I'd call this the law of unintended consequences -- except that the consequences are explicitly written into the bill. The bonus tax, which passed the House earlier today, applies not only to AIG but also to some 12 other firms that received substantial levels of government assistance. This includes both financial institutions like AIG and nonfinancial ones like General Motors; it includes banks that are preforming poorly, like Citibank, and those that are holding up fairly well, like JPMorgan Chase and PNC. The government has dictated that nobody at anybody of these companies is deserving of incentive-based compensation, unless their household income is less than $250,000 per year.
Just think about some of the implications of this.
A senior engineer at General Motors, who shepherds the production of a new hybrid vehicle that will turn out to be a best-seller, shouldn't get a bonus for that. Really?
Jamie Dimon at JP Morgan, who has managed his company's assets adeptly and kept it mostly off the taxpayer's dole, is no more deserving of a bonus than an AIG crook. Really?
An mid-level investment banker at Morgan Stanley, who works her butt off to persuade her bosses to facilitate a deal for a new wind-power company that turns out to be a big economic and environmental winner, should have her incentive compensation taxed at 90%. Really?
An administrative assistant at PNC, who is volunteering to work 70-hour weeks because of cutbacks in the company's staff, deserves a Christmas Bonus -- unless her husband happens to be a lawyer earning $250,000 per year, in which case it should be taken away. Really?
$500,000 in salary for an employee that performs badly is perfectly fine, but a $500,000 bonus for one who performs exceptionally well isn't. Really?
I understand that these might be hyperbolic examples. As I argued earlier, compensation in the financial services industry is probably too high in the aggregate. But there are much better ways to design around that. For instance, set a soft cap for aggregate compensation that is adequate to keep a company running healthily -- say, 20% of company earnings -- and then require companies who allocate more compensation than that to match it one-for-one with paybacks of their TARP funds. This would require companies to either right their ship or control their compensation levels. But it wouldn't discourage them from paying bonuses to those exceptional individuals who are deserving of it.
As written, I'm not even certain that the bill will reduce compensation for these bailed-out firms at all. It will just shift it from incentive-based compensation, which is subject to the levy, to salary-based compensation, which isn't. But in so doing, it will make it harder for the companies to align performance and rewards.
I understand why the bill was written this way -- it had to be broad enough to fend off a constitutional challenge -- but the cure is worse than the disease. Much worse. I can't imagine a credible defense of it along economic lines, and so far as I've seen nobody has even attempted one.
n.b. See also Noam Scheiber, who has been a voice of sanity on this issue; Josh Marshall is also starting to have reservations.
EDIT: To people who say I'm not getting the politics on this one: I'm not talking about the politics of it, I'm talking about the economics. If I were a Senator's Chief of Staff, I'd probably tell him to vote for it.
But I also think there have been political failures here: the Obama communications team failed to nip the AIG story in the bud to the point where it blew up on them and the political pressures on the Congress became irresistible. The public doesn't have the most basic understanding, for instance, of what the "bonuses" really are -- in AIG's case, they weren't really bonuses at all -- and so a lot of the debate has evolved from false premises.
I'm also not very sympathetic to the "they're rich -- who cares?" line of argumentation. I'd be happy to pay an employee a million dollars if he made me two million, and since the employees of the bailed-out firms are our employees in a certain sense (since we own various levels of debt/equity in their companies), I feel the same way about them.
If we want to address wealth discrepancies in this country (and I think that we should), we should do so by changing marginal income tax rates. The one good thing that may come out of the AIG mess is that it may actually prove to be fairly paradigm-shifting as far as that stuff goes. But if we're monkeying around with tax policy, it's important to do so in an economically coherent way. The idea that an authentically high-performing executive at Morgan Stanley should be subject to the tax but the same employee shouldn't be if she leaves for Deutsche Bank is asinine -- but that's exactly the outcome that this bill engineers.
3.20.2009
Throw Out Baby, Bail Out Bathwater
@ 3:54 AM
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212 comments
I agree. This kind of politics is dangerous...
The problem is that we are obviously feeding off sound bites that make some sense and seem to be logical, but discount too much complexity of reality.
Nate, the point is that people are really pissed off that their tax dollars are going to million dollar bonuses. That's why even the highest ranked government officials get paid shit compared to the private sector elite. Now, if the White House is going to back to Congress for more money to fix the banking system, the ONLY WAY they will get it is if the public is adequately convinced that it's absolutely necessary to prevent and is feathering no nests. This bill accomplishes that. The economic grounds on which it is based are as follows: without public support for the Obama Administration and whatever the banking fix ends up being, the economy will almost certainly collapse.
America has tons of people who work hard and never get paid a bonus. Someone who makes over $250k doesn't get a bonus? Cry me a river.
I concede your general point, Nate, but would contend that Incentive-based compensation is overrated.
Bonus money as a motivator to do your job well (esp in the longterm best interest of your company) ranks right up there with grades as an incentive to be a person who pursues learning (or allowance based on grades, even)
It's just not the most effective way to motivate salaried employees.
"But in so doing, it will make it harder for the companies to align performance and rewards."
Because the companies are doing such a stellar job at that.
If this tax action hits the high-flying heroes (if there are any), then they will become extremely pissed off at the high-flying baddies. This will reduce the clubbiness at the top.
I suspect there are some potentially good people out there in the top levels of our financial system, but they are reluctant to call out the transgressions of their peers. Maybe this tax action will help to make it socially unacceptable to screw things up.
I wish we could align pay to performance. The folks at AIG got paid in the neighborhood of 30% of profits, right? By that measure they should cough up around $60 Billion right now.
Is there any reason they can't just defer their bonuses until their companies aren't sucking the government teat? "Good job with that Hybrid car, Jim! We'd like to give you a million dollar bonus but we don't want you to get screwed, so as long as we're on government loans we're going to spread it out over the next few years for you."
Or is it that they have no faith that they'll ever right their ships and they just want to give each other a few more millions while the getting is good?
By and large, I agree with you that this "solution" is being done the wrong way and for the wrong reasons. There is one partially redeeming facet, though: it ties high-end executives more closely to the fate of their company. It's not enough to be a bonus-worthy employee in a failing company -- it is in your direct interest to keep your company from failing and ending up with a bailout. Maybe that means pointing out systemic flaws (such as the ones that got us into this mess) instead of turning a blind eye and thinking of them as someone else's problem.
That's not entirely fair, to be sure. But fairness went out the window the first time we heard the expression "too big to fail." I don't think we should tax these bonuses vindictively (though sadly, I think we're doing precisely that), but I don't think taxing them is the worst way to handle this.
Another good post, Nate. You are a voice of sanity at the moment.
This is what happens when lots of people think with their chimp brains, based on vindictiveness, status anxiety and jealousy: stupid legislation gets passed and a week of political time wasted, all for a minute drop in the ocean of government expenditure.
Apologies for the denigrating generalisation to any chimps reading.
But in so doing, it will make it harder for the companies to align performance and rewards.
Nate, try to keep it real, OK? The main thing executives in the financial sector think about is there own pocketbook.
Yes Steve (a quality which they share with almost all the rest of us, incidentally).
And that is precisely why companies need to retain the capacity to align the flow of money into those pocketbooks with performance. Which was Nate's point.
This was a pretty poor post. It only impacts people who are earning more than $250 000 anyway. For us regular people, the incentive for doing the job you are paid to is to keep your job. These employees on top of the heap should do their job because they are paid to do their job. If they stop doing their job because they are sulking, fire them and hire new people - like you would with any other worker. The justification for large bonuses one year ago was that a successful banker who didn't get a disgusting bonus would move to another bank - in today's economy with so many out of work bankers, I can't see any banker giving us a $250 000 job because they didn't get a bonus - who would hire them for more? Demand and supply is working the other way now.
Adrian, there's apparently still plenty of competition for people at top firms, with foreign banks circling round the supposed 'talent.' Another argument is that it's meant to be much easier for these particular guys to unwind the exposed positions quickly, which is what needs to happen and what seems to have been done with a trillion or so of CDO's already. Whether these arguments are true, I don't know.
What I find interesting in your post is the word 'disgusting,' seemingly applied to bonuses in general, not just those paid from the treasury to companies that have f*cked up.
I find it hard to understand that kind of moral revulsion, maybe because I just don't really feel financial jealousy. I'm jealous of people more talented than me, I've felt the odd pang of sexual jealousy in my time, but I seem to be immune from envy, anger and resentment at people being richer than me.
Who cares if they're multimillionaires? I'm not 'rich' by Western standards and I doubt I ever will be, but I do earn about 200 times what someone on the absolute poverty line earns, and there are a billion of these people in the world. To me it's much more 'dsigusting' that I live in comfort while they die of easily preventable causes, than that I have a car a small apartment while someone else has a private jet and a New York townhouse. The former disparity is much more important.
Bonuses to failed bankers paid from the treasury are a different matter, of course. In an ideal world they wouldn't be so well remunerated for that work. But still it's worth remembering that the vast majority of us, in their position, would take the money too. Greed's not good, but nor is it anything but normative.
Boing, the London finance market has huge numbers of people leaving finance because the number of jobs is rapidly shrinking. I strongly doubt your contention that it is a sellers market in the US right now.
The word disgusting does apply to bonuses on top of large salaries in general, yes. It is not financial jealousy, nor do I think of these people as somehow "more talented". It is disgusting for two reasons - one is the idea of bonuses for people simply doing their jobs. I see people working exceptionally hard and doing exceptionally well all around me (medical research). None of us gets any bonus and none of us expect to. It is a tough career with a huge amount of competition, so the reward for working hard is to keep your job. I see no reason why people who fabricated wealth should be treated to a bonus for turning up and doing a few hours of work as they were paid to.
The second issue is indeed the scale of the salary. The enormous boost in people in the financial sector is a sick problem for America. It is responsible for hiding the stagnation of the median wage and it creates a huge social division. In many other Western countries there is no such discrepancy between the highest and the lowest paid, and America is paying the price for that.
The argument isn't "screw 'em, they're rich", the argument is that they deliberately set up this kind of compensation regime to be somewhat inscrutable, and now it's biting them in the arse.
To most Americans, "bonus" means something entirely different than what it means to executives and the investor class. They see the "but the bonuses were contractually obligated" argument and they get even MORE upset. They get upset because it makes crystal clear just HOW different the rules are for them.
So they get upset at the relative extravagance and legislators respond. That's how it works, for good or ill.
These people created their compensation system; they're responsible for its byzantine nature and its comparative extravagance. It is THEIR fault this reaction was inevitable.
That being said, I honestly don't know if this is economically justifiable or not, and I probably never will. None of us will. The issue is too charged and the metrics too obscured for any sort of conclusion.
The focus should be on this as an impetus for the industry itself to restructure their compensation regimes to be more straightforward and honest. And if they won't do it, the public may demand that government do it for them. And yet again they will have no one to blame but themselves.
By 'more talented people' I didn't mean these bankers, I meant more talented people than me in general. I was trying to think of areas where I am prone to the same feelings of resentment as the next person, because in financial matters I'm not.
I agree with your points about social division, and I support much higher taxes on people earning high wages. But massive wealth discrepancies are a global problem, not just national.
