Tuesday, March 23, 2010

Why is this a stupid idea?

So I had to take the early ferry to my island the other day which meant I had to wake up at 5:30am. I'm not very good at that anymore and here is what I thought about.

What if the government passed a law saying that no one in the U.S. could earn more than 1 million dollars a year? Companies that were currently paying any of their employees over that amount would be ordered to redistribute the excess amongst their employees at a ratio that was inverse to an employee’s salary so that less well paid employees would receive a higher percentage wage increase than those earning closer to the million-dollar-a-year mark. There would be no imposed effort to reach complete wage equality, but a simple reduction in every company’s overall GINI coefficient would arise. Those who were self-employed and making over 1 million a year would also be required to disburse their excess income to whomever they saw fit so long as they could prove that the money was not given with any legal strings attached, or they could give it to a non-profit charity, or to the government to disburse. Income earned from capital gains or stock portfolios would also be subject to this rule although I am not economically savvy enough to delineate the exact mechanism by which this could be achieved. No property or asset would be seized by the government that was held by people before this rule came into effect. I.e. Bill Gates and others like him would keep their houses and other assets, although admittedly in all likelihood over time many of these ultra-rich would find it difficult to afford such assets on only 1 million dollars a year.

At this time the objections to this idea that I am interested in hearing about are not procedural/practical ones or ethical ones. I’m not suggesting that these are unimportant aspects of this hypothetical but for the moment I’m only interested in hearing why this would destroy our economy in a functional sense. In other words, I don’t want to hear that such a rule is “unfair” or “unworkable” but that it would wreck havoc on the American economy for reasons a, b, and c.

And pre-emptively I think it should be said that arguments about this hypothetical ushering in socialism or communism are non-starters. Remember the government isn’t getting any of the wealth that will be redistributed, unless the self-employed decided they wanted to give it to them. It is simply imposing a pay ceiling.

I am a libertarian by instinct but I also firmly believe that power corrupts and that in the modern world (always?) money = power. I am also convinced that pure market competition leads to high GINI coefficients, but that government regulation beyond a certain amount, usually makes this situation worse, not better. And so my question arises. What’s so bad about a pay ceiling? And again, for now, ethical, and practical objections are not allowed.

My suspicion is that this is a stupid idea but I am not economically intelligent enough to know why.


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