incentives interests congress salary

Time to bring financial incentives to Washington
middle class us economy pensions best practice

Why Congress needs a pay cut, or a threat of one

Everyone in business understands incentives. That's why much effort goes into designing and improving incentive systems to align the interests of directors, executives, and staff with those of stockholders. This 2009 critique is from by Brett Arends, posted on MarketWatch, Nov 17.

by Brett Arends

Charlie Munger, Warren Buffett's second in command, says he's been a fanatical believer in the power of incentives all his life and yet frequently finds he's underestimated it.

Take a look at the US Congress. Sure, there are plenty of reasons why it is among the most despised institutions in America (Latest approval rating: A derisory 26%).

And there are many reasons for the parlous state of America these days. Yet if America were a company, Congress would be its board of directors. And anyone used to the stock market has to notice that the members of the board have few, if any, incentives, to align their interests with those of the "stockholders" -- you and me.

The same is also true for presidents, which is another story. The national debt has doubled in a decade and risen far more than tenfold in the last thirty years. But not one penny is docked from congressional pay as a result.

The economy has so badly served the middle-class that the typical worker actually earns less, in real terms, than his or her parents did forty years ago. Yes, really.

And despite a tsunami of easy money, one worker in six is now either unemployed or serving lattes part-time because he or she can't find a full time job.

The US economy, once master of all it surveyed, is now poised to fall into second place. According to International Monetary Fund forecasts, America will be overtaken by China as the largest economy, in real, purchasing-power terms, within a decade.

Yet those tasked with minding the store during the past years --decades -- of misrule suffer no financial penalties for any of this. Past members do not have their pensions docked. Those in office are neither penalized today, nor offered any incentives to turn the situation around tomorrow. They get paid $174,000 in salary, regardless of what happens.

Obviously there is one sanction: They can be voted out of office for poor performance.

But everybody knows that elections are even more short-termist and superficial than the quarterly earnings game on Wall Street. Like Fannie Mae and Lehman Brothers, politicians know they can manage expectations, shuffle the cards and change the subject for years before the public catches on. No wonder most congressmen and senators are re-elected, time after time.

And their generous pension system is actually designed to compensate them for any risk of losing office -- in other words, to cushion them from this one sanction they might face. According to the official Congressional Research Service, the congressional pension scheme builds up benefits especially quickly while members are in office "because of the uncertain tenure of congressional service."

(How generous is it? According to calculations by the National Taxpayers' Union, a congressman booted out after just 10 years service would have accumulated an inflation-adjusted pension of $29,000 a year. That's not bad for ten years. It's on top of Social Security, of course. They also have access to the equivalent of a 401(k) scheme - with a 5% match.)

Plus, Congressmen and senators are members of the wonderful federal health insurance plan -- one so generous that people in Sweden must eye it with envy. Why do I have this nagging feeling that if congressmen and senators had to buy private health insurance for their own families on the open market -- the system bedeviling the rest of the country -- private health insurance in America would be cheap, efficient and safe?

Now look at where these people keep their money. Investments matter. For example, like most financial writers, I am forbidden to hold any individual stocks. That's normal in my business. It's to make sure we are not influenced in any way by personal investments.

Members of Congress suffer no such strictures. Anyone wondering why Congress seems to favor the interests of big US corporations can stop wondering. Favorite Congressional investments? Big US corporations. That includes banks rescued by bailouts, companies favored with tax breaks, and pharmaceutical companies merrily dodging the public relations bullet in the health care debate, according to the Center for Responsive Politics.

You don't need to engage in conspiracy theories to see why this situation is messed up. Best practice in business would say that congressmen and senators should have their pay and pensions tied to their performance on key measures important to the country. In purely economic terms, that would include median household incomes (in real, inflation adjusted dollars), the unemployment and poverty rates, and the level of the federal debt in relation to the economy.

It's true that in the case of very rich, plutocratic politicians, these incentives probably wouldn't be very important. But that's also true of very rich executives and directors in private businesses too. It doesn't stop them introducing incentives. It shouldn't stop us.

Shareholders have long since imposed these rules on companies -- including, at times, on some very reluctant boards. It's time to bring them to Washington.

Also see:

Following Wall St. advice proves costly

Dancing with the Czars

Bank failures in 3 months = all of 2008

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