In your medical research job, I'm guessing you get paid a good two to three hundred times more than a billion people in the world, many of whom are also doing very important jobs without which the world economy would be in trouble. That's about the same differential as that between you and one of these AIG guys. Where is the moral disgust?
This may sound facetious, but I don't believe it is. I'm trying to locate the point where you slip from rueful sadness about the inequality of the world to visceral revulsion, because for me the two emotions are reversed, respective to the 'crime'.
Is the structure of the compensation as bonuses really what sets the two differentials apart? If your pay were restructured as wage + bonuses, but kept at the same level, would you then become as guilty as them?
When you look at the actual results of the differentials, there's no comparison. The bankers have fairly unpleasant working lives, but get nicer houses, flashier cars, great holidays and if they're men can basically sleep with whoever they want to. But compared to dollar-a-day tin miners in West Africa, you are (I'm presuming here) vastly better off, because your children are highly unlikely to die of malaria and malnutrition. There's no comparison in terms of which should inspire more revulsion.
Boing, I don't understand where you get your basic premise from. Why do you assume that I have no moral revulsion about the global inequalities? If you knew me in the slightest you would know how strongly I feel about this issue and also that I act upon that feeling.
My moral disgust at a mass murderer does not stop me from feeling moral disgust at a "regular" murderer, so why should my moral revulsion at global inequalities bar me from feel the same reaction (at a fraction of the intensity) at national inequalities?
Really.
In a time when hundreds of thousands of people are losing their jobs every month, I don't think anyone making more than 250k deserves a bonus, period. They should be happy their companies haven't been nationalized and all their salaries adjusted back to reality. Past administrations facing less severe crises have taken much more severe actions (price controls, wage freezes, etc.).
I'm not surprised by the arrogance of the financial industry people and their insane compensation. But I'm really surprised that ordinarily insightful people would be their apologists.
" The government has dictated that nobody at anybody of these"
Maybe just the word "any"
Interesting take.
I disagree.
Boing:
"If your pay were restructured as wage + bonuses, but kept at the same level, would you then become as guilty as them?"
The point is that in the VAST majority of the labor marketplace, bonuses like these would never have survived a company tanking like AIG did no matter how carefully worded the contracts were.
That's what at least *I* meant when I said "the rules are different". Just wanted to make that clear.
Keep at it, Nate. If this comes to pass (and we've got to hope the Senate shoots it down) a dreadful precedent will have been set for using the tax code to bash anyone who's the current target of mob hatred. We'll also lose any chance of moving industry toward aligning compensation with long-term performance. What employee would accept such a detail with the knowledge the Congress might tax it away at any point.
Doesn't really matter. The whole scheme thing is unconstitutional, right
Somebody explain to me why these captains of industry, these financial geniuses, didn't stop to think: Hey, maybe we could defer these bonuses until we pay our debts off and we are solvent once again. The way I see it, that gives incentive not only to stay with the company until the bonuses can be paid out ("retention", right?), but also encourages these same employees to perform well ("merit", anyone?) to bring the company back solvent again. Who loses in this scenario? The added benefit is they become heroes in the media instead of scumbags.
I work for a company that had record sales and profits last year, yet instituted a hiring freeze just as the new year began. Caterpillar had record sales and profits in 2008 and is laying of people in 2009. F them all. They are spoiled children that need to be taught some serious lessons. If some butts get red and sore then so be it! When corporate America starts acting responsibly again then maybe America will care. Until then, F them!
Group punishments suck, but when you can;t pick out the good from the bad, then you have to punish them all. Again, we are dealing with children and we need to act like adults. We need to ensure they understand what the word responsibility means.
They burned down the house and you are worried about a random guy getting screwed? I can take his bonus and spread it amongst my unemployed friends and it would keep them afloat for a month.
Adrian -
Yeah, clearly I don't know you, and you may give all of your money to charity for all I know. When I say, "you," understand it as shorthand for something like "the vast majority of those who express a similar moral revulsion at wage inequality."
Now, "you" may very well feel similar levels of moral revulsion at global inequalities as national, but "you" don't act on it, do "you"? What's the ultimate difference between a banker who at some level realizes his level of wealth is pretty unfair and destructive, but still takes the money, and an ordinary worker who knows, deep down, the same thing in respect of his own relation to the world's poor, but still takes the money?
Yet people in this thread and similar ones seem to expect bankers to just want to give their money away. This seems to me hypocritical. Most of us live like kings compared to a fifth of the world's population, yet aside from small amounts of charity, we only give it away when forced to by tax - the same as the bankers.
To take your murderer example, it's like a murderer expressing moral outrage at a mass-murderer. Fair enough, but you have to think somewhere along the line he's got his priorities wrong. it would be great if the mass-murderer stopped killing people, but until the murderer gets a grip on his own bloodlust, his moral outrage rings a little hollow.
Prospero -
My discussion with Adrian had moved on to bonuses in general, not these AIG ones in particular. I do agree that these ones are pretty outrageous. I still find it hard to feel the same anger and revulsion as many on here, because to me it's a complete side issue in the scheme of things. I do think it would be good if the money could be got back without compromising democratic values, but I'd rather people got steamed up about the trillions, not the millions. I'd also rather people were more honest with themselves about the causes of this recession/potential depression, which are only partially the stupidities and frauds of the derivatives markets, and more profoundly the incapacity of government, corporations and individuals to live within our means for the last decade.
The money was for a bailout. It was not a handout. No company should have taken it without a fairly reasonable certainty that they would have gone bankrupt without it. If they did take the money, every one of their employees is getting any sort of paycheck, $20K, $200K, or $2M, because of the government. They would otherwise be on the street. If they took money without being in danger of failing, then they abused the system and should be punished for that. It works either way.
Bonuses? Get through the hard times, eat out less for a year, convince the wife/husband to cut back on her spa visits/his strip club nights, maybe only one vacation per year instead of three, pay back the money you took from the taxpayer.. and then go back to expecting a bonus.
This is mostly political theater in the House. I doubt if this bill will come up in the Senate and I think it is likely unconstitutional. The main thing it did was fracture the Republican caucus in the House. I suspect half the Republican caucus bolted on this vote because the flood of outrage from their constituents was overwhelming. Pelosi knew this and decided to use this moment to put the Republican lie about tax increases to the test. Eric Cantor was reduced to incoherency when he tried to explain his position on this one. The anger among House member's constituency was too great. Politically, it may have permanently broken the back of the Republican solidarity we saw during the stimulus debate.
As a technocrat, I agree with Nate. This is not good policy. I frankly think a better course of action here is to fix the regulatory system and go after some of the bad actors with criminal investigations.
Great job on this issue, Nate.
1.Most of the firms that took more than $5 billion in TARP money took it because they were encouraged to do so by the government. The government wanted these firms to lend again. JP Morgan, Wells, etc were not "bailed out" - they were in effect given stimulus money. This bill punishes those workers.
2. To people who say "why not wait until the companies are solvent." Deutsche Bank is already poaching a number of top employees from bailed out banks. Expect the other big multinational banks based in Europe and Asia to start doing the same.
3. The problem with people saying "just eat out less" is that for a number of these folks, bonus makes up a vast majority of their total income. If they have to service a mortgage, they may not be able to because their $100K salary doesn't allow for it, but their $500K annual bonus did.
To solve this issue, we need higher marginal taxes overall (like Obama has proposed), better regulation of the banks (which Obama and Geithner are working on) and better oversight of the TARP. We don't need income caps for hundreds of thousands of employees that had nothing to do with this mess.
If we pass any bill, it has to be narrowly tailored to majority government owned institutions like AIG, Fannie and Freddy.
Bonuses should come from shareholders. Dean Baker proposed this in something I read at TPM. It would more closely tie compensation to performance, and those who screwed people would have a hard time convincing the screwees to cough up bonuses. Shareholders would be the best judges of who's deserving.
Nate, forgive me for saying so but you seem to have a semi-blind sympathy for financiers. Brotherhood of Numbers, perhaps?
If Congress could pass a bill outlawing bonuses for specific people, I suppose they would. When collective justice is the only way, that's what you get. In this case, the head-exploding wrongness of the AIGFP compensations has ruined it for everybody.
Tomrigid - did you not read the bit about the GM engineer and the PNC admin assistant?
Boing,
Since you were wrong about me, perhaps you are wrong about "the vast majority". Or perhaps not, afterall, it is easier to act on a smaller more local injustice than to act on a large more distant injustice.
Yes, there are bigger issues, and I would disagree with anyone who said this is the worst injustice. But that doesn't justify not acting on this injustice.
Also, you were wrong - no one here "expects bankers to just give their money away". If we did, we wouldn't need government intervention. Instead, we know damn well that they won't give their money up by choice, which is why we want laws passed taking the money away from them.
And for the record Boing, I put my money where my mouth is and moved away from the US to a country where my wage was lower and the taxes higher but there was more equality. There is more to life than money, and inequality reduces the standard of living.
Let's all just hope that this bill gets slowed down and dramatically changed over the next few weeks; given the lukewarm reaction coming out of the administration and the pushback by liberal journalists and bloggers, this seems to be the most likely scenario.
We've talked at great length about the taxation issue, but another great point Nate made was the dropping of the ball in terms of framing the debate. Even trusted center-left news orgs like NPR are reporting the actual numbers ($165 Million of $170 Billion) knowing full well that the general public won't recognize the difference. Even worse, when the "experts" try to explain that it is in fact a small amount, they use "It's less than 1%" meme. It's in fact less than 0.1% of what was loaned.
It is too late now, but if the Treasury department had (last week) issued an early promise to keep more than 99.9% of the money from going to these bonuses, I think the American people wouldn't have flipped out so much.
Mr. Secretary, here is your talking point- "The AIG bonuses were not smart business decisions, but they were business decisions, made in the past, and the government has now stepped in. We are putting structures in place so that we can revive AIG and we can assure you that over 99.9% will go towards directly fixing the problem"
Boing - Eggs, omelette, etc...
The small injustice vs. large injustice issue is for ethicists. I say tax 'em all and let god sort 'em out.
If Congress could pass a bill outlawing bonuses for specific people, I suppose they would. When collective justice is the only way, that's what you get. In this case, the head-exploding wrongness of the AIGFP compensations has ruined it for everybody.
When one has the thread a needle in language in a bill just to not violate the Constitution, isn't that a pretty good indication that taking a deep breath and giving it some time and reflection?
We finally have a chance to give the American people good progressive government and this is what we give them? As I said before, I didn't vote for and support Democrats just so we can bring our version of the Bush administration to power. Some of the comments here are scarily similar to what we saw during the Patriot Act debacle.
Uberto, I understand the difference between billion and million and I also understand that the amount of money is small fry to the government. But it is the principle of thing - these people should not get a bonus. Even if it costs $160 million to get back that $165 million, I say go for it.
Also, why this outrage about the government stepping in and stopping AIG from making business decisions? AIG already proved they are incompetent at making business decisions, which is why the government had to step in in the first place. The entire bonus structure was one big bad business decision, so in a very real sense this is part of the necessary restructuring the government needs to do to fix up this ruined business.
