A B Western with a Great Economic Foundation

Feeling nostalgic for old cowboy movies I watched every Saturday morning when I was a lad, I downloaded a Gene Autry movie, “Cow Town” through Netflix.  In addition to a few songs, horse chases and shootouts, it had a very plausible economic foundation, a rare event in any movie let alone a B Western.

The story was written by Gerald Geraghty in 1950 and explains how barbed wire changed the West.  The movie opens with a documentary description of hardships faced by cattlemen raising their herds on the open range: lightning caused stampedes, hard winters, and rustling.  The description could have been improved by explaining how the common range was a “common resource” and was overgrazed, a problem that economists named the “tragedy of the commons.”The story pitted open range cattlemen against those who wished to control it by fencing property with barbed wire.  Closed range cattlemen believed that barbed wire fences would reduce operating costs and improve cattle genetics.  Cow hands, who were after all an operating cost, feared that the innovation would reduce employment opportunities, opposed closing the range.  Finally, two sheepherders attempted to fan the animosity between the three other groups into open warfare to push down land prices so they could make a killing on the market and turn cattle country into sheep country. 

Two scenes exemplified problems with ill defined property rights and resource allocation.  In one scene, open range cattlemen complain to the sheriff about fences blocking roads, the delivery of the mail and injuring cattle.  The sheriff asks for time to solve the problem stating that their is no law to covering their complaints.  These cattlemen were asking for enforcement of “range rights” or unwritten but respected rules governing behavior on the frontier.  Another scene anticipates the Coase theorem: if private parties can bargain without costs, they can solve problems with externalities (fences) and allocate resources efficiently.  In the scene, Autry confronts a neighbor who cut his fence. She said she had the right to use the road to get to town.  He replies that he would have built a gate had she asked.
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Economic Reform in Cuba

In “Say It Ain’t So, Fidel!”, I wrote about Fidel Castro’s statement that “The Cuban model doesn't even work for us anymore.”  New evidence of economic reform was reported by Paul Haven and Will Weissert in “Cuba to Cut 500,000 Government Workers.“

Cuba on Monday said it is laying off nearly half a million workers, an eye-popping figure in any country, but especially in a nation where the government so totally dominates the economy.

The shift would mean that one-tenth of the island's 5.1 million-strong work force will be looking for jobs in the private sector by April 2011, a drastic change that could mean a radically altered economic outlook, especially for Cubans in their 20s and 30s who have known nothing but a paternalistic communist system ushered in by Fidel Castro in his 1959 revolution.

The changes are the most dramatic yet in a reform program that began when Raul Castro permanently took over the presidency from his brother in 2008 - but which have sputtered in fits and starts since then.

But they were not entirely surprising. Raul Castro has warned for years that the state could no longer afford to subsidize every part of Cuban life, nor pay workers who contribute little. In April, he floated the idea that up to 1 million workers were superfluous and must go.

The government announced changes in property rights to help the newly unemployed.

To soften the blow, the statement - which appeared in state newspapers and was read on television and radio - said the government would increase private-sector job opportunities, including allowing more Cubans to become self-employed. They also will be able to form cooperatives run by employees rather than government administrators, and increasingly lease state land, businesses and infrastructure…


Larry Birns, director of the Washington-based Council on Hemispheric Affairs, said a series of small changes - such as privatizing some state-run barbershops, licensing more private taxis and distributing fallow land to private farmers - have moved Cuba toward economic reform. While none of those were blockbusters, Birns said, Monday's revelation has the potential to be one.


"Cuba is rapidly becoming like any other country," he said. "It is not going back. These are big changes."

Economic rights are civil rights.  The U.S. should devise polity to support reform in Cuba.  I believe that the reform should focus on increasing contact between average Americans and Cubans. 
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Drouillard Defends the California Coastal Commission

Frank Drouillard, made an interesting response to my post, "The California Coastal Commission and Property Rights."  He is a resident of the California coast and a design engineer for a San Francisco based company that has built bridges along the California coast, implying that professionally and personally he has knowledge of the California Coastal Commission.  He blogs at "MendonomaBlogspot."  Drouillard wrties

Norris and Gilder built a road on their property without the necessary permits. Instead of working with the Coastal Commission to resolve the violation, they took the advice of an attorney that sees everything through the lens of Nollan v. CCC and sued the Commission and their neighbors instead. That suit was thrown out of court last month. Nowhere in California can you build roads without a permit, especially in mountainous zones. Why should it be any different in Topanga Canyon? 

