Obama's pay limit plan courts disaster

(breakingviews.com) -- Politicians like to be popular. By that standard, Barack Obama's reported plan to put a $500,000 cap on salaries for top executives at companies that depend on government support is a great idea. But from almost any other perspective, the new U.S. president is courting disaster.

True, a philosopher-king in charge of executive compensation might establish a similar limit. Management theorists used to say the big boss should be paid about 20 times the salary of an average worker. That would suggest a cap of around $700,000 in the U.S.

In the real world, though, this sort of constraint is likely to make bad companies worse. A few public-spirited executives might relish the opportunity to run troubled enterprises for much less pay than they could garner from overseeing more successful ones. But amid an unprecedented financial crisis, the government cannot really afford to be stingy.

Although a pay-cap plan would probably be counterproductive, there's also little to be gained from defending multi-million-dollar pay packages in the current anti-business environment. A better idea is to implore Obama to use the support he wins for one simplistic idea to combat a worse one - protectionism.

Among U.S. voters, "Cut the idiots' pay" is right up there with "Buy American" T-shirt wisdom. Patriotic shopping has lots of superficial appeal. But if the biggest economy in the world blocks too many imports, the chances of a global trade war will increase dramatically. That could turn the current recession into a real depression.

Obama has been flirting with protectionist ideas since early in his presidential campaign. Now would be an excellent time for him to cast them aside in favour of a clear commitment to free and balanced trade.

Balance means a steady reduction of the big U.S. trade deficit. That would lead to more U.S. jobs - without alienating the rest of the world. Such a thoughtful approach might be unpopular now at home, but would gain favour overseas. A simultaneous effort to squeeze executive pay and protect free trade might allow Obama to stay popular and do the right thing. No politician can ask for more.