Nate, you're living in a dreamworld. The designer of a hybrid will never get a bonus, nor the engineer, nor the assembly worker, tool-and-die maker, etc. Nor do any of the above make over $250K.
In reality the bonuses go to people with the word president in their title, salesmen, middle managers, buyers and other parasitic employees. Not to the people responsible for designing and creating the product that makes the company money.
Silly rabbit, Trix are for kids!
Dave, there are two ways to achieve inequality. One is to not have much difference between the highest and lowest wages (eg, Japan and Europe). The other is to have high taxes at the upper end of the income scale (eg, America during the new deal). Both work well. Great progressive change would be to move towards one of these two policies, but let's face it - great progressive change is hardly likely, is it? The best we'll see is this type of crude go-around. It is far from perfect, but it is better than nothing.
Adrian - The problem with the bill is that it applies to at least 12 other companies, not AIG, and impacts future compensation, not just current compensation. It's simply a badly written bill.
Zifferent - Senior engineers certainly do make over 250K.
adrian, and others who agree with him:
let's say that i was willing to lend you $20 million at a very low interest rate for a year. Now, you know some guy who's really smart, and is willing to work 70 hour weeks for you, and can, with a relatively small standard deviation, make you $20 million dollars on that money, while the average guy would break even. So, at the end of the year, let's say you end up with $19 million dollars. How much of that money do you think that smart guy deserves?
Adrian,
Since you were wrong about me, perhaps you are wrong about "the vast majority". Or perhaps not, afterall, it is easier to act on a smaller more local injustice than to act on a large more distant injustice.
I very much doubt I'm wrong about them, or I think the vast transfer of wealth from working- and middle-class Westerners to the developing world would have shown up in more promising places than receipts for Chinese flat-screen TVs.
As for acting on injustice, the point I'm making is about emotion, not action. We don't feel moral revulsion and righteous indignation in order to effect change (though that might be why the emotions evolved). We just feel it. Often hypocritically.
Yes, there are bigger issues, and I would disagree with anyone who said this is the worst injustice. But that doesn't justify not acting on this injustice.
Ditto. Acting on it is fine, though there should be an appropriate cost-benefit anaylsis, to avoid setting precedents that could later be abused, particularly by an extreme administration like the last one. Extreme emotionalism doesn't usually lend itself to good analysis of that kind.
Also, you were wrong - no one here "expects bankers to just give their money away". If we did, we wouldn't need government intervention. Instead, we know damn well that they won't give their money up by choice, which is why we want laws passed taking the money away from them.
No. If the general attitude was, "It's human nature to want to keep what's been given you, so let's bring some pressure on these guys to give it back," then it wouldn't be expressed in moral terms at all, or at least not in terms of moral disgust. The general attitude, between (and often in) the lines, is "These guys are greedy scum, beyond the pale, I'd find it personally satisfying if we could claw it back off them." It betrays hypocrisy and lack of self-knowledge.
And for the record Boing, I put my money where my mouth is and moved away from the US to a country where my wage was lower and the taxes higher but there was more equality. There is more to life than money, and inequality reduces the standard of living.
Sorry for being presumptuous about your particular circumstances. If you really have changed those circumstances to the extent that you're not on, say, a hundred times what a fifth of the world is on, then you're a better man than most, and not remotely hypocritical in expressing your outrage.
Antmatic, all 12 companies failed in business decisions or they wouldn't have needed to beg for a handout.
But regardless, they could write it to cover the entire financial industry and it would be a plus.
Ideally, I'd like to see a complete restructuring of the income tax brackets, with higher rates kicking in at $500K, $1m and $5m. Plus a bill that limits companies to paying no more than 100x the salary of the lowest income earner to any individual (so if the CEO wants to give themselves a big pay rise they'll have to bump up the people who actually do the work). That would be a good bill. This one is hardly in the same league, but it is better than nothing.
Adrian - As mentioned many times before, most of the firms were asked by the government to take the money as a kind of stimulus - some of them didn't want it.
I'm a liberal, but these income caps don't make much sense. The bill passed by the house is not an attempt to rewrite the tax code; it's a badly written attempt to get back prior bonuses from AIG that restrict future bonuses for hundreds of thousands of regualr employees.
For those that disagree...
Imagine the republicans having control of the executive branch, the house, and the senate. Maybe a 30% democrat registration, and 70% republican.
This sets the stage for the republicans to raise the tax rates on people who are registered democrats.
While they're at it, they can raise tax rates on people in gay marriages or people in urban areas or etc. etc.
Yes this is somewhat of a problem, but no that doesn't mean you can go about swinging a battle axe at it blindly.
The cure in this case is much worse than the disease.
The interesting thing that strikes me, as I read these comments, is that Nate's meta-point (that this is a bad law -for economic reasons-) is hardly addressed. People are still reasoning from anger and revulsion. I personally agree that targeted punitive laws are a bad idea, are bad policy, and are bad for the body politic. Not to get all apocalyptic, but one major cause of the instability at the end of the Roman Republic was the growth in "proscriptions": retaliatory confiscations of property. Sound familiar?
Some of the comments here are scarily similar to what we saw during the Patriot Act debacle.
This sounds like the calm, measured reaction of someone with a bit too much sympathy for the financial services sector. When there's blood in the water, you come with chum or not at all.
Ar, if we are going to talk about who actually deserves the money, it is the people who actually make things. What proportion of the cost of buying a pair of Nike shoes goes to the person who actually makes the shoes? The reason why, deep down, the American economy is tanking is that the priorities have gotten messed up, and the person who designs the advertising campaign and who finances the project earn far far more than the person who actually makes the product. Then the product manufacturing moves abroad and the entire edifice has no foundation. America got away with this slight of hand for a few years, but it was never going to last.
adrian-
i mean, that's not really responsive. i'm genuinely interested in your answer. you could take that money and do whatever good you want to with it, but you can't do that without that really smart guy. So how much is he worth?
This sounds like the calm, measured reaction of someone with a bit too much sympathy for the financial services sector. When there's blood in the water, you come with chum or not at all.
Yes, for god's sake let's not be calm and measured. What we need is pitchforks...
Nate, your reasonable take on this subject is much appreciated. Still hard to believe the MSM is letting this annoying issue, which is trivial in the grand scheme of things, dominate the economic news. SURE it pisses people off, but gosh, it's almost as if folks don't realize that 170 billion is A THOUSAND times bigger than 170 million.
If you lie down with dogs, you get up with fleas . . .
Hang in there Nate. From the tone of your post seems like you have been getting some flack from the Left. Chin up you know what you are talking about.
Still hard to believe the MSM is letting this annoying issue, which is trivial in the grand scheme of things, dominate the economic news.
To this, and to Nate's general point about the peril of letting the politics trump the economics, I say: don't oversimplify.
There may yet be several years of expanding government intervention in the economy which all you newfound Keynesians will find swallow like horsepills.
Politics is the necessary art of making those horsepills go down the body politic, and if Congress and the President are too calm or measured now they risk losing their ability to enact meaningful policies later on.
I agree that this sort of tax-code justice is ugly and probably ineffective, but don't make the mistake of thinking that it doesn't matter. The politics and economics of this situation are inextricable, and will be for some time.
Nate,
The issue compensation and bonuses is much more insidious than what has been discussed or reported. In fact the whole wage system rift with contingencies that work against creativity and productivity. The easiest and most accessible source of information on this is Bill Abernathy's "Managing without Supervising." In it he presents the case for a performance based pay system based on true-i.e., replicated, research based--principles of human behavior. Bringing that data base and set of guiding principles into the discussion would open up whole new possibilities for reform and sustainability.
All,
I complianed about this to my sister and she responded about who will pay for healthcare, and do I really believe in our current regressive tax system. The following is my reply and better states what I was trying to say yesterday.
I really believe that we (and by we I not only mean U.S. tax payers, but [my wife] and I as upper income earners) need to pay more in taxes. I believe that our top rate needs to increase and that we need to add one or two additional rate brackets with even higher taxes. Right now both our top tax rate and the earnings cut off for the top rate are at or near 100 year lows.
I believe that we need single payer health care or at least a major overall of our health systems.
I believe that benefits should be taxed as the wealthy buy the more expensive benefit options and therefore get larger tax breaks.
I believe that the home mortgage interest deduction is the largest government give-away on the books and only benefits middle and upper income as renters get no similar deal. Either extend it to renters or phase it out (it has to be phased out because we can't punish those who bought at a level knowing they could afford their payments because of its existence - much like we shouldn’t be taxing bonus money after the fact, no?).
I agree that often policies need to be tweaked as we discover their limits and limitations.
All of these things I believe.
The problem is that TARP was created as a stimulus package. Banks were withholding cash to cover potential losses leading to a severe and crippling credit crunch. Many were fine and some were in real trouble.
All banks in the FDIC were required (ok – coerced not legally required) to take TARP money and lend it. The size of the TARP funding for each bank was based on the size of the deposits protected by the FDIC, not by any metric of the health of the bank. Small banks that were in trouble were still allowed to fail because TARP did not actually address their balance sheet. It was money in money out. That is why there is still a record number of bank failures occurring.
A few 'too large to fail banks' were forced into marriages to stave off a chain reaction among investors and bond holders such as Washington Mutual (to Chase) and Wachovia (to Citi but taken off the block when Wells stepped in without gov. assistance). These were with non-TARP government guaranteed assistance. I.e. Tax payer on the hook for rescuing dead banks and as such the government deserves control.
The problem is that the purpose of TARP was then muddied when those funds began being used as bailout funds. This occurred specifically with AIG (a non-FDIC financial institution which received its first (maybe first two) bailouts from sources other than TARP), GM (see AIG), Citi and BofA.
So now TARP is both a bailout and stimulus program. But all the banks are having the terms of their participation changed. Originally one board seat was for the government if the bank missed a payment. Now two must be reserved regardless of if the bank is performing or not, leaving every bank two board seats empty and its common stock shareholders with fewer voices on the executive boards. Now there is also this bonus issue that is being applied after the banks have paid bonuses. Perhaps Wells would have suspended everyone's bonus this year and paid back TARP with some of those funds in advance but now can't 'cause it is their employees bank accounts. In effect turning TARP into a Ponzi scheme for the government. The banks are still on the hook for the TARP loans but also having their employees pay a punitive 90% tax in addition.
My issue therefore is not about who pays for government or what is the fair share for individuals with respect to each individual’s ability to pay, but rather about fairness. We don’t change the rules after the game begins. If I have a home loan and pay my mortgage, I don’t expect the bank to have a say on the value or appropriateness of an addition I might make. If I add four bedrooms I don’t need, the bank can’t decided that it gets to use three of them just because it was a bad decision. If I miss my mortgage payment, go ahead and foreclose, but otherwise it is my house.
Due process, rule of law, play by the rules. Left or Right, it still should apply..
Boing -
Well, I guess I'm one of those people who "thinks with my chimp brain" on this issue.
Luckily, my chimp brain seems to work better than your human brain.
First of all, there is a huge loophole in this legislation - you can always continue to reward people by increasing their salaries.
Second of all, the alarmist examples of design engineers and so on are silly, because those positions are largely compensated by salary anyway.