As for the filming, CCC staff initially agreed to the filming on the condition that they too be allowed to film. Norris and Gilder refused to reciprocate, which tells me their intend all along was to mischaracterize the CCC's enforcement efforts. 

Kathleen Kenney (and her estate) also failed to obtain the necessary coastal development permit for her 741 sf building.

A fair and uniform enforcement of the Coastal Act requires that all development activity within the Coastal Zone be subjected to review for conformance to the Coastal Act. The Kenney estate is subject to daily fines until Coastal Act violations are corrected, which the estate (Starz) has chosen not to do.

There's nothing arbitrary about the Commission taking enforcement action against Wildcrew's Playground or Kenney's old chicken coop.

Richard Oshen is attempting to make heroes out of scofflaws. He's also unjustly blaming the CCC for everything from wildfires to bad hair days.

It doesn't take that much of a journalist effort to get the other side of the story and get the facts straight. (Unless you're an attorney that relies on ignorance of the Coastal Act to make a living, in which case you may want to spread that ignorance around.)

 

BTW, the Coastal Zone has shrunk since the passage of Prop 20 and the subsequent Coastal Act of 1976. A quick review of any of the Coastal Zone maps readily available from local governments with certified LCPs or the Commission's website will show that the Coastal Zone extends inland far less that 5 miles for most of the California coast.

The purpose of the Coastal Commission is to make sure that development within the Coastal Zone is consistent with the Coastal Act. Unless your intent is to destroy ESHA or to block access to the coast, it isn't that difficult to develop in a manner that suits the site and is in full compliance with the Coastal Act.
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The California Coastal Commission and Property Rights

Property rights define the rights individuals have to use, transform and transfer the property they own.  Transforming to the rights that owners have to combine resources to improve a product, or make a new product.  For example, consumers have the right to put spinners on wheels, transform a tree into a table, or undeveloped property into low income housing.  Glenn Hubbard and Anthony O'Brien, the authors of "Economics" write,

We have seen that a market system cannot work well unless property rights are enforced. Entrepreneurs are unlikely to risk their own funds, and investors are unlikely to lend their funds to entrepreneurs, unless property is safe from being arbitrarily seized. 

The California Coastal Commission (CCC) regulates the use of property within five miles of the California coast.  Many people, including filmmaker Richard Oshen (and me) think that the CCC has too much power in defining property rights and that it uses those powers arbitrarily.  In "The California Coastal Commission vs. Its Critics," Brian Doherty of Reason Magazine describes sections of Oshen's film "Sins of Commission," which documents CCC power and its abuses of property rights.  How much power does the CCC have?

As CCC Executive Director Douglas humbly told Oshen on-camera in the film (along with describing himself as a "radical pagan"), his unelected commission (whose members are appointed by the governor and leaders of the two state houses) doesn't have the power of eminent domain. All it has is the power to regulate, plan, and enforce restrictions on pretty much any action involving land within five miles of the coast, which means it doesn't really need the power of eminent domain at all. It can largely control the land anyway.

The CCC has a record of abuse of power regarding its right to define property rights losing ain Nollan v. California Coastal Commission before the Supreme Court in 1987.  Doherty continues his description of CCC power.

The CCC's authority has decidedly grown since its beginnings as a temporary outfit with jurisdiction over 1,000 yards of coastline to an established agency with five miles of nearly absolute power, overriding local decisions and slapping multi-million dollar fines on people building small houses on existing concrete pads that could only be seen from the coast by a Superman with telescopic and X-ray vision.

Doherty describes two cases of abuse by the CCC.  Worse than the abuse, is the CCC's ability to use the power of the state to enforce its capricious actions.  The first involves Dan Norris and Peggy Gilder, and it is the case involes Oshen directly involved and got him started on his documentary.

