Thursday, March 19, 2009

Cut off Our Nose to Spite Our Face

Today’s passage, in the House, of the 90% tax on bonuses received by employees of companies receiving bailout money is economically foolish and quite possibly unconstitutional. It stands as another testament of the failure of our government to think rationally and unselfishly in order to help this economy. The Democratic s, and unfortunately about half of Congressional Republicans, are quickly adding to a long series of failed policies.

While I am no Constitutional expert, this bill seems highly likely to be unconstitutional. The bill essentially violates Article 1, Section 9 of the constitution that forbids the legislature from passing bills of attainder or ex post laws. In other words, Congress does not have the right to punish individuals or groups without trial. This law serves as a direct, and ex post, punishment of anyone who happens to work at a company that accepts bailout money.

Along this line, it is also fair to note that this bill is indiscriminate in that it equally punishes those who have done well and poorly. Many of the people that made ruinous mistakes are long gone. Their replacements should not be punished for the misdeeds of their predecessors. Likewise, these companies are large and complex. One division could have performed poorly, while another was stellar. Is it fair to punish a division within AIG that had strong profits this year? It is not the government’s but management’s place to make these decisions.

Constitutionality aside, the proposed law is economically insane. This policy will only serve to further America’s economic plight. First, if anything, the bill will induce a huge flight of talent and make retention next to impossible at any bailout company. When these companies are at their most needy, we want to design policies that entice the most talented people to work on fixing the problem. What talented manager will continue (or start) to work at a bailout company if they not only have the risk of being on a sinking ship, but now have severely reduced opportunities of compensation. They’ll just as easily move to a competitor who can pay them more.

Furthermore, the companies that recognize this and want to avoid such a flight of talent will naturally change their compensation structures. Simply, they could increase salaries to offset potential bonuses. This makes the legislation ineffective. Simultaneously, it serves to divert management’s focus from fixing their business to finding creative ways to compensate their employees. This is a huge waste of time and money that we cannot afford right now. In addition, if employees are more heavily compensated with salary, instead of bonuses, their incentives to work long and hard hours are reduced. Finally, companies take on much greater risk with fixed salaries, rather than flexible bonuses which can be tailored based on personal and company performance. This detracts from the ultimate goal of fixing the economy.

Secondly, this proposed law will reduce incentives for companies to accept bailout money. This policy is clearly counterproductive when coupled with the bailout. If the Democrats think a huge bailout program is necessary, there is no better way to thwart that than by un-incentivizing companies from accepting the money. It is like extending a leprous hand, knowing you may help someone stand but ultimately kill them from the disease.

Furthermore, the policy only serves to destroy market confidence. It reeks of nationalization and excessive government involvement. Who will invest in companies that, as pointed out above, have even more reasons to fail? It is unnerving to think that the pompous fools in Congress think that this is going to help our market confidence- one of the main things that is needed in this environment. Also, it’ll continue to undermine consumer confidence and spending, creating yet another downward pressure on individuals’ desires to purchase goods (or even pay their mortgages).

It is all too clear why such a bill gained such traction; why half the Congressional Republicans voted for it. It is simple, unbridled populism. It is far too expedient and politically beneficial for these legislators to stoke the anger in the people and then come to ‘save the day’. Unfortunately, saving the day is the last thing that will happen here. Rather, these congressmen and women are using the angry masses and these proposed policies for political expediency. Barney Frank and Nancy Pelosi know they can get Joe-Six-Pack into a furor by blaming his plight on Wall Street, and then look like a hero when they punish Wall Street. Not only does this negate Joe’s, Barney’s and Nancy’s culpability, but it doesn’t just punish Wall Street, it punishes all of America.

People may feel a bit angry at Wall Street- and possibly rightly so. But the channeled rage that the President and Congress are creating is not constructive, but destructive. We need to be focusing on fixing problems, not pointing fingers. This is especially true, because, as I pointed out elsewhere, there is not one group of people responsible. We cannot start drawing lines and finding scapegoats, but come together to find real, smart, economic solutions to this mess.

[Just a note -I could care less if the management at AIG received bonuses. That isn’t the point. The point is that the government should not be getting involved in such issues. If the government deems it appropriate to give taxpayer dollars to companies than it has to accept that the money will be spent by the companies. The bigger the role it plays it deciding how a company spends this money the closer we slide down the slope of nationalization and state control- a place no one [hopefully] wants to go.]

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