Third of all, there will be deserving people who are unfortunately affected by this, but that's not the fault of the taxpayer, it's the fault of the executives and directors of AIG for coming up with an outrageous policy in the first place, and then expecting the taxpayers to swallow it. (*As described previously, the idea was that the CMO traders were to be paid a generous commission on profits, and were paid millions, but then when they lost money, compensation was switched to a match of what they had earned in commissions the prior year*.)
You seem to confuse an insistence on economically rational compensation with a "resentment".
I've noticed a strong desire to be submissive and groveling in a fair number of my fellow Americans, when it comes to finance. Madoff investors were the same way. When they explain their investment, we hear a lot of "I assumed he was so much smarter than me that I just did what he commanded...please don't hurt me..."
Those who think senior engineers make over 250K are smoking crack. It's the people who "manage" and sell who make the big bucks, not the people who create.
First of all, there is a huge loophole in this legislation - you can always continue to reward people by increasing their salaries.
Great, so legislation that's cost considerable political time and capital at a moment when the US can afford to waste neither will also likely be easily circumvented. That's certainly a terrific argument for the legislation.
Second of all, the alarmist examples of design engineers and so on are silly, because those positions are largely compensated by salary anyway.
Third of all, there will be deserving people who are unfortunately affected by this, but that's not the fault of the taxpayer, it's the fault of the executives and directors of AIG for coming up with an outrageous policy in the first place, and then expecting the taxpayers to swallow it.
No. If legislators draft a law that punishes a large class of people for the wrongs of a small number of miscreants, that is not the fault of the miscreants, it's the fault of the legislators. Just step back and think of your logic in the hands of the next Dick Cheney. Carnage.
You seem to confuse an insistence on economically rational compensation with a "resentment".
No I don't, as I'm in favour of considerably higher taxes for high income earners than existed under Clinton. I also have no issue in principle with these payments being renegotiated. If so, it should be done calmly and analytically, not frantically and emotionally, and if the government perceives that it can't be done without compromising far more important issues in the current catastrophe, it shouldn't be done at all. I suspect this was the decision that was in fact taken by Geithner, if he was aware of the payments at all.
Wow, rarely have I ever agreed so completely w/ a commenter on a blog. Boing is exactly right.
"I'd be happy to pay an employee a million dollars if he made me two million".
Nate, this does not align compensation with long-term performance. Further, this is the type of economic friction that led to the problems in the first place. The incentive is to make money fast so you can get a big bonus, as opposed to creating long-term value.
Yes, it's a bad law for those who actually create. The engineer that you mention, who will never be offered a bonus like this, by the way, would in theory get the shaft. I would feel terrible if those engineers had their bonuses taxed (though they did still get a bonus in a year when the company did not perform well) at 95%. That said, a company cannot get the bonuses back if a design flaw leads to millions in losses (Ford Pinto anyone?).
The reality is that most bonuses are tied to the firm's performance and the individual performance. If the firm performs poorly, it is hard to justify paying bonuses to anyone, especially when paying those bonuses further puts the company in the hole.
According to payscale.com, the median salary for electrical engineers with more than twenty years experience is $95,000. People in that income range are likely to have some income other than salary from the primary employer; particularly talented engineers, who may have side consulting, patents, or royalties.
And the $250,000 figure is a bit misleading. That's family income. If our hypothetical engineer is married to someone who earns the same as they do, the threshold is really $125,000.
So it's clear that many skilled, experienced engineers will hit this threshold.
And the House bill is written so that the amount of the bonus doesn't matter. If the family income of the engineer exceeds the threshold, and they earn a $10,000 bonus--it's confiscated.
Do engineers get paid bonuses? Yes.
So I don't think the examples involving engineers are hyperbole.
This only effects a ferw companies, lets all relax and move to something that matters.
How about looking at what Obama will do to all folks making over 250K if his home mortgage deduction limitation goes in, his FICA change making all income subject to social security taxes, and the increased tax rate on the households. If you want to argue 250K is not rich, then all these changes are much more meaningful than a change at a few companies - most of which should be allowed to go bankrupt.
Not only that, the income of an engineer is across the entire country, look at it in New York where a lot of these companies are located and you will find a lot more people above the line because the cost of living is reflected in the salaries. There will absolutely be more people affected by this that don't deserve it than those that do. The proper solution is to start playing hardball and like Barney Frank has been saying - insist that the government owns this company. If I were an investor in a company and I owned an 80% stake, I would make my weight felt if they were driving it into the ground. The government needs to act like a private investor if they are going to hold a stake that large. Instead AIG basically is accountable to no one.
I'm OK with the bill. You take government money, you play by government rules. If those rules force you to make less than $250K/year; I'm OK with that. I don't think anyone in the government makes that much, except for the president.
This should be the start of cleaning up the crisis, though, and not the end. First, we need to staff up the Treasury Department. Second, we need to figure out which banks are healthy and which are not. Measures of health should also include the credit these banks are extending. Lastly, we need to nationalize those banks that aren't healthy and aren't lending. This latest bill is one way to see which banks are healthy and which banks aren't. Healthy banks won't take the money, and sick banks will. This bill is a pre-nationalization of sorts, and I'm OK with it.
Thanks Will for the kind comment.
There seems to be an assumption at large that financiers don't 'create.' This is nonsense. While it's certainly true that in the last decade a large number of them have taken some extremely stupid risks, it's hard to overestimate the role of finance in the acceleration of prosperity over the last six hundred years or so.
There's nothing wrong with debt, and its associated products, in themselves. The ability to spend future earnings now is crucial to investment in countless thousands of ideas that otherwise wouldn't have got off the ground. The mistake lay in assuming that growth will be essentially eternal.
And the $250,000 figure is a bit misleading. That's family income. If our hypothetical engineer is married to someone who earns the same as they do, the threshold is really $125,000.
So it's clear that many skilled, experienced engineers will hit this threshold.
Right, because "many" senior engineers are married to people who make the same or more than they do. Get a grip; this is not a common case, and painting it as people earning $125,000 a year is completely misleading. Less than 2% of the entire population has a household income of greater than $250,000.
There may be valid arguments to be made here, but this isn't one of them.
Former AIG CEO Hank Greenberg says the bonus system that they had rewarded good work and was not guaranteed. As reported on HuffPo, "When I was there, nobody had a contract with the company, including me," Greenberg said in a nationally broadcast interview Friday. "If you didn't do the job, you didn't deserve to be there. We had a bonus plan based on performance."
Greenberg's interview was broadcast this morning on CBS's "The Early Show. . . ."
wv: pubes (no comment)
I liked Nate a lot better when he was crunching polls and stats (something he knows something about) than in his new guise, Stalwart Defender of the Ancien Regime. To his point that the new legislation may sweep too broadly, I would say that its overbreadth serves a useful purpose - to encourage the others, as the French like to say. We've had thirty years of people in the finacial industry playing games with our money, from the S&L mess to this, with no realistic penalty being paid and no message sinking in that we won't tolerate it. The Masters of the Universe toying with our fates (like flies to wanton boys, killing us economically for sport) need to know that we ain't playing any more and to modify their behavior accordingly. If the legislation promotes that, all to the good.
Nate may now resume his full-throated defense of the powerful, comforting the comfortable, and telling the rest of us (afflicted by the comfortable) to fuck off.
Nate you missed a key point. This bill applies ONLY to firms that have accepted Federal bailout funds that have effectively transferred ownership to the government.
Without these finds these firm would have collapsed. Ten where would the bonus monies have come from? This is misuse of shareholder funds and that is why there is such anger.
Michael Dickerson
Albert--I agree with most of what you said, but strongly oppose this bill.
The $250,000 is misleading, as it's family income. For married filing separately, it's $125,000. Every elected national office pays more than that.
In 2007, the average pay for a lawyer working for the federal government was $120k. Surely many made much more than that.
By the way, there's one unintended consequence of this bill that I haven't seen discussed: it encourages divorce. The limit is $125k for married filing separately, but $250k for single. In some cases, the bill could amount to an incentive of more than $100k to get divorced.
Redshift: High income people tend to be married to high income people. In some cases the spouse might not work, but that's not as common as it used to be. I don't have statistics at my fingertips to look this up, but I would bet more than half of the $250k+ family income people in the US earn considerably less than $250k per individual.
Battuta: Not quite true. They have to have received more than $5 billion. They were encouraged to take this money. Many, such as JP Morgan would not have collapsed. For many, the government stake is considerably less than 50%.
Summary: This is a poorly written bill.
Re my earlier posting about ex AIG CEO Hank Greenberg, I should have done some due diligence. Located this on a blog by Larry Roibal:
"Founder of AIG, Hank Greenberg, was forced to leave the company in 2005 under threat of indictment by New York’s (then) attorney general Eliot Spitzer, but not without a very nice golden parachute. As PART of his deferred compensation, he received 3.7 million shares of AIG stock in January of 08. At that time AIG’s stock price was in the mid 50’s making the payment worth about $200 million, for which he paid $70 million in taxes. Today AIG’s stock is valued at 42 cents, making those same shares worth 1.5 million. Now Greenberg is suing his former company claiming they hid their exposure to sub-prime, artificially keeping the stock price high. I guess he’s in a position to know. Yesterday on Bloomberg, current CEO Liddy claimed that Greenberg was at the helm during the formation of AIG’s financial products unit, which sold derivatives that cost the company more than $30 billion in writedowns and prompted a government rescue. The worst part is, since AIG is being kept afloat with taxpayer money, should Greenberg prevail, you and I would pay the settlement. That’s rich!"
But in so doing, it will make it harder for the companies to align performance and rewards.
Nate, there is copious evidence (from those who've looked at the AIG "retention bonus" contracts, for example) that most of these companies reward performance when the company was doing well, and emphasize "retention" when performance tanks, resulting in rewards for short-term risk-taking, not long-term performance. In that light, pressure to increase salary rather than giving bonuses in response to good performance is arguably a good way to fix what is wrong economically.
I find it a little hard to swallow that an incentive structure that led companies to crash the world economy fits any sane definition of "aligning performance and rewards" and on that basis must be allowed to continue.
The real problem here is that we've invested enough in these companies that the taxpayers really should own and control them (controlled bankruptcy), but since the Republicans have made "nationalization" such a boogeyman, we're left in the position where the taxpayers are the effective shareholders and must be satisfied with the operations of the company they own, but they don't have control in the normal sense. So we end up with indirect actions like this when the taxpayers are unhappy.
Boing (and Nate, and SarahLawrenceScot, etc) -
No I don't, as I'm in favour of considerably higher taxes for high income earners than existed under Clinton. I also have no issue in principle with these payments being renegotiated. If so, it should be done calmly and analytically, not frantically and emotionally, and if the government perceives that it can't be done without compromising far more important issues in the current catastrophe, it shouldn't be done at all. I suspect this was the decision that was in fact taken by Geithner, if he was aware of the payments at all.
Oddly, I agree with all of this. I guess I see where you are coming from. The hyped up media explosion is distasteful.
Yet I am strongly in favor of stopping these bonuses dead in their tracks. Ten percent still seems overly generous to me.
If a future Dick Cheney targets people based on their political affiliation, ethnicity, etc, then that violates the constitution and I vehemently oppose it.
