The National Mall from the Bank of America building in Washington, D.C.

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DURING THE Great Depression
, the National Recovery Administration set price floors for tailors, farmers, manufacturers, and even Hollywood. In a twisted 21st-century parallel, the Obama administration has decided to set a cap on executive pay at companies accepting government recovery funds. The move is tactical, intended to reassure taxpayers that their money won’t be going towards “exorbitant” C.E.O. salaries. Instead, it distracts the debate from substance to semantics.

The new rules the White House announced last Wednesday will limit cash compensation to $500,000 per year for executives at firms receiving "exceptional" aid from the government. Any additional payment above that threshold would be limited to company shares redeemable only once the government was repaid.

While its true that many of America’s top business leaders haven’t been too worthy of their lucrative contracts lately, this smoke screen of efficiency isn’t exactly the politics of change, either. Setting wages doesn’t fix the financial system, but it does make the new administration appear tough on Wall Street arrogance. The ploy is politics as usual for Washington, and a disturbing turn of events for a White House that does not appear have any better ideas to put forth.

Instead of really addressing financial sector problems—a behind the scenes task, down in the weeds, overhauling the Securities and Exchange Commission—President Obama has opted for the easier political points. But what’s the most troubling is what this use of executive power means for the next four years. The Obama administration believes it can run businesses better than the firms themselves; how far will they reach with this logic?

The $500,000 figure seems to have been chosen arbitrarily by people who only believe they have enough knowledge to set a good unifying wage. According to compensation survey firm Equilar, the average salary for a C.E.O. receiving TARP money was $844,229. Would $600,000 have been too exorbitant a wage? Why not $400,000? There’s no good business mindset behind the salary cap, just politics.

The rules reveal a misalignment between the White House’s idea of the public interest and what is sensible business practice for a company trying to compete in the marketplace. Companies will self-limit their pay if that’s in the best interest of their future, just as many top executives turned down their bonuses last fall. A government mandate, however, may unnecessarily hurt firms that need to pay large salaries to attract the best talent for helping rebuild crumbling institutions. Making financial firms struggle longer than necessary is certainly not in the public interest.

Even if firms have not yet taken bailout money, the thought that the government may force them to, as former Treasury secretary Henry Paulson did to the nine largest banks last fall, is sure to make the most skilled administrators and sales people wary about their compensation. That this might kill New York by driving talent away from the financial sector to other markets should be enough for the President to quickly rescind his proposal.

The reasons for President Obama’s new rules are understandable. Some see the move as a moral action, since taxpayer money shouldn’t be used to fund a high salary for a failed business leader. Putting a limit on pay for firms that get future bailout money does offer some encouragement for firms to avoid dependence on government help. In the sense that the pay cap fights against moral hazards, it has some limited legitimacy.

But that small gain is not worth the much larger damage the rules may do to the market. Nor do we know what future government interventions this opens a door for. There are other ways of discouraging business leaders from dragging their firms into the ground just to get government money. This path is much likelier to drive skilled administrators away from the financial sector where they are sorely needed now.

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