BISHOP: Caps On CEO Pay Isn’t The Way To Reduce Inequality

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Tho Bishop Media Coordinator, Mises Institute
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Editor’s note: We endeavor to bring you the top voices on current events representing a range of perspectives. Below is a column arguing that restrictions on CEO pay is wrong and won’t fix any of the underlying causes of the pay gap between executives and employees. You can read a counterpoint here, where Jason Nichols, a lecturer in African American Studies at the University of Maryland and a prolific progressive commentator, argues that CEOs shouldn’t be making exorbitant salaries while their workers go without and that more stringent tax policies can help alleviate that inequality.

Over a decade has passed since the Great Recession, yet the scars continue to shape American politics. The events in Washington this week are simply the latest incarnation of the frustration and anger that exists with American elites, which is perhaps one of the few common values left in both red and blue America. While the elites seemed to have regained the reigns of power in Washington, the energy and critiques of the populist left and right will not be going away any time soon.

One of the most interesting results of the modern populist era has been the increasing scrutiny on the right of non-state power, particularly the growing concerns with corporate America and the financial class. This is a welcomed phenomenon. Big business has always been one of the great benefactors of progressive political power, and the consequences of a century of largely un-interrupted progressive rule has corrupted American free enterprise and turned it into debt-addicted crony-corporatism.

Appropriately identifying those unjustly benefitting from political power, however, does not necessarily justify all strategies for curtailing it. Simply eating the rich does little to actually benefit the day to day lives of average Americans.

Similarly, calls for arbitrary caps on CEO pay, massive taxes on the rich or the nationalization of large industries ends up doing little more but expand the power of the American empire, push genuine talent overseas and prevent the sort of technological innovation that can remarkably improve the lives of the most vulnerable among us.

The problem that exists today is not CEO pay, but the degree to which the financial success of large firms has become separated from the merit and performance of the CEO. In a properly functioning market, a CEO’s ability to visualize and execute corporate strategy is a feat that requires genuine talent and instinct. America today still benefits from the remarkable accomplishments of great men who were able to produce goods and services on such a large scale that it made tangible improvements on the lives of average Americans.

This does not mean, however, that the ghost of Adam Smith requires us to ignore any potential government fixes to the growing concerns about the consolidation of corporate power or increasing income and wealth inequality. What it does mean is that the better focus is on the underlying systemic issues with our age of financialization.

One of the most overlooked targets of attack from the loudest voices in populist politics today is central banks and the consequences of a decade of reckless and irresponsible monetary policy. The combination of low interest rates and expanded balance sheet has created a situation where those invested in financial assets – which often makes up a large part of CEO compensation – benefit while savers and those who cannot afford to buy stock suffer. The response to COVID-19, including loan guarantees and the holding of corporate debt, have only made the problems worse.

The result of this is a perverse economic system where a company’s financial success is increasingly less reliant upon the quality of their output, but rather their size, access to cheap debt and their proximity to power. As we’ve seen from Facebook and other Big Tech titans, if any serious upstart tries to challenge a industry leader, they can either be purchased or destroyed.

As such, arbitrary attempts to limit and restrict CEO pay are shortsighted measures precisely because they are an emotional response to the symptoms of American corruption. What is needed is a populist movement that wants to get serious about the underlying cause.

Tho Bishop is an Assistant Editor for the Mises Wire. Prior to that he served as Deputy Communications Director for the House Financial Services Committee under Rep. Spencer Bachus and Rep. Jeb Hensarling.