If a future Dick Cheney puts the kibosh on a secretive scheme by an incompetence-bankrupted insurance company to hand out massive millions in unearned compensation to a group of traders at taxpayer expense, well, I wouldn't expect any Dick Cheney, present, past or future, to do that, but if he did, I'd agree with it.
AIG had a very clear alternative. They did not have to accept the bailout money, which in their case, was never anything but a pure bailout.
If they wanted to avoid government controls on their activities, they could have refused the money. They could have gone bankrupt, or tried to reach a private deal with creditors.
They had another choice, as well. They could have, immediately upon receiving the bailout money, reviewed extremely large compensation packages, and voluntarily offered to moderate them. That type of activity is often referred to as "being transparent" or "acting in good faith", and it tends to be a good course of action in many circumstances.
People are outraged because AIG's behavior WAS outrageous (and Geithner may have been complicit, which does not make AIG any better).
Sometimes outraged people are an irrational mob, but sometimes outraged people do the right thing.
I'm going to shut up about this now, because all of the bonus defenders seem to be people I agree with on most other issues, and it's moot now at any rate.
"I'd be happy to pay an employee a million dollars if he made me two million."
Really? Because that's exactly the problem with the bonuses that you discussed a couple of posts ago: Why AIG Paid the "Bonuses". There are many situations where an employee can pull in boat loads of short-term cash on risky investments (or at least there were once, and there will be some time in the future).
Of course there are good reasons to give employees bonuses, but maybe a bonus isn't the right incentive. Maybe companies SHOULD be focusing on giving successful employees raises so that they are motivated by the long term success of the company.
Well said, Harold.
I'll have one more say and then probably shut up myself.
AIG's behavior was outrageous, all the way along the line. The compensation should have been reviewed, and should be reviewed now. We own AIG; we should consider options like orderly bankruptcy.
One of the problems, though, is that this bill, in an effort to be constitutional, ends up catching all sorts of other people in its net. We should be asserting ownership rights, not raw legislative power.
And one technical note. This is a 90% federal tax. There are still state and local taxes. This bill is designed to make it close to 100% confiscation.
Initially, I understood the outrage about the bonuses. Then I thought back to 2001 and 2002. I was working for a large company. After 9/11 and the resultant downturn, the company began to execute layoffs. As well, it unilaterally changed the bonus plan - agreed to and based on personal and company performance - from cash to options. Not a surprise, the strike price of those options made the bonus effectively zero or less.
At the time, we all knew that times were tough and the company had to tighten its belt - layoffs, reduced travel, reduced perks, etc.
However, in changing the bonuses, they unilaterally changed the rules and messed with our compensation. And nobody was happy or understanding.
While I hate the idea that AIG would pay out bonuses while sucking on the government teat, despise even more retroactive changes to contracts and compensation, such a taxes applying where none applied before. The first is immoral. The second is evil.
If you want a professional finance dude making the same point that the risk of under-reacting to this mess is far greater than the risk of over-reacting, check it out:
http://www.voxeu.org/index.php?q=node/3232
His post was directed more toward the question of regulation rather than the narrow bonus issue, but his point about adjusting NOW the perverse incentives of our economy-crashing financial "leaders" is a good one.
On one hand, I agree with Nate that this is a silly bill, populist outrage over the $165 million in AIG bonuses doesn't understand orders of magnitude, and certainly I wouldn't apply a punitive tax to the first few thousand dollars of bonus, as in the case of an administrative assistant married to a lawyer. But Jamie Dimon? The broader context for me is that the government has racked up at least a trillion in debt by undertaxing people like Jamie Dimon for decades, and especially for the last several years under the Bush administration. If the House can find a 2/3 majority for a 90% tax in certain cases, maybe it'll eventually get a majority for a modest but serious tax increase on the wealthy once the economy recovers.
Nate,
I have strong doubts about the wisdom of legislation written out of reactive impulses. That said, are you sure that the correlation between bonus compensation and performance is as strong as you seem to be assuming? You should perhaps look for some data on that. I'd thought it was you, actually, who had been writing about attribution asymmetry with respect to performance bonuses a day or so ago; I can no longer find the article, however, so I'm no longer sure who it was. To encapsulate, however, performance bonuses should be subject to a severe 'ratcheting' effect due to the shifting of causal attribution: bonuses will be happily paid in a time of abundance for market performance which is not demonstrably caused by any action of the party in question, but will not be as easily reduced in times of scarcity so as not to 'punish' the party for market conditions which are 'not their fault.' The AIG bonuses which had been negotiated are themselves are a case in point: they were locked in at 100% of 2007 levels precisely because it had become evident that market performance would be poor in 2008, and that as a consequence the bonus compensation would have been disappointing (and presumably 'unfair').
Nate- Mad props on getting name dropped on the Diane Rehm show (NPR) just now. This is the second time on NPR this week, after your friend's open letter to the president on muslim relations was read on This American Life.
If a future Dick Cheney targets people based on their political affiliation, ethnicity, etc, then that violates the constitution and I vehemently oppose it.
If a future Dick Cheney puts the kibosh on a secretive scheme by an incompetence-bankrupted insurance company to hand out massive millions in unearned compensation to a group of traders at taxpayer expense, well, I wouldn't expect any Dick Cheney, present, past or future, to do that, but if he did, I'd agree with it.
No-one's doubting your reasons for supporting this particular punitive, retroactive targetting of particular private citizens. Most of us agree with you in not feeling any sympathy for the ones at AIG. The problem is the precedent.
You'd vehemently oppose Future Cheney legislation
that you felt was wrong or unconstitutional. But the precedent would have been set, and if he had a majority of the kind the Dems have now, he'd have a good chance of pushing it through.
Neither Terry Schiavo nor the Patriot Act are perfect analogies, but they're along the right lines.
They had another choice, as well. They could have, immediately upon receiving the bailout money, reviewed extremely large compensation packages, and voluntarily offered to moderate them. That type of activity is often referred to as "being transparent" or "acting in good faith", and it tends to be a good course of action in many circumstances.
Well, they claim they couldn't, without losing the only people who could wind down their positions really quickly, which was the greater need.
But if we assume they could, then yes, ideally that's what one would like to have happened. i don't think anyone disagrees on that. The relevant question is, given that it didn't happen, what should be done next? That ought to take into account the wider context, even if it means the lesser of evils goes unpunished.
Sometimes outraged people are an irrational mob, but sometimes outraged people do the right thing.
That's true, and I hope it does turn out to be the right thing. As a general means of going about dealing with extremely complicated and delicate situations, media-fueled irrational mass rage is not great. When the consequences could be genuinely globally catastrophic, as is the case with AIG (whose paper liabilities technically ran into the tens of trillions), I'd argue it's a terrible approach. But it's true that when a systemic shake-up is required, it can be the only way of making it happen.
I agree with SL Scott that the best option would be straightforward, transparent nationalization where we own the place and either run it the way we want or dissolve it in orderly bankruptcy proceedings. But Tim and Larry have decided that's Bad Socialism Talk (oh no!) so we're left with AIG subsisting on our money but not answerable to us in any way. Given the practical straitjacket in which this puts us, the tax option may not be ideal, but it's the only lever available to correct what is an abuse of our money and our trust.
Regardless of whether the tax is right or wrong, it seems that congress is rushing into it, perhaps without due diligence. It's only March, there's plenty of time to make a change to the tax code before the end of the year. Why not spend a few weeks taking a deeper look?
Wow! I can't BELIEVE how many stupid people there are posting here!
What part of "the government is going to get its ASS sued off" do you people not understand????
All those companies (GM comes to mind) that will lose their BEST PEOPLE because they took government money BEFORE SAID GOVERNMENT RETROACTIVELY CHANGED THE GAME ON THEM are going to have one HELL of an excuse for suing for damages in the TENS IF NOT HUNDREDS OF BILLIONS OF DOLLARS!!!!!
How can they possibly compete against, say, a Toyota, that won't have this sort of burden to contend with? Think about it: If they go down, FOR WHATEVER REASON, they'll be able to blame the U.S. government!
STUPID, STUPID, STUPID!!!!
I as a taxpayer am OUTRAGED that you would risk my tax dollars in this manner!!!!!!!
Redshift: High income people tend to be married to high income people. In some cases the spouse might not work, but that's not as common as it used to be. I don't have statistics at my fingertips to look this up, but I would bet more than half of the $250k+ family income people in the US earn considerably less than $250k per individual.
I suppose it would depend on your definition of "considerably less", but I still very much doubt it. Let me know if you find that statistic, because in my experience, two-earner couples who each make more than 100k are extremely uncommon. But the fact still stands that it's not "many," at best we're talking about a tiny fraction of the less than 2% of households that are 250k and up, since it's only in the 250-500k range where it's possible for both earners to make less than 250k individually.
And people getting divorced so they can avoid taxes on their bonus? Now you're into anti-tax fantasy land. If you're really concerned about the divorce rate, the tax on that bonus could prevent multiple divorces by supporting people who are suffering on the low end of this economy than by worrying about the highest earners fiddling with their tax brackets.
I'm going to mercifully shut up too in a minute. I do think there's a lack of understanding of exactly how exposed AIG is/was, and how intertwined that exposure was with the whole financial system. If "too big to fail" is true of any institution, it's true of AIG. It really could have sunk the ship. That's what Summers and Geithner had to address. Remuneration is a big issue from the moral hazard POV, and I don't mean to diminish it, but in the present situation it was dwarfed by the cataclysm looming over them.
Tristram - how do you get from 'people like Dimon are undertaxed,' which I entirely agree with, to that 'racking up at least a trillion in debt'?
Waiting for Nate's next post to explain why Obama's making fun of the Special Olympics is actually the Most Brilliant Move Evah!
Since I said the same thing here last week, I guess I have to agree with you:
>>But I also think there have been political failures here: the Obama communications team failed to nip the AIG story in the bud to the point where it blew up on them and the political pressures on the Congress became irresistible.... a lot of the debate has evolved from false premises.<<
If Obama had said he was forming an interagency task force to investigate with the intent to prosecute any people who committed mortgage or securities fraud or corruptly benefited from such fraud, he could have got ahead of this.
When the packagers leaned on the originators for more loans, preferably the more profitable subprimes, they were fully aware of the corners their partners were cutting to fill the demand. To then go to AIG for their AAA blessing knowing that a substantial number of mortgages were fraudulent was a criminal act regardless of any disclaimers.
I can sell you all right title and interest I may hold to the Brooklyn Bridge, and that disclaimer will work, but if I broker the bridge to you for a third party who claims to own it, knowing this to be false, no fancy disclaimer will save. Even an integration clause (this document represents the entire agreement superseding all other agreements, representations or understandings...) won't save me if one of those representations was fraudulent and not retracted.
Given all the footprints these guys left, I expect they're going down. However my confidence in this is clearly not shared by the general public. If Obama want's freedom to maneuver, he's going to have to show people that the crooks will be going to jail and disgorging their loot. If people can't get their money back, they at least want to see justice done. They don't see much sign of it.