Oshen's project started in October 2005 when he was called by a pair of friends, Dan Norris and Peggy Gilder, who were involved in a legal bind with the CCC. They wanted Oshen to film a CCC inspection of their property. Norris and Gilder insist that the inspection came about because nosy neighbors and a CCC agent trespassed on their posted private property, looking for complaints to trigger an inspection.

The inspection was accompanied by a court order that explicitly forbade Norris and Gilder from filming the proceedings-though at least one of the sheriff's deputies brought along by the CCC inspectors (who were also accompanied by a deputy attorney general) was filming, as can be seen in the footage Oshen did shoot. That footage appears in the rough cut of his documentary.

As Oshen told me, that October day on the 40-acre Norris/Gilder property on Old Topanga Canyon Road in the Santa Monica Mountains was the first time Oshen had even really heard of the CCC. Oshen was amazed to discover a government land use agency with the power, and the desire, to prevent citizens from making an independent record of what happened during an official inspection-thus putting that citizen at a decided disadvantage in any later court proceedings where their version of events diverges from that of a government official.

The second involves Kathleen Kenny.  The link in the quote is to a Los Angles Times article detailing legal proceedings against Kenny.  The article is a good read.

See, for an example, the story of Kathleen Kenny, one of the stars of Oshen's documentary, now deceased. Kenny beat back local inspectors' assaults on her for building on her own property. She even in 1997 won an unprecedented RICO suit against local government officials for harassing her, a case where she acted as her own lawyer. Despite this, she was never able to shake off the CCC from coming after her for more or less the same offense. It has levied multi-million dollar fines that still hang over the head of her living partner, Arthur Starz.

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Dark Deeds

HT Drudge) Let me be clear, defacing other people's property to make your political point is a violation of the owners' property rights and is a crime in most places and should be in all. The crime is particularly annoying because the Internet allows anyone to plaster political posters all over the world. Anthony Colarossi describes efforts of authorities to find and punish those responsible for defacing others' property in "Clermont police interview suspect in Obama 'Joker' posters," written for the Orlando Sentinel on August 13, 2009.

Clermont police have interviewed one suspect who is admitting to putting up the dozens of posters pasted around the city depicting President Obama as the Joker character from the Batman film The Dark Knight, city officials confirmed...

At this point officials are not sure how much damage was caused by the signs or the dollar amount associated with the clean-up.

Dozens of the posters were pasted around the city earlier this week. A pair of the posters were pasted to a Clermont Post Office collection box. They prompted the postmaster to contact the Postal Inspector's office, which is looking at potential federal crimes for defacing federal property.

City officials, meanwhile, are trying to determine what local crimes might be associated with the posting of the images on public and private properties. They've also been busy ripping down the sticky signs because they're a violation of city ordinance regarding illegal signs.

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The Living City?

Tom Leonard has written an interesting article, "US cities may have to be bulldozed in order to survive," for the Telegraph.co.uk in which he or the people he interviews anthropomorphizes American cities like Flint (HT Drudge). 

"Places like Flint have hit rock bottom. They're at the point where it's better to start knocking a lot of buildings down," she said [Karina Pallagst, director of the Shrinking Cities in a Global Perspective program at the University of California, Berkeley]...

If the city didn't downsize it will eventually go bankrupt, he added [Dan Kildee, the treasurer of Genesee County, which includes Flint]...

The city is buying up houses in more affluent areas to offer people in neighbourhoods it wants to demolish. Nobody will be forced to move, said Mr Kildee.

A city is not a living being with a heart, soul and brain, and we should remember that.  It is a political organization formed by citizens to establish rules that will allow people to interact socially and economically.  I understand the difficulty in continually referring to the relevant people involved in government or market actions, but it is a useful exercise.  When Karina Pallagst said that, "Places like Flint have hit rock bottom," she must be referring to the remaining citizens, the property owners, or the citizens that comprise the local government.  Dan Kildee's perspective seems clearer; he is referring to the people that run the city and the financial difficulties they face in providing services to citizens.  The article only condescendingly refers to the citizens served.

