The Pay Czar's Diversion
By Arnold Kling
Ninety-four percent of college professors believe they are above average teachers, and 90 percent of drivers believe they are above average behind the wheel. Researchers Paul J.H. Schoemaker and J. Edward Russo gave computer executives quizzes on their industry. Afterward, the executives estimated that they had gotten 5 percent of the answers wrong. In fact, they had gotten 80 percent of the answers wrong.
Self-deception. A favorite topic in Tyler Cowen’s Masonomics. Brooks continues,
Since the masters of finance have been exposed as idiots, the masters of government have concluded (somewhat illogically) that they must be really smart.
He goes on to suggest that the actions of the pay czar in regulating bonuses reflect the “fatal conceit” (a title of one of Hayek’s works) of government officials thinking that they have wisdom that private actos lack.
I think there is something even more sinister going on. I interpret the pay czar in terms of Murray Edelman’s symbolic uses of politics. The idea is to focus on a symbol of the cause of taxpayer losses–bonuses of the executives of bailed out firms–in order to distract attention from the substance. The substantive issue is the extent to which the losses were caused by political actions and the extent to which they are concentrated at Freddie Mac and Fannie Mae.
Back in 2007, when this was called “the subprime crisis,” I wrote that Freddie and Fannie would be nearly unscathed, and that this was entirely a Wall Street problem. I am not sure if I wrote this on my blog, but I did write in a chapter of the forthcoming From Poverty to Prosperity (with Nick Schulz) that none of the major regulated institutions was involved in subprime. As the book was being edited for publication, I discreetly removed that paragraph.
The further into this crisis we go, the greater the share of subprime loans and mortgage losses are turning out to be located at Freddie and Fannie. Even one year ago, if you had asked me, I would have told you to expect at least 2/3 of the losses to be at companies like Citi and Bear, with less than 1/3 at Freddie and Fannie. It now looks quite different. Conservatively, 3/4 of taxpayers losses will be at Freddie and Fannie. Perhaps as much as 90 percent of taxpayer losses will be there.
Given the large role of Freddie and Fannie, it makes sense for politicians to create as large a diversion as possible. Hence, the brouhaha over bonuses at bailed-out banks.
Incidentally, the debate over the “public option” in health reform also can be viewed as an exercise in symbolic politics and diversion. The point is to divert attention away from the bankruptcy of Medicare.