If Cassano and crew were under indictment, then Obama could say - "See, these were the bad guys and they're going to jail. The rest of the 30,000 AIG employees are blameless and the traditional insurance operations are solvent and tightly regulated by state and federal government. It would be catastrophic if all the many millions of customers with AIG policies had to find other insurers. Large sections of the economy can only legally operate when properly insured and many others would choose not to take the risk of operating uninsured."
The memo AIG wrote for the Fed on the consequences of a bankruptcy is frightening, even taken with a large grain of salt. People understand what it would mean to have no homeowner's insurance and see doctors without malpractice insurance.
Why aren't we hearing this from the administration?
My thanks to (almost) everyone here for the informative interpretations and exchanges of information.
The absurd assumption you're making here is that the main reason one would come up with ideas for an energy-efficient hybrid vehicle or that new technology for wind turbines is for monetary compensation -- the jingoistic idea that the only driving force behind pioneering ideas is a big paycheck or a fat bonus. I reject the entire premise and instead offer the possibility that some people get a sense of satisfaction from their work and perhaps want to improve the condition of humanity, perhaps in a moral egalitarian way or maybe just simply to improve the world for their own offspring.
And even if you accept the money-as-sole-incentive paradigm, then you can just as easily argue that this kind of law would drive workers to get their company "out of the hole", so to speak, so they can once again become strong enough in the private sector and to no longer be subject to any bonus caps.
I will never feel sorry for those households who are making more than 250K/year if they get docked a little bit of pay. They will get by just fine without their bonuses, especially since low income workers can barely survive in an economy that has fallen apart! Whatever happened to service to your country and making sacrifices for the greater good? The notion that taxpayers should have to reward these people for doing the jobs they probably (with a few exceptions) haven't been doing right in the first place? I said this in a previous thread -- bonuses are supposed to be for examplary work, not just on a personal level but also on a company-wide level and are supposed to encourage teamwork, not competition. They should not be an expectation, and this whole debacle just plays into the Americans as greedy consumers meme.
I have serious doubts about GM senior engineers making over $250k. If they do then perhaps they really don't need those bonuses anyway.
@ Redshift
I disagree with your assessment of households with combined incomes over $250k. Any two-earner households with combined income over $250k will be hit, whether the earnings are split equally or not. Take Nate's comment about the administrative assistant who is denied a bonus because she's married to a lawyer. The point is that this punitive tax is applied to someone at a financial institution because their spouse is well-paid. That is messed up.
BTW, I'm in one of those two earner households with two professional incomes. I don't think they're that rare.
Why do we need $1 Mil.+ bonuses as incentive for making the world a more livable and clean place for the majority?
If you make $250k a year you have more than enough to live on. Go jump in a lake if you feel like you deserve more than that.
Redshift: I concede the bet.
I was guessing that the vast majority of family incomes above $250k were in the $250k - $500k range, but it doesn't appear to be true. Although it's hard to find statistics separating out these very high ranges, it does appear than approximately 1% of households exceed $1 million in income, while roughly 2% exceed $250k. Since some presumably make between $500k and $1M, it's not possible for me to be correct.
So, a rough estimate: perhaps 25% of households making more than $250k earn less than $500k. I looked, but I can't find information that's even remotely current on correlations between spousal incomes in the United States. So let's say in one-third the cases between $125k and $250k neither partner makes more than $250k (I'm making the estimate much lower than I would have because the large fraction of $250k+ compared to $1M+ suggests it's easier for one person to earn $250k+ than I thought). That brings me to an estimate of 8%. I'd call that more than a "tiny fraction," but it's much less than I thought it would be.
It would be catastrophic if all the many millions of customers with AIG policies had to find other insurers. Large sections of the economy can only legally operate when properly insured and many others would choose not to take the risk of operating uninsured."
The memo AIG wrote for the Fed on the consequences of a bankruptcy is frightening, even taken with a large grain of salt. People understand what it would mean to have no homeowner's insurance and see doctors without malpractice insurance.
Why aren't we hearing this from the administration?
Yes, this is what needs to be hammered on. Insurance underwriting is a very capital intense business. Because AIG's marketshare is huge it is extremely unlikely that there is enough capacity to take up the slack. Because of the capital requirements it is also very unlikely in the short term, because of market conditions, that new insurance companies could be formed or the existing ones grow, to fill the gap.
The relatively streamlined FDIC process that stands in for standard bankruptcy was put in place for the critical services of banks way back when was not put in place for insurance companies. This is just making stuff up as we go now, trying to avoid that "learning curve" crash that we went through in the 30's.
It isn't that hard to explain, I think? As you say the public has at least an elementary grasp on how things would grind to a halt if insurance policies weren't available.
Here's a link to a spreadsheet on the IRS website that breaks down AGI (adjusted gross income). This would be HOUSEHOLD AGI.
138M tax returns, 4M (3%) with AGI of 200K or more.
http://www.irs.gov/pub/irs-soi/06in23ar.xls
This is from tax year 2006, the most recent stats available on the IRS web site.
Bernanke just gave a GREAT sppech. He is the star of this crisis - fire Geithner and Summers and give him the reins.
I have to disagree with you Nate. Right now, bailed-out companies need to stop exorbitant compensation. All of them, including your examples. After they've paid back the taxpayer money, they can do whatever they want.
I hate this shit. It reminds me of the runup to the Iraq war.
Frankly, I find the manner in which we have distributed bailout money to be distasteful. The near total lack of regulation and oversight is a sucker's bet. And don't give me that 'free marketeer' crapola about regulation being bad for the market-if deregulation were so good, no bailouts would have been needed to begin with.
Wrong + Wrong
Is that right now?
One thing that bothers me about the "drop in the bucket" argument: the $170 billion (or, as xkcd puts it, $170,000 million) is obviously much, much, much more than $160 million.
But the $170 billion seems necessary to save the economy, for many of the reasons stated. The $160 million doesn't. And the argument that the $160 million is, depending on who's making the argument, can sound an awful lot like extortion.
Obviously neither may all be going to/taken away from the right places. Both numbers might be too big, or vice versa, or neither. But even though the ratio is very high, you have to consider the purpose of each figure.
First, this only applies to firms receiving bail out money from the government; not to all firms.
Second, the proper way to incentivize people is not with bonuses but shares in the ventures they work on. It is brain-dead simple for a large corporation to spin off a project as a separate corporation which they fund and own, and to give key employees shares in said corporation, and to buy those shares back at increased value if the employees succeed. Voila. Bonus. The rest is details.
Third, Nate misses the central fact of this entire discussion: These companies are bankrupt!
If you want to reward performance, reward it after they perform and after they pay back the bail out money! That will reward loyalty, and risk taking, and put some skin in the game for the employees that stay.
If you want to talk economics, lets talk about supply and demand for the services of these employees earning $1M bonuses. If there is truly a market for them, where they generate more than their pay, let them go there, why would we want them continuing their current role in a market that we hope will never exist again? We are shutting down these products, shutting down these business models, and these guys don't belong here! If their brains or charisma or sales talent or whatever is truly worth their pay, let them prove it and help the economy recover, don't let them sit on their duff and mull over the swatches for their new $10M offices.
Sorry Nate, but you're full of crap on this one!
NO company which is required to get BAILOUT money should pay ANY bonus to ANY employee for ANY reason. Period.
NOBODY whose company is receiving public money as an alternative to bankruptcy is "worthy." NO-ONE!
That they thought they could get away with this and are whining about how terrible it is that the government is going to seize their bonuses, is just a sign of how totally divorced from reality the American elite really is.
They not only live by different rules than the rest of us, they think this is perfectly normal and RIGHT! No matter what they do, they have created themselves as a class who cannot be touched.
Well, they might as well get used to it, because this is just the beginning of public anger at the elites who have caused us so much suffering! Screw them and the horse they rode in on if they don't get it.
" If I were a Senator's Chief of Staff, I'd probably tell him to vote for it."
This is probably one of the biggest problems: "It ain't right, but to get re-elected I'll vote for it."
I'm upset at the witch hunt. There should be NO bailouts. If you are going to have a chance to succeed, you got to have a chance to fail.
You're very attentive when rich people are getting screwed. Why don't I ever see you post anything about how the working class and the poor are getting fucked over?
This is just like how Repugnants talk about welfare. They decry it as a catalyst for idleness. The idle poor is a bad thing, but the idle rich is a good thing? Listen, if you agree to the abolition of inheritance, I'll let you gut welfare. Since idleness is the great evil here, it shouldn't matter who's being idle-rich or poor.
Likewise here, if you want to stop the taxation of executive pay bonuses, then let's stop cutting entitlement programs aimed at assisting the poor. Why should AIG execs get all the bailouts when you can't bring yourself to give a bailout to the homeless family that lives on my street?
Nate Silver, you have a big blind spot when it comes to the lower-income people in this country. You may have crystal clear vision of the wrongs faced by the rich, but where are you when it comes time to focus on the poor?
Your double standard is appalling and inhumane.
OK, I'm confused. Casual Observer's link to IRS data shows completely different numbers than census data from the same year.
Given that this is a statistically-oriented site, I'm sure someone knows the reason. Care to enlighten me?
A senior engineer at General Motors, who shepherds the production of a new hybrid vehicle that will turn out to be a best-seller, shouldn't get a bonus for that. Really?
Nate, one thing I would say from personal experience here is that a lot of people in engineering jobs are taking benefit or pay cuts already as part of the recent economic issues-- even at very healthy companies. In fact checking google one finds that General Motors employees appear to be currently this year subject to an across-the-board paycut already, regardless of $250,000 income or not (the cut is more severe for employees classified as management). I'd have to wonder, are, say, JPMorgan Chase and PNC doing this sort of thing? And if not, is their ability to comfortably operate without payroll adjustments linked to their unique ability, as financial sector companies, to get very large, very favorable loans directly from the government despite doing, as you describe it, "fairly well"?
Wow! I can't BELIEVE how many stupid people there are posting here!
What part of "the government is going to get its ASS sued off" do you people not understand????
All those companies (GM comes to mind) that will lose their BEST PEOPLE because they took government money BEFORE SAID GOVERNMENT RETROACTIVELY CHANGED THE GAME ON THEM are going to have one HELL of an excuse for suing for damages in the TENS IF NOT HUNDREDS OF BILLIONS OF DOLLARS!!!!!
How can they possibly compete against, say, a Toyota, that won't have this sort of burden to contend with? Think about it: If they go down, FOR WHATEVER REASON, they'll be able to blame the U.S. government!
STUPID, STUPID, STUPID!!!!
I as a taxpayer am OUTRAGED that you would risk my tax dollars in this manner!!!!!!!
yes, Nate! "really"! "really" none of them deserve bonuses! Sheesh, I have never known you to be so off the mark. Nearly half a million people have been thrown out of work in the last year. Then these corporate executives get *bonuses* worth more than some people will earn over the course of 10 or 20 years of their working life! And these bonuses come on top of an already quite generous salary??
Congress wanted to force the auto unions to renegotiate their contracts, including contractual obligations for retirement and pensions and health care - things people actually desperately need, unlike million dollar bonuses. So I don't want to hear a word about this contract bullshit.
If it weren't for taxpayer money, these businesses would be bankrupt and there wouldn't be any bonuses or salaries, period. So the execs that lose their bonuses should be grateful they still have jobs, unlike many Americans who are just as hard working and just as deserving.