When net migration is negative, the remaining population, through their political representatives must decide how to cut back on services.  Kildee suggests that city officials have and should continue to buy property in "good" neighborhoods and offer it in exchange for property in "bad" neighborhoods.  The city officials would demolish homes in the "bad" neighborhoods and return them to a natural state.  This may be a good way for city officials to deal with a declining population if exchange is conducted at market prices but the article suggests that the purchases of homes may not be conducted at market prices.

Flint's recovery efforts have been helped by a new state law passed a few years ago which allowed local governments to buy up empty properties very cheaply.

Without more information, I am doing a little guess work, but it seems that the owners of abandoned homes are the big losers.  If I am a city official wishing to retain employment and needing someone to tax, who better to tax than those who have left the jurisdiction and no longer capable of voting.  Force the owners of abandon properties in the neighborhoods to be preserved to sell at below the market prices and offer it to voters at discounted prices.  Then force owners of abandoned properties in neighborhoods to be demolished to sell at cheap prices and create green zones for remaining citizens.  What a racket!
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Epstein on Sotomayor

Richard Epstein, writing on the Sotomayor nomination to the Supreme Court, expresses dismay over President Obama's and Sotomayor's lack of concern about the protection of property rights ("The Sotomayor Nomination," Forbes, May 26, 2009)

We have already seen a president whose professed devotion to the law takes a backseat to all sorts of other considerations. The treatment of the compensation packages of key AIG executives (which eventually led to the indecorous resignation of Edward Liddy), and the massive insinuation of the executive branch into the (current) Chrysler and (looming) General Motors bankruptcies are sure to generate many a spirited struggle over two issues that are likely to define our future Supreme Court's jurisprudence. The level of property rights protection against government intervention on the one hand, and the permissible scope of unilateral action by the president in a system that is (or at least should be) characterized by a system of separation of powers and checks and balances on the other.

Here is one straw in the wind that does not bode well for a Sotomayor appointment. Justice Stevens of the current court came in for a fair share of criticism (all justified in my view) for his expansive reading in Kelo v. City of New London (2005) of the "public use language." Of course, the takings clause of the Fifth Amendment is as complex as it is short: "Nor shall private property be taken for public use, without just compensation." But he was surely done one better in the Summary Order in Didden v. Village of Port Chester issued by the Second Circuit in 2006. Judge Sotomayor was on the panel that issued the unsigned opinion--one that makes Justice Stevens look like a paradigmatic defender of strong property rights.

I have written about Didden in Forbes. The case involved about as naked an abuse of government power as could be imagined. Bart Didden came up with an idea to build a pharmacy on land he owned in a redevelopment district in Port Chester over which the town of Port Chester had given Greg Wasser control. Wasser told Didden that he would approve the project only if Didden paid him $800,000 or gave him a partnership interest. The "or else" was that the land would be promptly condemned by the village, and Wasser would put up a pharmacy himself. Just that came to pass. But the Second Circuit panel on which Sotomayor sat did not raise an eyebrow. Its entire analysis reads as follows: "We agree with the district court that [Wasser's] voluntary attempt to resolve appellants' demands was neither an unconstitutional exaction in the form of extortion nor an equal protection violation."

Maybe I am missing something, but American business should shudder in its boots if Judge Sotomayor takes this attitude to the Supreme Court. Justice Stevens wrote that the public deliberations over a comprehensive land use plan is what saved the condemnation of Ms. Kelo's home from constitutional attack. Just that element was missing in the Village of Port Chester fiasco. Indeed, the threats that Wasser made look all too much like the "or else" diplomacy of the Obama administration in business matters.

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Scalia and Epstein on Economic Rights

Yesterday, Sonia Sotomayor was nominated for the Supreme Court by President Obama.  Many have written on her qualifications. As a change of pace, I am posting on a debate in the January/February 1985 issue of Regulation Magazine between Antonin Scalia ("On the Merits of the Frying Pan") and Richard Epstein ("The Active Virtues") on the Supreme Court's lack of desire to constitutionally challenge legislative intrusions into the economy.

