The news has been replete with stories of political and popular indignation over the bonuses being paid to AIG executives. Some of the political discontent is hypocritical. Many of the harshest critics of the bonuses have been recipients of AIG political contributions. As noted in "AIG Bonuses," Chris Dodd of was AIG’s largest single recipient of $103,000 in campaign donations during the 2008 election cycle. Other major recipients of campaign donations include President Obama and Senator Schumer, both critics of the bonuses (Mullins, Brody and T.W. Farnam. "Critics Got Donations From Insurer," Wall Street Journal, March 19, 2009.). As an aside, to be fair to Democrats, John McCain, and Mitt Romney are also on the list of top ten recipients. Dodd, McCain, Obama, and Schumer voted for the Emergency Economic Stabilization Act, which was used to bailout AIG. Dodd placed a provision into the stimulus bill that exempted contractually obligated bonuses.
News broadcasters on television and radio, talk shows hosts, and newspapers columnists are full of stories about popular discontent with the bonuses. John Christoffersen, an AP writer gives body to the specter of popular discontent in "Protesters visit AIG officials' lavish Conn. homes," myway, March 22, 2009 (HT Drudge).
FAIRFIELD, Conn. (AP) - A busload of activists representing working- and middle-class families paid visits Saturday to the lavish homes of American International Group executives to protest the tens of millions of dollars in bonuses awarded by the struggling insurance company after it received a massive federal bailout.
About 40 protesters sought to urge AIG executives who received a portion of the $165 million in bonuses to do more to help families.
"We think $165 million could be used in a more appropriate way to keep people in their homes, create more jobs and health care," said Emeline Bravo-Blackport, a gardener.
She marveled at AIG executive James Haas' colonial house, which has stunning views of a golf course and the Long Island Sound. The Fairfield house is "another part of the world" from her life in nearby Bridgeport, which flirted with bankruptcy in the 1990s and still struggles with foreclosures and unemployment."
So the envious want the greedy to repent! According to MariAn Gail Brown, in "AIG executives at the center of firestorm," ConnPost.com, March 21, 2009, the protest was organized by Connecticut Working Families, a small political party and ACORN. Perhaps these activists have different motives than others in the mosaic of popular discontent but I imagine that there is a great deal of overlap.
Ignoring the maneuverings of politicians caught in the crossfire of their previous statements, actions and campaign donations, protecting the employee contracts was the right course of action even if the recipients were the bad actors who brought down AIG, and I have not seen an attempt to make that link. Taxing the bonuses away is wrong. It weakens contracts, an important part of property rights, for short term political gain.
Krugman and Wells write in "Microeconomics," Worth Publishers, 2009, page 314,
...the effectiveness of markets comes down largely to the power of two features of a well-functioning market: property rights and the role of prices as economic signals.
Property rights are a legally enforceable bundle of rights associated with a property. Salary contracts have been and should remain an enforceable property right. If the government's bailout gives it the right to set wages after the contracts expire, by all means, set lower wages, fire employees involved with the financial collapse, and do away with bonuses. Even if these actions are wrong, I believe their impact will be small compared to the abrogation of property rights through an act of attainder, a punitive law aimed a specific individual or groups of individuals.
The protesters and others who want to take away the bonuses and help the downtrodden miss a couple of important points. As Armen A. Alchian ("Property Rights," Concise Encyclopedia of Economics) explains,
..social critics in the United States and throughout the Western world have complained that “property” rights too often take precedence over “human” rights, with the result that people are treated unequally and have unequal opportunities. Inequality exists in any society. But the purported conflict between property rights and human rights is a mirage. Property rights are human rights.
Punitive actions against financial institutions may kill the goose that laid a lot of gold eggs, even if most recently it laid a rotten one. Financial Times reporter write in "Banker fury over tax ‘witch-hunt’," FT.com, March 20, 2009,
Bankers on Wall Street and in Europe have struck back against moves by US lawmakers to slap punitive taxes on bonuses paid to high earners at bailed-out institutions.
Senior executives on both sides of the Atlantic on Friday warned of an exodus of talent from some of the biggest names in US finance, saying the “anti-American” measures smacked of “a McCarthy witch-hunt” that would send the country “back to the stone age”...
“Finance is one of America’s great industries, and they’re destroying it,” said one banker at a firm that has accepted public money. “This happened out of haste and anger over AIG, but we’re not like AIG.”
Some policymakers expressed concern that banks may try to break out of the government’s embrace by paying back public capital even if the price is a more severe credit squeeze.
They also fear that financial institutions may decide not to take part in public-private partnerships to finance credit markets and acquire toxic assets.
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9 months ago
Although I am not pleased about the bonuses, I am going to have to agree with you. The politicians in Washington are being hypocritical, and it is a slap to the American people's face. I will admit I am a Obama supporter, have been since he ran for president, but him, Geitner, Dodd, and the other politicians need to straighten it up. For the sake of the American people, at least.
ReplyDeleteI honestly don't think the AIG bonuses can be considered a salary contract as part of property rights. In my mind, monetary bonuses are a privelege not a right. This can be linked to the Republican ideal of individual accountability. For instance, if a child continues to make bad decisions then they often lose priveleges like their cell phone, computer, or TV time. These business men in companies like AIG should be held accountable and certainly should not be receiving extra earnings for faulty management! AIG and other struggling companies still giving absurd bonuses could learn a thing or two from the company my stepfather works for, where bonuses are based on profit margin alone. It is a system in which everyone from the top dogs to the line workers recieve a certain percentage of the profit made. Thus, in months of good production, bonuses are wonderfully high, but when production is low you can be sure that ALL employees, including the very important people, will not be receiving outlandish bonuses!
ReplyDeleteCatherine L.
Well, of course the media is going to be filled with talk about the bonuses, because the media's main interest is to write something that will catch people's attention and cause them to read that newspaper or watch that channel. The easiest thing to do with the bonuses is to display them as unfair, because most Americans (who have suffered from the economic downturn) would agree with that view and may be enticed to continue watching TV to see the development in the bonus affair.
ReplyDeleteAs for politicians...they are also just playing up whatever side would benefit them. It was to the politicians' benefit to vote for the bill that would rescue their campaign contributors, and now, it is to the politicians' benefit to express disapproval of the bonueses since most Americans are outraged by them. The politicans are just trying to walk the fine line between pleasing those who give money for them to campaign for office and those who vote for them to *be* in office.
Although the majority of Americans view the bonuses as unjust and outlandish, it still has to be known that the connection between the people who received the bonuses and the dysfunction of AIG has yet to be made. While I agree that the way the money AIG received might not have been used to their best interest in the form of massive bonuses, no one can tell them that the way they used the money is wrong. This view is hard to accept, but who are we to tell the company which person deserves or doesn't deserve part of the bailout? As stated in the post, "even if the recipients were the bad actors who brought down AIG, and I have not seen an attempt to make that link". If these bonuses are taxed away property rights will be infringed. Property rights have been established to help build contracts and promote growth. Also, I agree with Alchian in his saying that, "property rights are human rigths". Yes, I believe that the money used for bonuses could have been used more efficiently, but by law and under human rights, the bonuses are as just as anything else.
ReplyDeleteTrey Graham
P.S. And for the hypocrites in Washington, what's new?