Capitalist Nexus

Conde Nast Portfolio Magazine, recently reported that Senators Kent Conrad and Christopher Dodd received sweet heart deals on mortgages from Countrywide CEO Angelo Mozilo. Putting aside whether the senators broke laws, violated ethics standards they endorsed, or acted hypocritically in their public proclamations about the mortgage crisis, their behavior raises a much larger question regarding how America’s legislators should be compensated. The fact that Conrad and Dodd would consider embarrassing themselves and their family for thousands of dollars indicates that these senators obviously have financial issues requiring supplemental income. Given that the compensation for Senators and Representatives is approximately $165,000 it is not surprising that these men faced such financial difficulties when one considers how expensive it is to maintain two residences, constantly travel back and forth to visit family, and participate in high profile local and national activities throughout the year. It is unreasonable to expect such compensation cover so many expenses.

Fortune magazine reports that in 2005, the median Fortune 500 CEO earned $8.4 million. While an elected official does not warrant such compensation, it is embarrassing that the talent pool in Washington seems particularly thin and receives such little competition during each election cycle. Relying on individuals willing to undergo such self-sacrifice in order to attract public servants seems like a recipe that describes our current Washington environment – career public servants that are logically tempted by small amounts of money relative to the resources they oversee, or independently wealthy individuals disconnected from the troubles of everyday citizens. I propose a different approach to compensating our legislators – treat their positions more like the executive posts they are and pay them for their long-term performance.

What if rather than being bitter and thinking that we over-pay for elected officials in Washington, we instead ask – what is an effective Congress worth that creates the environment for a vibrant and thriving economy? For example, what is it worth for Congress to create an environment where economy can grow 1% a year above its historic average for 5 years? Given that the US GDP for 2006 was approximately $13 trillion in 2006, an extra 1% added to GDP growth in a given year is worth approximately $130 Billion. Over 5 years, such growth is worth an extra $650 billion of value to the economy, over 10 years it’s worth an extra $1,300 billion. Shouldn’t such performance warrant an extra $1 or $2 billion in bonuses for Congress to give them the incentive to have the economy prosper in such a manner?

How can we create the proper long-term thinking among our elected officials? The answer is simple; create long-term payouts that match their performance to that of the economy. For example, lets say that we want to evaluate the economy over 10 year periods, then we simply look at the economy today and ten years ago and see whether the economy performed better or worse than a reasonable goal of say 3%. If the economy, in this example grew more than 3% over that time period, then the Congressional Bonus Pool get some small amount of that excess growth. Every member of Congress over that 10-year period would then get an equal share of that bonus. If the economic growth falls short in a given year, not only will there be no payouts during that period, but Congress will incur a negative balance in the pool that has to be recaptured before any future payouts will take place. In other words, Congress is not entitled to a bonus when Americans suffer due to the economy underperforming. The same calculation would be performed each year. Because the calculations have long memories, Congress has an incentive to pursue long-term policies that create value, as they will not benefit from short-term legislation that creates long-term damage to the economy. The actions of today’s Congress will be measured over the coming decade to hold members accountable for policies that create long-term prosperity.

So long as Congress puts forth a reasonable set of policies to encourage risk taking, entrepreneurship, and capital formation, each Congress member rightly benefits from the amazing wealth the American economy creates. What a breath of fresh air Washington would receive if Congress were looking at the long-term good of our nation, rather than pursuing short-term policies that maximize their political gain. Such incentives will have the likely effect of spurring meaningful debates about what capital gains tax rate creates more wealth for the economy, rather than vilifying corporate America for generating profits. A Congress that benefits in a similar manner as American citizens will be an important stimulus to keep America as the world’s most vibrant economic market and expanding our citizens lead among the world’s wealthiest.

Whether Conrad and Dodd broke laws, or merely traded on their privilege will be determined later. But the fact that they would risk such potentially public humiliation for such relatively small amounts of money indicates a serious potential problem with how we compensate our leaders. Moving to a more reasonable market based compensation with much higher base salaries and incentives to grow the economy for all Americans, rather than merely looking after their narrow individual interests would be a powerful force to create a tide to life the economic ships of every American citizen. Further, moving Congressional salaries to market levels consistent with the enormous impact each member has on the economy will likely attract much more capable individuals and spur competition for each seat that is sorely lacking today. After all, what truly capable people want to live hand to mouth needing to beg Corporate America to save a few thousand dollars on their mortgage to make ends meet, when instead they can pursue exciting careers in the private sector that create jobs, empower individuals, improve the lives of thousands, and fundamentally change the world with new inventions and technologies?