Phil Gramm on the value of investment banking

Stephen Moore:

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Most of his former colleagues probably can't fathom why Wall Street bankers make tens of millions of dollars in salaries and bonuses each year. How would he justify these fat pay days? "It's simple," he lectures, sounding very much like the Texas A&M economics professor that he was in the 1970s: "In economics, we define labor exploitation as paying people less than their marginal value product. I recently told Ed Whitacre [former CEO of AT&T, who retired with a $158 million pay package] he was probably the most exploited worker in American history because he took Southwestern Bell, which was the smallest of the former Bell companies, and he turned it into the dominant phone company on earth. His severance package should have been billions."

Mr. Gramm says that today there is "a lucrative premium for talent. When we were all hunters and gatherers, and you were better with a bow and arrow than I was, there were limits on how much more game you could kill than me. Today, CEO decisions about whether to acquire or not acquire a company, to shut down one part of the company or not shut it down, get into a market, get out of a market, where those decisions mean billions of dollars, is it surprising that people are willing to pay tremendous amounts of money for people who make those decisions right?"

So what if a President Barack Obama were to impose 50% or 60% tax rates on these CEOs and other big earners? Mr. Gramm pounces: "When you help a company raise capital, to put its idea to work, and you create jobs, those jobs are the best housing program, education program, nutrition program, health program ever created. Look, if a man in one lifetime is responsible for creating 100 real jobs, permanent jobs, then he's done more than most do-gooders have ever achieved."

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He fingers the U.S. corporate income tax as another competitiveness killer: "We can't possibly compete with a 35% corporate tax rate that is so punitive that if a company opens a plant in Ireland it costs them a billion dollars less than in the U.S. over 10 years because of the difference in corporate taxes." Mr. Gramm urged Mr. McCain to add a corporate income tax cut (to 25%) as part of his economic package.

"Why is America the richest country in the world?" he asks. "It's not because our people are more brilliant; it's because we have a better free-market system. Why has Texas created 1.6 million jobs in the last 10 years whereas Michigan has lost 300,000 jobs and Ohio has lost 100,000 jobs? Because governance matters, taxes matter, regulation matters. Our opponents in this campaign are so dogmatic in their goal of having more government because they love the power it brings to them that they're willing to let it impose costs on the working people that they say they want to help. I am not."

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Getting government control freaks out of the way is important to prosperity. His statements on tax policy are also important in the coming campaign. Obama will go with the Michigan-Ohio approach instead of the Texas approach and make us all poorer in his elusive search for "fairness." I hope professor Gramm would teach more economics to the voters this year.