From AP: "President Barack Obama on Wednesday imposed $500,000 caps on senior executive pay for the most distressed financial institutions receiving federal bailout money, saying Americans are upset with "executives being rewarded for failure.""
While this might sound like good news for taxpayers, it is worrying. Why would a qualified executive go to work for one of these financial firms instead of working at a hedge fund, private firm, or industrial company where he can earn much more? As a result, financials firms will have trouble recruiting the executives they need.
"There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen." Frederic Bastiat
Obama sees the money taxpayers will save in the short-term. He is a bad economist. A good economist also sees the negative long-term effect of this market distortion.