At the time the written debate took place, Scalia was a judge on the United States Court of Appeals for the District of Columbia Circuit.  In a nut shell, Scalia defends the Supreme Court's inaction in protecting constitution economic rights by postulating that these efforts would be interpreted as judicial activism, justifying past and future activism, and that the Supreme Court might further limit economic freedom rather than protect it.  I selected a few quotes to illustrate his arguments.  He begins by defining the debate.

Fundamental or rarefied, the point is that we, the judiciary, do a lot of protecting of economic rights and liberties. The problem that some see is that this protection in the federal courts runs only by and large against the executive branch and not against the Congress. We will ensure that the executive does not impose any constraints upon economic activity which Congress has not authorized; and that where constraints are authorized the executive follows statutorily prescribed procedures and that the executive (and, much more rarely, Congress in its prescriptions) follows constitutionally required procedures. But we will never (well, hardly ever) decree that the substance of the congressionally authorized constraint is unlawful. That is to say, we do not provide a constitutionalized protection except insofar as matters of process, as opposed to substantive economic rights, are concerned.

Scalia makes his case.

...in my view the position the Supreme Court has arrived at is good-or at least that the suggestion that it change its position is even worse.

...my skepticism arises from misgivings about, first, the effect of such expansion on the behavior of courts in other areas quite separate from economic liberty, and second, the ability of the courts to limit their constitutionalizing to those elements of economic liberty that are sensible...

The second basis for my skepticism is the absence of any reason to believe that the courts would limit their constitutionalizing of economic rights to those rights that are sensible.  In this regard some conservatives seem to make the same mistake they so persuasively argue the society makes whenever it unthinkingly calls in government regulation to remedy a "market failure." It is first necessary to make sure, they have persuaded us, that the cure is not worse than the disease-that the phenomenon of  "government failure," attributable to the fact that the government, like the market, happens to be  composed of self-interested human beings, will not leave the last state of the problem worse than the first. It strikes me as peculiar that these same rational free-market proponents will unthinkingly call in the courts as a deus ex machina to solve what they perceive as the problems of democratic inadequacy in the field of economic rights. Is there much reason to believe that the courts, if they undertook the task, would do a good job?

Epstein was the James Parker Hall professor of law at the University of Chicago.  Epstein argues that we must compare the imperfections of the legislative branch relative to the judicial. 

IN MY VIEW, Scalia has addressed only one side of a two-sided problem. He has pointed out the weaknesses of judicial action. But he has not paid sufficient attention to the errors and dangers in unchanneled legislative behavior. The only way to reach a balanced, informed judgment on the intrinsic desirability of judicial control of economic liberties is to consider the relative shortcomings of the two institutions---judicial and legislative-that compete for the crown of final authority. The constitutionality of legislation restricting economic liberties cannot be decided solely by appealing to an initial presumption in favor of judicial restraint. Instead the imperfections of the judicial system must be matched with the imperfections of the political branches of government...

THE THEORY OF CONSTITUTIONALISM, as I understand it, tries to find a way to minimize the sum of the abuses that stem from legislative greed on the one hand, and judicial incompetence on the other. There is, by and large, no third alternative to this sorry state of affairs. What I fear is wrong with Scalia's  statement of the argument is this: by focusing exclusively on the defects he finds in the judicial part of the process, he tends to ignore the powerful defects that pervade the legislative part of the process. Our constitution reflects a general distrust toward the political process of government-a high degree of risk aversion. That is why it wisely spreads the powers of government among different institutions through a system of checks and balances...

Judicial restraint is fine when it keeps courts from intervening in areas where they have no business intervening. But the world always has two kinds of errors: the error of commission (type I) and the error of omission (type II). In the context of our discussion, type I error refers to the probability of judicial intervention to protect economic rights when such intervention is not justified by constitutional provisions. And type II error refers to the probability of foregoing judicial intervention to protect economic liberties when such intervention is justified. This second type of error cannot be ignored.

What Scalia has, in effect, argued for is to minimize type I error. We run our system by being most afraid of intervention where it is not appropriate. My view is that we should minimize both types of error.

