Unintended Consequences

A nice illustration of Unintended Consequences provided by the Wall Street Journal, Kevin Drum, and Professor Bainbridge. The WSJ printed an article describing a massive shift in the past decade to dual pension systems, one for ordinary employees, another for higher-ups.

For decades, executives relied on the same pension plan as other company employees, so they had an incentive to make it generous. The shift toward a dual system started in 1994, when Congress passed a law intended to limit the cost to taxpayers of runaway executive pay. The law barred companies from taking a tax deduction on compensation in excess of $1 million a year for any current employee. The result: Companies began setting up supplemental pension plans that encouraged senior managers to defer compensation.

Kevin points out the story contains "a hearty dose of cognitive dissonance for well-meaning liberals." Populist legislation intended to "do something" about "runaway" executive pay largely brought about today's dual-track system.

Prof Bainbridge notes Kevin's cognitive dissonance and brings on a couple of additional observations:

First, the 1994 tax change was effected not by some generic "Congress" but by Bill Clinton and the Congressional Democrats over GOP objections. Second, the Democrat tax change also was a major factor in the Enron, WorldCom, and other scandals of the tech bubble period.

Good points all.

Unfortunately, the original WSJ article only mentions the 1994 legislation in passing; the main thrust is summed up in the lead paragraph:

Rankled by the rich retirement payouts many troubled companies make to executives, Congress is moving to block such companies from funding the lavish packages.

I. e., unintended consequences of past populist tax legislation cause problems, bringing demands for more populist tax legislation today; which will no doubt have its own set of unintended consequences; which will bring more demands for populist tax legislation in the future.

It's the circle of legislative life. If they didn't do this, they'd have to go home, and that's no fun.

Last Modified 2012-10-25 3:07 PM EST