Federal Financial Assistance and Wage Control - Essay Example

Federal Financial Assistance and Wage Control Introduction In 2008, the US Government implemented a $700 billion bailout package for the beleaguered financial industry, ostensibly with a view to stabilize the market and rejuvenate the economy. The money for this salvage project came from tax funds collected from citizens and instead of being used to fund public welfare and infrastructure projects, the money was diverted to bail-out corporate giants in the doldrums due to gross mismanagement and unsound business practices. In spite of poor market conditions and the average citizen caught in the insidious grasp of recession, for top management executives in bailed out companies, it was "business as usual" - they secured high salaries, bonuses and perks, commensurate with previous years! Public outrage at the bailouts and the government's haste in pushing through the economic package was huge and unprecedented, with other entities and industries also clamoring to be bailed out in a similar manner. This objective of this essay is to discuss the morality of using tax funds to bail out ailing corporate entities to avoid them becoming insolvent and whether the government should initiate wage controls and strict accountability policies when providing such funds. With respect to wage controls, the questions to be answered are why and how much, rather to what degree government must step in to control and prevent the misuse and abuse of bailout funds. Each of these questions is addressed in the different sections which follow. The Morality of Governmental Bailouts in a Capitalist Economy By its very definition, a capitalist or free market economy is built on competition and "survival of the fittest", with little or no government intervention. The success or failure of a business is determined by the way business is conducted and how such businesses deal with fluctuating market forces. In the current economic meltdown, it is quite obvious that many business entities played "fast and loose" with sound economic principles in order to maximize profits by following unsound credit practices and with inadequate risk management or controls in place. By doing so, they've traded long-term growth and profitability for short-term gains in the years preceding the sub-prime mortgage crisis. The latter acted as the trigger which brought down the American economy to its knees and led to the collapse of numerous financial institutions. This has forced the government to step in to bail-out distressed companies at the cost of its citizen taxpayers. Is such an intervention justified The answer is clearly a 'no', given the unique nature of a capitalist economy. Businesses are required to compete with each other in the marketplace, having a free hand in the usage of capital, labor and other resources, because the end goal is profitability. A company or business entity which does not adhere to the principles of a free market economy, or tries to derive unfair advantages by misusing its powers, is doomed to fail in the long run. This is the natural consequence of unfair competition and the corporation must face the same in the natural order of the market. However, such large-scale failures of several companies at the same time can have a disastrous effect on the economy and society as a whole, hence it raises the question of government interference to avoid a catastrophe, a rationale advocated by the Bush administration and Congress in providing the $700 billion bailout in 2008. According to Ingham (2008), in a capitalist economy, the market is a self-regulating entity and the state (or government) role should be limited to providing infrastructure and resources which help in sustaining a free market economy and intervening under only exceptional circumstances where the market fails to correct itself. Is the current economic crisis such a circumstance Common sense would indicate this to be so, but the next concern would be to what extent should the state intervene to resolve this issue The answer to this concern can be summarized as below: A bailout or other form of state intervention must be a clearly articulated policy stating the pros and cons of such intervention. It must address clear lines of accountability and responsibility of both the state as well as the entity receiving the bailout benefits. The bailout should be time-bound and there must be a mechanism which controls the distribution and utilization of government funds. Clearly, these concerns were not adequately discussed and implemented in the 2008 bailout and there was no control over how the rescued companies used the funds allocated to them to avoid insolvency. This brings us to the issue of wage controls and the necessity for implementing such controls in situations where federal financial assistance is provided to private sector companies to prevent bankruptcy and the collapse of the entire economic system in the country. The Need for Wage Controls where Federal Financial Assistance is given Traditionally wage and price controls were used by the federal government to curb inflation. The controls were first used by the federal government during the Second World War (Rockoff 118). The current demand for wage controls is a reaction to the fact that top management executives in companies which received funds under the federal bailout plan, took home a massive $18 billion in salaries, bonuses and other perks. The bailout funds came from tax funds and it appears these executives were being 'rewarded' for achieving failure rather than profits, at the cost of the average citizen. The gap between compensation received by average white and blue collar workers on the one hand and business executives on the other is humongous. Past statistics show that the percentage increase in compensation for the two groups have never been at par, with the scales fully tilted on the side of managers and top business executives. Historically too, unconditional financial bailouts have not translated into an equitable redistribution of wealth, but have instead served to aggravate the gap between the rich and the poor through a disproportionate income distribution (Lloyd 107). A policy cap on compensation received by managers in companies which are beneficiaries of federal assistance by way of bailout funds is hence fully justified. An equitable wage control policy must necessarily be structured around the following components: (a) a cap on salaries, bonuses and perks for executives in companies receiving financial assistance funds from the government; (b) a strict chain of accountability on how bailout funds are distributed and utilized; and (c) a strictly-implemented deadline on how funds are disbursed and used for preapproved purposes and a predetermined point at which both federal funding and consequential wage controls will come to an end, adhering to the principles of a capitalist economy. Just as individual borrowers are subjected to conditions and limitations when borrowing money from banks and other financial institutions, there is no reason why corporations and business entities receiving government funds should not be subjected to the same kind of limitations/conditions, one such condition being controls on the amount of compensation being paid out to their top management talents. A bailout funded from public monies should be transparent and establish a clear chain of accountability, especially in a tough economic period. Moreover, the control should not be left at the sole whims of politicians, but administered by responsible public servants. Wage controls in adjustment programs are meant to address the crisis of inflationary pressure resulting from wage increases (Howe 135). Why Wage Controls are not acceptable in a Free-Market Economy No federal oversight is just as bad as excessive federal oversight when bailout or stimulus packages are implemented. As mentioned previously, state intervention in the economy must be limited and time-specific. While the state can and should intervene during times of extreme financial crises, it is equally critical that the intervention must end when the economy has stabilized and free market factors are back in play. Companies and business entities which have continued to follow free market principles and are profitable without being detrimental to the larger goal of public good and welfare, should not be penalized for the rogue actions of a small sub-set of the business community. Therefore, any wage control policy must necessarily applied on a micro level and not as a general condition and in the instances where it is applied, the policy must enforce accountability and penalize managements where funds are misused or fraudulent practices to defraud the state and the public are carried out. One of the ways in which control can be exercised is by applying the public disclosure rule which gives the public more say on decisions that affect the running of publicly traded companies (Lloyd 95). Conclusion In conclusion, it is the author's considered opinion that wage controls must be an important part of programs where federal financial assistance is provided to bailout corporations that are on the brink of insolvency. The bailout process should be transparent and subject to scrutiny by the general public and the government, while the beneficiary entities must utilize the funds provided for the purpose of nursing the company to fiscal health and not to line the pockets of the upper management teams. Clearly, transparency and accountability are the two important requirements for the success of any federal financial assistance program and these objectives can be met by exercising a prudent wage control policy. Works Cited Howe, Christopher. Wage Patterns and Wage Policy in Modern China, Cambridge University Press, March 2009 Ingham, Geoffrey. Capitalism: Key Concepts, p. 190, Polity, 2008 Lloyd, Ulman. Wage Restraint: A Study of Incomes Policies in Western Europe. University of California Press, 1971 Rockoff, Hugh. Drastic Measures: A History of Wage and Price Controls in the United States, New York: Cambridge University Press, 1984. Read More