Thanks for being a voice of reason on this Nate.
.... and here it comes, the equivalent for other financial companies of FDIC powers for banks.
http://finance.yahoo.com/news/US-Is-Rushing-to-Get-More-cnbc-14699504.html;_ylt=Ateuwi9wMJfTbNAf2p_m.NBQ5D0D
Once that's in place they could try let AIG fail, although it is likely still to be a really messy situation due to the international nature of these companies (really groups of companies).
In all seriousness (sort of), I have no doubt that Nate is a good person/kind to animals/nice to his mother, but I agree with Jesse and Statler that it's really disturbing that THIS is the issue Nate chooses to go to the barricades on. Not the mass unemployment, the denial of health care, people losing their savings, and everything we see around us, but the fact that people at the top of the economic pyramid won't get bonuses. And people like Yglesias and Ezra Klein seem not to get that jarring disjunction, either, between their (very occasional) lip service to the suffering of a broad swath of people, versus their noticeably more emotional engagement when the interests of their own social and economic class are involved. I call that a failure of imagination, a failure of empathy and compassion, and ultimately a failure to understand the welfare of this society as a whole instead of the interests of their own Creative Class/Symbolic Analyst group. Those failures are pretty significant in my book because they mean that Nate, Ezra and Matt are failing a basic acid test for liberals and progressives - whose side are you on? People and firms who loot the system, accept our money, and then have the gall to ask for bonuses? Or the rest of us, outraged at being fleeced and seeking any practical redress that contains a rudimentary sense of fairness and economic justice? From their recent posts, I can't tell, but it seems quite suspicious that they seem more frightened at the outraged rabble (ie the rest of us) than at the people who are sending us down the tubes.
From what I have been able to understand of Nate's write-up on this, these were not really bonuses aimed at improving returns (which already looked hopeless for those years) but essentially salary given in a lump sum. They wanted to keep people from walking out the door in 2007, so they guaranteed the amount; but they paid only at the end of the year.
Would it make any difference to all of you posters if they had just received that same total amount distributed over the year? It shouldn't; but then we wouldn't be talking about bonuses, would we?
If you think the amounts were obscene, then the issue is the total amount of compensation. But that is another issue than whether or not people "deserved" a bonus.
The most that can happen from this fuss is that the entire concept of bonuses goes away: People just get paid a salary (the total amount of which will still be set by the market demand for their skills), and there will be no particular alignment with specific goals (except the possibility of a raise, of course). That isn't necessarily a bad thing: Maybe the bonus system excites too much greed, and makes people go for an unreasonable degree of risk.
But it does seem to me that, if Nate's presentation of the facts is correct, at least some of the"bonus receivers" are getting painted with the wrong brush.
Glad to see sanity reigning for the most part in here.
This episode is exhibit A as to why politicians and managing a business don't mix.
There are lessons to be learned far beyond the specifics of this legislation, namely that there's a fundamental reason for limited government.
I find it ironic, Nate, that a few weeks ago you felt that $250K was a fortune ("Can't raise a family in Manhattan on $250K? Then live somewhere else!") and now you're suddenly concerned about their bonuses (paid with taxpayer money). What if they earn $250K AND live in Manhattan? Should they move somewhere else before they qualify for their bonus?
What is so hard to understand? Companies that lose money don't pay bonuses. So what's your revelation-- that Congress paints with a broad brush? Shocker.
I'm reading this during my lunch hour, so I have not read all 100+ comments. If this has been mentioned already, forgive the duplication.
I appreciate the deserved scorn and desire for vengeance, but this is supposed to be a government of laws, not men. Wasn't that one of the major complaints about the previous administration, and something Obama was going to fix?
Well, if it is, any person even remotely familiar with the Constitution is aware of the prohibitions against ex post facto laws and bills of attainder, both of which apply here.
Yes, it sucks that these people are being rewarded for running their companies (and their country) into the ground. Yes, it sucks that we, the taxpayers, are basically paying for this mis-, mal-, and non-feasance. But those were the rules at the time.
Pass any legislation to control this in the future; I am all for restrictions on total compensation for everyone, not just those taking bailout money. But we don't get to change the rules in the middle of the game.
Nate, I can use your same logic and say that the guy at GM who comes up with a best-selling car getting his "deserved" bonus from federal bailout funds sets just as bad a precedent as giving the crooks at AIG theirs. The bottom line is the same double-standard is applied: the notion that who is deserving and who is not can be somehow divined. After all, aren't you the one in favor of clear language on this issue? Moreover, if you yourself admit it was a "hyperbolic" example, then why are you using it? It's like a couple of days ago when you featured the example of Obama and his correlation with the Nasdaq as your headline, then said it was stupid. Hyperbole is one thing, but the "GM's hero" scenario is worse than that: it's pure speculation.
Maybe your own success is causing you to exhibit Rebublican tendencies. It happens, friend. I can't help but think that you are framing the notion that anyone deserves to be earning shitloads of money right now within the context of your own sense of entitlement. I congratulate you on your success, but when you stop being hungry, you risk losing touch with the readership that gave you your success, and can just as easily take it away.
Stay on message. You're still my favorite blogger.
Wow! I can't BELIEVE how many stupid people there are posting here!
What part of "the government is going to get its ASS sued off" do you people not understand????
All those companies (GM comes to mind) that will lose their BEST PEOPLE because they took government money BEFORE SAID GOVERNMENT RETROACTIVELY CHANGED THE GAME ON THEM are going to have one HELL of an excuse for suing for damages in the TENS IF NOT HUNDREDS OF BILLIONS OF DOLLARS!!!!!
How can they possibly compete against, say, a Toyota, that won't have this sort of burden to contend with? Think about it: If they go down, FOR WHATEVER REASON, they'll be able to blame the U.S. government!
STUPID, STUPID, STUPID!!!!
I as a taxpayer am OUTRAGED that you would risk my tax dollars in this manner!!!!!!!
P.S.
I'm a fracking CARD-CARRYING LIBERAL, so don't give me any of your "Right Wingnut" crap!
Sarah Lawrence Scott:
"OK, I'm confused. Casual Observer's link to IRS data shows completely different numbers than census data from the same year.
Given that this is a statistically-oriented site, I'm sure someone knows the reason. Care to enlighten me?"
I'm guessing that "income" is defined differently? Perhaps the census one (which says it is a joint effort of Bureau of LABOR Statistics and the Census Bureau) is focused on money earned from labor, as opposed to passive income (investments?)
Also, the census data is a survey. Does this mean they asked for information from people and didn't verify it? Could certain people have been excluded from the sample?
I don't have a definitive answer, I'm just making some guesses.
Personally, I'm more comfortable with the IRS numbers, because I have a background in accounting and know specifically what they are referring to as AGI.
Nate, I have always admired your innate sense of a how any particular issue fits into the larger picture. If; (regardless of economic utility); populist rage is not quelled by some actions that are and are SEEN by average low information people, as a vote that SOME punishment is actually occurring for these misdeeds will anything else in the progressive agenda have a PRAYER? I don't think so. Is this truly the one on which you want to stake everything?
The thing I love most about this site is the insight contained in the comment threads that is often so lacking in the main posting. Nate, I hope you bother to read your threads because your blog in full of visionary geniuses, most of which I'm sure are tremendously undervalued and under-compensated for their efforts. What I urge you to do, Nate, is reward quality by featuring more user content. This, in essence, would be putting your money (if time is money) where your mouth is.
Yours always, Daddyuncle
I think you're being a little inaccurate when you write, "the government has dictated that nobody at anybody of these companies is deserving of incentive-based compensation, unless their household income is less than $250,000 per year."
The government has not said anything. The House has. The Senate has not, and neither has the executive.
Also, a point about risking businesses' ability to contract that you discussed in a previous article, courts have found numerous public policy reasons to void contracts before, and usually do so with care, noting that it's really up to the legislature to determine public policy. From that standpoint, that is exactly what the legislature is doing, determining public policy.
Having said that, I make no arguments about the effect such a legislative determination will have on the market and any fear of contracting it may instill.
It is important to note, however, that in many other instances where public policy has been used to void provisions of contracts, fears of the end of contract law proved unfounded. Installment contracts that many consignment companies used brutally against consumers are now subject to consumer regulation, and contracts made before or after the regulations are not enforceable. Non-compete agreements in the case of professionals (lawyers and doctors), are routinely held by courts to be against public policy. And there are many other examples of where legislatures or the courts have determined that a certain type of contract or contract provision are not enforceable. In consumer regulation, consumers are the obvious victims, but in the case of non-compete agreements, the public at large is the victim. In the cases where provisions of contracts are held by courts to be unconscionable or against public policy, in nearly every dissenting opinion you will read arguments about how this shatters people's faith in their ability to contract.
I again say that I make no arguments about the effect a legislative move in this situation will have on the market. I just want to demonstrate that these fears have proven to be mostly baseless in the past, although perhaps on not such a large scale.
Nate,
Is this tax fair to everyone? No. But how does it compare to the unfairness and economic irrationality of paying people in this industry millions or tens of millions of dollars a year for the past decade or so to gamble away more than a trillion dollars of taxpayer savings?
When we consider that these people have stolen, or at best leeched, hundreds of billions of dollars from the economy, then irrational scolding and shaming may in fact be the most rational thing to do.
Redscott,
I think it's entirely understandable that Nate would be sensitive to this issue. He — my impression — is that he's a very technically oriented person. A numbers geek, to put it bluntly, and a positive outlier when it comes to performance and productivity: for which he has been well rewarded, and rightfully so, in the past. As an entrepreneur and someone with an abstract modeling rather than 'common sense' approach to the world, he's prone to have a certain degree of libertarian idealism in his view of fair compensation. I think what he objects to is:
1) The introduction of arbitrary rules to the system of incentives and disincentives for short term gain without consideration of the wider consequences.
2) That the emotional dynamics of mob disgust rather than rational analysis are the driving force behind this action.
3) That this attempt to curtail the illegitimate gains of non-productive workers will reduce but more importantly stigmatize the reward and recognition of productive workers.
This last point is especially salient with respect to fields such as engineering, science, and information technology, where the recognition of accomplishment is a major motivating factor, and any financial reward tends to be negligible in relation to the actual long term wealth generation which their labour has potentiated.
I'm no doubt fairly wrong about what I'm attributing to Nate's cognitive process here, but having read his writing for a while and having seen him on TV, it doesn't surprise me that his moral calculus focuses on the unfairness of the voluntary action, rather than seeing it as balancing the unfairness of the existing situation.
If your company starts making profits, you get a bonus; otherwise you don't.
Nate,
I'm a free market, business kind of guy... and I think you're wrong on this one.
You've missed the point that these are FAILED firms. There needs to be consequences for failure - not having any is the worst of economics and incentives.
Don't want your pay to be capped? Fine, don't take our taxpayer money and don't let your firm engage in super high risk behavior.
Not having consequences is dumb. If good people go to firms that weren't dump, that's GREAT not bad like you suggest. We don't want the firms that do bad things and put us here to stay around. We want good people to be at firms that don’t engage in fraud – even if it’s not technically legal fraud.