Scalia may be tactically correct, but I believe Epstein's arguments are more sound.
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AIG, Property Rights, Demagoguery, and Hate

My original interest in the AIG story was spurred by the expropriation of contractually specified bonuses. This is an abrogation of property rights and is bad for the AIG employees, employees in everywhere, and economy as a whole. The popular hate and ignorance as well as the blatant political demagoguery have expanded my interest.[1] In “Misguided Angst about AIG Bonuses,” I suggested that people expressing anger about the payment of contractual bonuses, be they residents of Main Street, activists or politicians, did so without establishing a link between the executives that made bad decisions that drove the company to financial despair and the bonuses. The link does not exist. The employees receiving the bonuses were not those that drove the company into a dysfunctional government receivership as Edward Liddy, the Treasury appointed CEO of AIG testified before Congress (Jenkins, Holman. “The Real AIG Disgrace,” Wall Street Journal, March 24, 2009).

Our elected representatives and their political appointees have known that the executives receiving the bonuses were not guilty of corporate malfeasance, yet they have treated them as if they had. Jenkins writes about the actions of several elected officials. I quote his article on three, New York Attorney General Andrew Cuomo, Treasury Secretary Geithner, and President Obama.

As far back as October, New York Attorney General Andrew Cuomo had summoned the Treasury-appointed Mr. Liddy to hammer out a deal on AIG's pay practices. Said Mr. Cuomo in a statement afterward: "These actions are not intended to jeopardize the hard-earned compensation of the vast majority of AIG's employees, including retention and severance arrangements, who are essential to rebuilding AIG and the economy of New York."

On March 3, Mr. Geithner himself was quizzed during a congressional hearing in detail about the AIGFP retention plan by Democratic Rep. Joe Crowley -- a week before Mr. Geithner now says he heard of the plan.

It may be that the full picture was kicked up to him only when a political decision was needed, but by then his one decent choice was to insist on the bonuses' legality. However politically inopportune the bonuses may be, the president only dirtied himself by authorizing a feel-good, bipartisan hate storm aimed at innocent AIG employees. And it's hard to believe Mr. Obama would have done so, or the subsequent spectacle would have unfolded as it did, without Mr. Geithner's seminal prevarications (and we say this fully acknowledging that he's had a rough ride in an inhumanly difficult job).

It is difficult to measure the size of the hate storm. After all, some people may not like the high levels of executive compensation but not support legislation mandating lower compensation or taxing high compensation at exorbitant rates. But if hate mail is a good measure of the intensity of feelings, our elected representatives have poured gasoline on a raging fire. Andrew Pergam, representing the Connecticut/News in “Threats to AIG: ‘We Will Get Your Children,’” (HT Drudge) gives many examples of hate mail received by AIG employees.

-- All you motherf***ers should be shot. Thanks for f***ing up our economy then taking our money.

-- Dear Sir: Ya'll should have the balls and come clean and give back the bonuses. I know you would never do this so the gov't ought to take you out back and shoot everyone of you crooked sonofb****es...I would be very careful when I went out side. This is just a warning. If I were ya'll I would be real afraid. Thanks, Bill.

-- I don't hope that bad things happen to the recipients of those bonuses. I really hope that bad things happen to the children and grandchildren of them! Whatever hurts them the most!!

And my favorite,

-- We will hunt you down. Every last penny. We will hunt your children and we will hunt your conscience. We will do whatever we can to get those people getting the bonuses. Give back the money or kill yourselves.

The emphasis added is mine, and I must ask if the author received inspiration from Senator Grassley of Iowa.

Jake DeSantis, an executive vice president of AIG’s financial products unit, defends his and many of his coworkers actions in “Dear A.I.G., I Quit!,” NYTimes, March 25, 2009.

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage…

Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.
DeSantis, like so many others, has been hurt b AIG employees who participated in the failed unit of AIG.

I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

The popular and political hate are having an impact on AIG employees.

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.

The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to “name and shame,” and his counterpart in Connecticut, Richard Blumenthal, has made similar threats — even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.

DeSantis is not returning his bonus, nor is he keeping it.

I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.

That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn.

[1] I would like to thank a coworker who listened to me sound off at the political injustices foisted on AIG employees, and rightly pointed out that I needed to cool down, at least a little.

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Misguided Angst About AIG Bonuses

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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