milton Friedman's intellectual godfather, would say yes to both questions.
Posted by: dan | Jul 2, 2007 9:00:45 PM
...what were ford's projected goals for the year of that 12.7 billion dollar loss? what if it *were* a projection of 35 billion loss? This guy makes it 12.7...you pay him 18, you're still up almost 5 billion vs. what you would've been w/o him. I don't know what 'marginal productivity' is, but that's a scenario that seems plausible to me...
I'm jus' sayin...is all. Of *course* we're not going to trust corporations, and you're dead on that they'll use their opportunities to curry favors.
"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public."
Adam Smith, Henry Simons I-don't-know-what to his I-don't-know-who-the-hell-he-is-anyway, actually *said* that.
:)
So...what're we left with? Who cares if corporations are over-compensating their CEO's? If I don't like them, I won't support them, buy their product, or own their stock. If I knew what I was doing (as in, if I could read earnings sheets, etc.), and didn't like Ford, their stock price might go down after I sold off a big chunk of their stock because I didn't like their tack, and didn't believe that they could keep up their foolishness in future years. If enough people who knew what they were doing didn't like Ford, their stock might go WAY down, and they might kick out that CEO.
So...since I don't know what I'm doing, I'll just keep buying cars that I like, and assume that the people who know what they're doing will reward and punish Ford appropriately.
Posted by: shawn | Jul 2, 2007 9:48:31 PM
"I think libertarians tend to disregard the fact that extremely large corporations are well-insulated from serious competition.
I'd tend to disagree, and not just because I'm generally disagreeable. Large companies are more susceptable to threats from competition because they have more shareholders and more at stake in their market segments. Ford, believe me, isn't happy when Toyota decided to enter the full-sized pick-up truck segment. Still, Toyota is at risk from other, smaller, companies from India and China who, someday soon, will be able to surpass the threshold of safety concerns. No extremely large company is insulated from a free market.
"Isn't it possible that the compensation of CEOs is extremely out of line with their contribution to society because the companies that they work for possess a great deal of market power?"
That's impossible to know without an ex post analysis of thier performance. When they haven't been of net benefit, they get a boot in the ass. Otherwise, they remain installed at the tiller, steering the corp where they will. I t happens all of the time. There is no grand conspiracy to defraud the public by corporations, regardless of the leftard alarmists.
And besides, Obama is the ultimate beneficiary of any contributions to his campaign. That is, unless you think that he possesses some paradigm-shifting ideas (or ideals) that with morph society into something never seen before. And that, my friends, ain't going to happen. Hed he's another boiler plate politician who is invested heavily in the status quo.
Posted by: skh.pcola | Jul 2, 2007 10:00:26 PM
If Ford lost $12.7 billion, I shudder to imagine how much was lost by the smaller companies who aren't well-insulated from serious competition!
Posted by: Paul Zrimsek | Jul 2, 2007 10:37:45 PM
Don,
I enjoy the post but I do have a concern. You mentioned that Obama's ambition is "especially greedy and venal one" How is the greed of any of us less so (corporate CEO or otherwise)? Isn't that greed in of itself? isn't ambition what makes this whole country work? I don't want to vote for any politician or work for any CEO who isn't ambitious.
Posted by: Jimmy Simons | Jul 3, 2007 12:07:08 AM
"These funds, of course, are all voluntarily contributed. "
I didn't voluntarily donate to this company....but I did donate.
http://finance.yahoo.com/q/bc?s=HAL&t=5y
Further I don't remember any recent collections of windfall profit taxes. Last times I know of were when we fought some wars like WW1, WW2 and the Korean War. Back then the thinking was obscene profits especially from and during a time of war and sacrifice by soldiers and their families was un-American.
Posted by: muirgeo | Jul 3, 2007 12:13:04 AM
Yes, CEO compensation is often determined by boards, not market forces. They are not paid based on their marginal productivity, as the textbook model would dictate.
If a CEO is not being paid, on average, his/her marginal productivity, then you are postulating a free lunch; that is, all big-paying corporations could increase shareholder returns by being less picky and paying much less.
Corporations are not widely known for systematically leaving money on the table - their success against other forms of industrial organisation relies on finding and eliminating such costs - and it seems to me the "chummy board" model of CEO pay has to fail in general, even if conspicuous exceptions exist.
