Kenneth Feinberg Must Be Super Smart!

Thom Lambert —  22 October 2009

Back during the days when socialism was all the rage among the intelligentsia, F.A. Hayek predicted that Soviet-style central planning was destined to fail because the central planners lacked access to, and couldn’t process, all the information needed to allocate productive resources efficiently. Optimal resource allocation can occur, Hayek contended, only if resources are allocated according to the prices that emerge as millions of people buy and sell on the information to which they alone are privy. Hayek maintained that market prices dictate the highest and best use of resources and that such prices cannot be produced by a single mind (i.e., the Soviet-style central planner) but can emerge only as millions of folks reveal their needs and desires by trading amongst themselves.

Today, the powers that be seem to think that some czars possess abilities their historical successors, the Soviet central planners, lacked. I’m speaking, of course, of our most esteemed Pay Czar, Kenneth Feinberg. In his near-infinite wisdom, Czar Kenneth has determined how labor resources should be allocated in seven disparate firms (two auto companies, two banks, two auto financing companies, and one insurance company).

Of course, the Czar — whose official title is the less dictatorial sounding (right?) “Special Master of Compensation” — isn’t directly allocating labor resources. (Remember, dear readers, your federal government is not going to run the business of its financial wards!) But, in setting labor prices by fiat, Czar Kenneth is inevitably channeling labor resources away from, toward, and/or within the firms at issue.

Consider, for example, last Saturday’s Wall Street Journal article, GM CFO Search Complicated By Pay Restrictions. According to the Journal, “The company is concerned that [Czar Kenneth’s] salary limit will make it tough to get qualified executives to move to Detroit [really? Detroit?!], especially given the uncertainty facing the company.” The upshot is that GM may end up with a less-than-optimal CFO, and the CFO it does end up with will not be able to work for the firm he or she would likely have gone to had bargaining been unfettered.

No matter, say Czar Kenneth and the Obama administration. The Czar’s salary dictates are necessary because “skewed compensation incentives were one cause of the financial crisis.” (It was, after all, GM’s lavish executive compensation that brought down the company — the company’s woes had nothing to do with improvident union contracts that gave its foreign-owned competitors a cost advantage of over $1000 per vehicle.) Czar Kenneth’s dictates, it seems, are necessary to protect the taxpayers’ equity investment in GM.

I’m just happy the Obama administration was able to find someone with Czar Kenneth’s smarts — someone able to come up with a single policy, applicable to seven companies in disparate industries, that will generate the optimal level of risk-taking (remember, equity investors like us taxpayers generally prefer a bit of risk-taking!) and will not drive talented employees to any of the scads of other firms (domestic and foreign) that are not subject to the Czar’s enlightened policies.


[More from Geoff here. And please note that the first WSJ article linked above (from today’s paper) quotes our new TOTM colleague, J.W. Verret. Welcome Jay!]

Thom Lambert


I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

2 responses to Kenneth Feinberg Must Be Super Smart!


    Geoff: You obviously missed the part where Nomi Prins, who has a book to sell, conducted the following analysis: “It’s going to affect a small portion of a small portion of the industry. It won’t have a lasting impact.” So you see, folks ACTUALLY leaving the companies is not evidence of the fact that incentives matter. There is nothing to see here.

    Hey — look over there! Isn’t that guy from Fox News?


    Turns out Ken may be foiled by his own arbitrary exercise of power. But it’s not Ken’s fault–it’s the system: