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Reason Foundation

Corporate Workfare

Wall Street's bailout money comes with strings attached

Jesse Walker
February 11, 2009

"What gets people upset, and rightfully so," President Barack Obama declared last week, "is executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers." Pounding his fist, he announced that the flood of federal money into corporate hands would cease, effective immediately.

Ha! No, of course he didn't say that. He announced that henceforth, when taxpayers subsidize a failing Wall Street firm, the company will have to cap the boss's pay at $500,000 a year.

It was merely the latest effort to expand the bailouts into a behavior modification program. When Democrats proposed a subsidy package for Detroit last year, for example, the plan included another set of limits on executive pay. Not to be outdone, the Republicans countered with a requirement that union workers agree to wage cuts. But for the most part, the idea of using the taxpayers' money as a Trojan horse for new controls has been a Democratic enthusiasm, not a Republican one.

Or at least that's how it's been during this crisis. In the early and mid-1990s, it was Republicans who called for social engineering via the public purse, and it was Democrats who served as inconsistent opponents. That time, the money wasn't destined for banks and auto giants. It was earmarked for poor people, and the instructions attached to the money involved working, going to school, or taking birth control. The most extreme proposal, endorsed by James Q. Wilson, Myron Magnet, and other neoconservative social critics, would have required many welfare mothers to live in group shelters. Magnet was willing to achieve this through directly coercive means. (In his 1993 book The Dream and the Nightmare, he proposed that "if mothers refuse to enter the group homes and fail to support the children, then the state will intervene to take the children away.") But Wilson framed the proposal the same way Obama framed his Wall Street plan. Interviewed by Reason magazine in 1995, he said his system "would be voluntary in the sense that, if you want public support, that's the way you get it. You don't have to go there. But you won't get any money and you won't get any housing units."

That suggestion never became law, but a host of milder "workfare" and "learnfare" proposals were enacted on the state level. And in 1996, of course, Bill Clinton signed the federal welfare reform bill, which established new work requirements for people on the dole and strengthened social workers' surveillance of their lives. That system has been in place for nearly 13 years now, though Washington may soon roll it partway back: Even as Obama brought corporate workfare to Wall Street, congressional Democrats were inserting a measure into the "stimulus" bill removing some of the work requirements for jobless Americans seeking food stamps.

Are there differences between old-fashioned workfare and corporate workfare? Sure. At least some of the original workfare plans were devised to make the dole less attractive, for example, whereas Washington seems intent on bailing out even those banks who claim they don't want the money. But the most important difference is simply one of scale. Put together, food stamps, Supplemental Security Income, and Aid to Families with Dependent Children rarely rose above 4 percent of the federal budget. If only that were true of the Troubled Assets Relief Program. Say what you will about AFDC, but there never was a risk that it would saddle the Treasury with enormous, unpayable debts. That put a different spin on the old workfare debates: Whatever trade-offs you made between extravagance and intrusiveness, the larger social impact would be limited.

That isn't true of the bailouts, and that leaves policy makers in a double bind. It is absurd to give out trillions of dollars without demanding some sort of behavior in return. And when we're directly subsidizing CEOs' lifestyles, every misspent penny is going to spark a new wave of resentment. When the chiefs of the Big 3 came to Washington in private jets, they might as well have pulled up in welfare cadillacs.

But a corporate workfare plan won't stem that resentment. Not even if it gets the feds involved in business decisions as petty as how to transport officers across the country, a level of supervision so intrusive that you might as well get it over with and nationalize the industry. If you think companies forced to lower their executives' pay won't find other ways to compensate them, from luxury travel to free financial services, then I have a pile of Chrysler bonds I'd like to sell you. Obama's plan doesn't even limit companies' ability to give their officers stock, though he did add restrictions on when the stock can be cashed in.

More importantly, he didn't simply stop giving them public money, which is the actual source of public resentment and the only way out of the double bind.

There's a reasonable case to be made that CEO pay is often inflated, a result of the sort of self-dealing that's possible when the people who control the company are not fully answerable to the people who own it. The least sensible way to address this is by moving decision-making power even further from shareholders and into the arms of the government. You might as well try to teach a mother personal responsibility by institutionalizing her in a group home.

Jesse Walker is managing editor of Reason magazine. This column first appeared at Reason.com.


Jesse Walker is Senior Editor


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