Posted by: ben | Jul 3, 2007 12:24:59 AM
muirgeo... I'm just curious... What were you smoking in the "just say no" 80s? Because between 1980 and 1987, we had a WPT, and it made the oil companies invest less in domestic production and increased our dreaded dependence on foreign oil by 8 to 16 percent according to a Congressional Research Service report. As I recall of the time period, we were mostly disabused of quaint notions such as profits being unamerican.
James Glassman discusses here:
http://www.capmag.com/article.asp?ID=4417
Posted by: Brad Hutchings | Jul 3, 2007 4:00:03 AM
Jimmy,
You said:
"isn't ambition what makes this whole country work? I don't want to vote for any politician or work for any CEO who isn't ambitious."
One is the ambition towards an end which involves coercive rule over others.
The other is the ambition towards an end which involves non-coercive personal profit.
I suspect that it is the former kind of ‘greed’ that Don finds abhorrent.
My definition of good ambition is that which is contractual and non-coercive.
Posted by: I_am_a_lead_pencil | Jul 3, 2007 8:13:23 AM
My definition of good ambition is that which is contractual and non-coercive.
Posted by: I_am_a_lead_pencil
So is that like when oil executives meet in private with the Vice-president to form "our" energy policy and say, "can you spare some soldiers to get us that oil in Iraq?"
A WPT is certainly not the answer but subsidizing these guys the way we do has no doubt artificially lowered the cost of fuel and blocked out any potential competition.
Posted by: muirgeo | Jul 3, 2007 9:20:14 AM
'So is that like when oil executives meet in private with the Vice-president to form "our" energy policy and say, "can you spare some soldiers to get us that oil in Iraq?"'
No. It's more like like when candidates get together with NEA leaders and say, "sure, we'll sacrifice another generation of underprivileged kids to the public school monopoly."
Posted by: M. Hodak | Jul 3, 2007 10:26:57 AM
Muirgeo,
Re; Windfall profits, obscene profits, excess profits, etc.
Profits come from transactions. Very large profits come from very large transactions or a very large number of transactions. So my question to you is, if you believe that some of the profits were "windfall", "obscene", or "excess", then which of the transactions which resulted in those profits would you consider "windfall", "obscene", or "excess"? Specifically which computer users would you take the software away from? Which drivers should be denied the right to have gasoline? Which retail customers should be told they have to shop elsewhere? Because what you're really saying is that you don't believe that anyone should be allowed to do participate in more transactions than you believe to be proper.
Posted by: Randy | Jul 3, 2007 10:38:56 AM
Randy,
I never suggested I supported WPT. But I would suggest that we have a say in how boards of companies run if they are taking significant sums from our treasury.
Posted by: muirgeo | Jul 3, 2007 1:01:30 PM
Muirgeo,
This isn't going to happen often, I suspect, but I agree with you on that. I'm not a big fan of corporate welfare, and it does seem to me that those who take handouts from the government are in effect inviting the government into their business.
Posted by: Randy | Jul 3, 2007 1:10:18 PM
Muirego, you mention the Veep meeting with oil execs to form energy policy. Should policies be set without input from those who are experts in the field. How about health care policies being set by governmental fiat with complete indifference to the consequences of bad policy? Your bias is showing, and you yet again impugn government while at the same time advocating for far more of it. It is gross illogic on your part.
Posted by: skh.pcola | Jul 3, 2007 3:24:41 PM
I said:
My definition of good ambition is that which is contractual and non-coercive.
Muirgeo said:
So is that like when oil executives meet in private with the Vice-president to form "our" energy policy and say, "can you spare some soldiers to get us that oil in Iraq?"
----
No. Why would it be? Wielding the power of government is inherently coercive.
Posted by: I_am_a_lead_pencil | Jul 5, 2007 9:02:57 AM
The money doesn't go to Obama personally, it's only to be spent on his campaign.
However, I'm in favor of taxing all donations to organizations just the same as if they were profits generated by a for-profit business.
Posted by: Half Sigma | Jul 9, 2007 2:38:19 PM
Posted by: laptop battery | Oct 13, 2008 4:01:26 AM
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