The recent economic catastrophe can be summed up thusly: people respond to incentives. Much of the financial sector made bad long-term decisions because individuals were highly rewarded for thinking exclusively of the short-term.
The response from our leaders and media has been a typical outburst, decrying those individuals as greedy. Its a fruitless proposition. People respond to incentives, and I'd bet even money that most people would have made the same decisions. Rather than name-calling, I suggest we change the incentive structure. What follows are a few ideas off the top of my head.
What about creating a special class of stock or stock option that cannot be sold, traded or redeemed for, say, seven years? Then apply a progressive scale to compensation; cash bonuses or other immediate compensation gets taxed at a high rate, while the new long-term stock is taxed much lower. If the executive makes decisions to help the company prospers long term, he or she will be rewarded. Short-term decisions, on the other hand, become self-defeating.
On the larger scale, what if we made corporate taxes progressive? The last year has seen terrifying examples of the problems with ever larger corporations, compounding the problems of shortsightedness. What's more, politicians of both parties are always praising small businesses, calling them engine of innovation, the heart of the American economy, etc. So why not reward smaller businesses with slightly lower tax rates while discouraging bloated "too big to fail" mega-corporations with slightly higher ones?
I haven't researched these ideas, I'm just throwing out the first things that come to mind. But let's start coming up with solutions - new solutions, real solutions - rather than relying on dogma and ideology to maintain a failed status quo.
