Wednesday, June 15, 2011

Presidents Need Long-Term Economic Incentives: Modifying Presidential Compensation

An article about the economy and the President in today's Wall Street Journal, "A Welfare State or a Start-Up Nation?: After one generation, a one percentage point difference in growth rate becomes a 25% difference in per capita income." by Allan Meltzer raises an interesting point about short-term versus long-term US economic growth.

While not discussed directly by Meltzer, his article collaterally raises an important issue. Do Presidents have long-term incentives? Does the US need to create long-term incentives for Presidents? Should the President's (also maybe Congress's) compensation be modifed to include long-term, deferred compensation incentives?

Short Term Goals
Presidents and other elected officials definitely have short-term goals to get reelected and to be popular in the media and public's eyes. If the President were the CEO of a large corporation, part of his compensation package would attempt to promote long-term corporate goals through a long-term incentive compensation package, such as deferred compensation, stock options, etc.

Incentives Matter
Imagine the difference in a President's political and economic objectives if a President's compensation included a possible substantial deferred pay bonus after his term in office that depended on the future growth rate in GDP and the future change in unemployment levels.

Suppose our Presidents' salaries included a substantial deferred bonus per year, after they left the Office of the President, for same number of years they were President, to be paid immediately following their term as President, and that the amount depended on the performance of the economy after they left office as measured by GDP growth and the decline (or the stability if already low) in unemployment in each year of bonus eligibility.

Meltzer states:
The welfare of the citizens—poor, middle-class and wealthy—is best improved by using resources more productively. Of course, increased productivity isn't an instant cure for what ails us; there is no instant cure. Administration and Federal Reserve policies have tried mightily, and wastefully, to get quick gains—with few results to show. Despite near-zero interest rates and almost a trillion dollars in "stimulus" spending, unemployment remains stuck at 9% and a true recovery is elusive.
Mr. Obama and his followers claim they want a solution that is "fair." Why is it fair to distribute more welfare to today's voters at the expense of their children and grandchildren who will pay for this less productive use of resources? This is the same "fair" approach that Europeans chose decades ago, and which led to chronic low growth and high unemployment.
It isn't fair to tax future generations just because they can't vote. We have a choice between a brighter future for our descendants and more social spending now. The missing words "more productive use of resources" are critical for a rational choice. To realize the promise that the U.S economy has always offered, we must choose less social spending, less intrusive regulation, and more efficient use of resources in both the public and private sectors.
Helping Everyone
Long-term, sustained, non-inflationary economic growth helps everyone; the rich, the poor, the middle class, the current generation of workers and the future generation of workers. Additionally, economic growth fills state and federal governments' tax coffers and allows government to provide economic safety nets and government services where necessary.

Shouldn't we use all we know about economic incentives, incentive compensation and Public Choice Theory to foster long-term US economic growth and employment?

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