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Rewarding Bad Behavior

Reading Larry Ribstein’s excellent Ideoblog today, I was alerted to this report in yesterday’s Wall Street Journal.  Reading this report prompted me to send the following letter to the WSJ:

To the Editor:

Upset at what he has divined to be excessively high pay for corporate CEOs, Sen. Barack Obama wants to change "a system where bad behavior is rewarded” (“Candidates Target Executive Pay,” April 12).

If Mr. Obama truly seeks to rein in institutions that systematically reward bad behavior, he should scale back government and forget about intruding into the private sector.  In private markets, Smith spends only Smith’s money.  Smith profits or loses depending on the prudence of his choices.  This tight connection between each person’s actions and the consequences that he or she bears provides remarkably effective carrots and sticks encouraging private persons to behave responsibly.  In the so-called “public sector,” in contrast, Smith spends Jones’s money.  Smith profits or loses depending on how effectively he uses Jones’s money to buy votes from Jackson, Johnson, Williams and other persons who are assured by Smith of their moral right to free-ride on Jones’s resources.  Surely, there is no surer recipe than this for rewarding bad behavior.

Donald J. Boudreaux