Profit or Salary Cap?

Somewhere out there recently has been news about proposed federal legislation for capping CEO salaries. That strikes me as the government being too meddlesome. Shouldn't corporate shareholders and governors of each company have the autonomy needed in a free market? If they are so inept as to compensate the CEO a ridiculous sum, shouldn't that firm suffer the consequences for itself? Though I've not thoroughly investigated this issue, a possible reason for concern would seem to be a shortage of qualified CEOs, who thereby command greater pay. If that's the case, and its a persistant structural issue, there surely must be a better way to deal with it than a salary cap. After all, we should not want to resort to draconian egalitarianism, where we must knock down what someone has built up simply out of jelousy and a sentiment of unfairness. We can do better than that!

A related issue is oil industry profits. Last Friday, Michael Medved featured an economist who writes for the Wall Street Journal. Medved does a great service with his head-on approach, inviting callers who disagree, and correcting them with his framework of coservative principles. In this case, protectionists and people otherwise generally ignorant of economic workings called in to complain about all sundry things related to the high price of gasoline. One man was upset at "obscene" profits made by the oil industry. Michael rebutted that no profits can be called obscene. Indeed, these profits are arising from voluntary transactions. If you don't like the price of gasoline, get a hybrid, drive less, or do something! Exercise your options. Don't complain about high prices, its not and should not be the government's job to regulate prices. Government should not try to conform reality to something that is unnatural.

If you've still got it out against the oil industry, consider their profits in proportion to the market they deal with. The market for gasoline is tremendous! Almost every vehicle in a fully-developed economy with 300 million people, that spans 3,000 miles, is run on gasoline. So of course the volume of money exchanged, let alone profits, is going to sound staggering. But when the profit as a proportion of sales is compared with other industries, it is relatively low. Remember we're not talking about a ridiculous monopoly, such as Comcast and Microsoft effectively are. Gas stations are competing with each other, sometimes 3 on the same street corner. But what if the top four firms, who do make up a considerable portion of market share, are colluding, by limiting domestic refining capacity? There might be something there, but its important to remember that suppliers won't necessarily make more profits by supply shortage price markups. This is a case where more homework needs to be done, because of course these firms will have a desire to be producing at something like their point of diminishing returns. The question is whether they're attaining that right now by colluding. For the number of firms involved, I think its easier said than done--and if it is being done, I believe they would be held accountable by antitrust actions. Unless, Cheney has something to do with it! What else were those secretive meetings with oil execs about? Don't worry friends, I assure that I don't suffer from Bush Derangement Syndrome.