If these firms had been selling say earthquake insurance in California and pocketing all the premiums instead of building a capital reserve these people would be in jail. They just found a way to do this without technically breaking the law, and instead of going to jail now they’re spending millions of our taxpayer dollars on their fancy life styles and not changing their behavior.
Make the good people go to the good firms. It’s the best thing that could happen.
There are two issues here, which may apply less in the US than the UK, but I think are still relevant.
Firstly, if they are bonuses they should be performance related. (thats kind of implicit in the name) and as such to most peoples eyes, its ridiculous that bailout money should be used to pay bonus. (How can companies deserve a bailout and still be in a position to have to pay so much in bonuses?)
Secondly, bonuses seem to many, if they are not incentive based, to be a way to avoid the standard income tax system. The lack of transparency in all of this is very difficult for ordinary people to deal with. To be honest I am not sure its fair on every bonus receiver to be punished for the failures of AIG or any other bailout receiver. But I know that many people in those companies have to ask themselves serious questions about the morality of receiving public money and then using it to pay themselves large presumably performance related bonuses that don't seem merited.
I am appalled by most of the commenters on this post, and the general tone of anger among the public in general right now. It is going to have a very destructive impact on the economy as a whole. Where was all of this anger when the congress passed the multi-BILLION dollar bill with all of its 9000 earmarks?
it makes no sense. I do think that government should have had a much clearer idea of where the bailout money was going to go in the first place, and that is part of the problem. They are handing out our money right and left, by the 100 billion, without having any clue of what is going to happen to it, and to little overall impact. and predictably, obama seems rather clueless as to how to take control of the situation. we are all screwed.
well, if everyone else has a pitchfork, I better get one too...
From what I have been able to understand of Nate's write-up on this, these were not really bonuses aimed at improving returns (which already looked hopeless for those years) but essentially salary given in a lump sum. They wanted to keep people from walking out the door in 2007, so they guaranteed the amount; but they paid only at the end of the year.
I've heard it described essentially that way, although I hadn't heard anything about "walking out the door in 2007?". The way I heard this described this is just more standard practice in the financial services industry-- that for some reason they've adopted a system where bonuses are regular and expected and just a part of regular compensation. There are reasonable reasons to adopt such a system, but it sounded like the financial services companies take this to a ridiculous extreme-- like to the point where some employees by design under normal circumstances would receive more bonus than salary-- and it sounded like at least part of why they were doing this was as some sort of tax dodge. My response in this case is whether this is really a behavior it makes sense to encourage. If they intentionally classified normal compensation as an extra bonus, it seems kind of odd to come along later and tell the people writing tax law "no fair, you can't treat that like an extra bonus, it's secretly normal compensation!" Aren't weird accounting tricks what caused this entire crisis in the first place?
I appreciate the deserved scorn and desire for vengeance, but this is supposed to be a government of laws, not men... Well, if it is, any person even remotely familiar with the Constitution is aware of the prohibitions against ex post facto laws and bills of attainder, both of which apply here.
Okay, but if we are to be a nation of laws then we have to interpret things like "ex post facto laws" and "bills of attainder" according to their legal definitions, not whether or not they "seem wrong". There are established precedents and case law for interpreting these things.
A cursory look at that case law makes it seem extremely implausible that either of the constitutional restrictions you mention are relevant in this case. For example, although there may be limits on it I'm not aware of, there appears to be a broad precedent that tax law changes cannot fall under the legal definition of "ex post facto law". Wikipedia claims the supreme court found constitutional retroactive tax changes unanimously in United States v Carlton. Looking around one finds this handy list of many retroactive tax precedents, many of which seem dubious on the face but which clear the established legal tests. This list is actually provided by the Heritage foundation, and they compile the list with the goal of arguing that such retroactive taxes are terrible and should not be allowed. But their examples do a great job of showing that retroactive taxes are legal under the law as it exists today. The example they give that seems most relevant in this case was the Superfund environmental cleanup law, implemented as a tax which on its face seems if anything even more specifically-targeted, punitive, and retroactive than this bonus law. Heritage, assuming they can be taken at face value, puts it like this: "Many Americans mistakenly believe that retroactive legislation is barred by the ex post facto clauses, which apply to both Congress and state legislatures. Since at least the early part of the 1800s, though, the ex post facto clauses have been interpreted as applying to criminal laws only."
As for Bill of Attainder, it was the first thing I personally thought of when I heard of this legislation-- but the legislation turns out to be a lot broader than initially described (hence Nate's baby/bathwater complaint in the first place). In the case of Bill of Attainder, we need to again consider the legal definition, the case law. Here's one example of that case law in action. That article asserts that under the legal definition, "a bill of attainder must: (1) apply with specificity to a group or individual; and (2) impose punishment"; and that "the Supreme Court has established a three-part test to determine whether a legislative burden qualifies as a punishment: (1) whether the challenged statute falls within the historical meaning of legislative punishment; (2) whether the statute, viewed in terms of the type and severity of burdens imposed, reasonably can be said to further nonpunitive legislative purposes; and (3) whether the legislative record evinces a congressional intent to punish". They furthermore note: "Historically, bills of attainder entailed execution, imprisonment, banishment, or the punitive confiscation of property. Burdens also found by the Supreme Court to rise to the level of punishment have included legislative bars on specific groups or individuals from participation in specific employment or professions."
It is of course tricky speaking as a layperson to make conclusions about how an actual court would apply law, but if these are in fact the relevant tests then it looks like this bill would have to clear some very high hurdles in order to be decided a bill of attainder. It seems difficult to imagine how a tax on earnings above $250,000 could fall under the traditional legislative definition of "punishment", since earnings above $250,000 have been heavily taxed in the past just for purposes of raising taxes; and it seems difficult to see how the bonus tax names the targeted group "with specificity" any more than any number of normal, established taxes (or tax breaks) do.
I think you're being a little inaccurate when you write, "the government has dictated..." The government has not said anything. The House has. The Senate has not, and neither has the executive.
Well, I don't know about the Senate, but the President has specifically said he will sign the bill once it passes (okay, specifically he says he "looks forward to receiving" a finished bill).
Not only does this smack of mob-rule, we're going to lose a lot of tax revenue when these folks say 'screw it - I'm moving to London'. Most of these companies have offices there already. It's not that hard for Americans to emigrate to the British Isles, is it?
Yes, really!
And why not? If a family member goes to jail for a crime, the entire family suffers. Unfair to the "innocent," of course, but parts of the whole sometimes catch the fallout for the wrongdoing of other parts.
The enterprise has, by receiving bailout money, failed in its essential purpose. Within the enterprise, of course, there will be some who deserved the fallout, and some who did not. But this will caution other enterprises and individuals within against similarly failing.
@wavydavy:
Ex Post Facto: For decades we have been writing tax law during the year that must be paid at the end of the year. The justification for this is that annual income is formally measured as of Dec 31st, and the tax bill is computed then. Withholding on bonuses is a form of insurance the IRS demands to ensure against default; it is a credit against any tax owed and not a tax in itself. If the net tax owed is less than the withheld amount, they owe a refund.
Bill of Attainder: By definition, a bill of attainder is when a government declares a person or group of people guilty of a crime without a trial, and then punishes them. What George W. Bush has done with prisoners (declaring them enemy combatants that must be jailed) can reasonably be interpreted as a Bill of Attainder; but the House has not declared any bonus taker guilty of any crime.
It may look like punishment to you but with no crime declared, no Bill of Attainder has been written, and no Ex Post Facto law has been written. If this bill is unconstitutional, then the entire tax code is unconstitutional, and good luck getting the Supreme Court to decide that case.
I have to admit I am not particularily pleased with the new "law" whenever it gets signed but can't say I agree with this post either.
1) Do we know how many this law will effect? Let's face it nowadays, to avoid income taxes, higher level execs (ie all those that get huge bonuses whether they do their job right or not) don't actually have a very high salary. Usually its a low salary that where the difference is made up with bonuses, stock options and other benefits. So the question we should be asking is will this law actually accomplish anything?
2) I don't care what argument you make, I just can't feel sorry that some high level, highly weathly exec isn't going to get his extra money while laying off his underlings (many of whom probably didn't get a bonus). Those same underlings in many cases where the reason those execs supposedly "earned" such fantastic bonuses.
3) If the concern is the economy, what do you think would do more? Give $1 million to a single exec for a job supposedly well done (many people get bonsues that clearly don't deserve it at places I have worked) or use that $1 million to keep an additional 20 or so on the job or give out as bonuses to 100s of non-exec level employees in the form of a raise?
Personally, thanks to the finely honed methods of dodging taxes, I think we will find this new law will probably only recover a fraction of the tax payers money.
mcc --
I appreciate the enormous amount of time and research it must have taken you to compose that answer. (Seriously; there is no snark or sarcasm intended.) Your current knowledge of the history involved clearly exceeds mine, and I am glad to read what you have to say.
Nevertheless, the defense of ex post facto appears to me to be "well, it's been done before." I am all for respecting precedent and such (probably more than most here), but the fact that it's been done before does not make it any more "right".
As for bills of attainder, I think it would be fairly easy to demonstrate item #3 ("intent to punish") from your case law listing by simply reprinting any number of the quotes issued by congresscritters in the past week.
As you say, it is indeed unproductive to speculate about how this would be interpreted in an actual court. And, yes, it is the House of Representatives, so presumably they should at least attempt to "represent" the will of their constituents, which obviously favors punishment of some or any kind.
I know I am swimming against the tide here, but I am still uncomfortable with the idea of changing the rules in the middle of the game.
@Mason:
we're going to lose a lot of tax revenue when these folks say 'screw it - I'm moving to London'.
Let them go, we'll start charging them operational fees for any installations they have inside the USA that will match their tax bill here. Then they can pay taxes in BOTH the USA and UK.
Let me just add, before I am misinterpreted, that I am not buying any of the (to name just two defenses of the bonuses) "well, they'll take their ball and go home (or to England)" crap, or the "we need talented people to solve this problem so we have to retain them" really stupid crap.
As to the first one: let them go to England or wherever. The economy there is not much (if any) better than it is here, and the pay scales in pretty much every country outside of this one are much more compressed, so I doubt that they will receive the same kind of grossly disproportionate remuneration.
Plus, most of that kind of talk is just that -- talk. I take it about as seriously as I do the "threats" to "go Galt" from some of the wingnuts. People are not going to uproot their lives and families for something as relatively minor as this.
As to the second: well, is there anyone who actually believes that we need any of these people to stick around? If your house is on fire, are you going to hire the arsonist to put it out?
I know there is a great desire to punish those receiving the bonuses, and in a truly just world they would be punished. In fact, I agree that they should be punished (or at least not rewarded) for destroying their companies and the economy.
I just don't think this is the right way to do it.
@Tony C --
I appreciate your response as well as mcc's; it wasn't posted when I first composed my response to him. Thanks to you, too, for a serious response.
this is outstanding - well-written and well-reasoned.
i couldn't have said it better myself, which those who know me is something i would very rarely admit, and it was something that needed very badly to be said.
Don't forget that their were some companies that did not want TARP funds and didn't need it, but were forced to take it so that the unfit banks wouldn't be singled out.
I agree Tony. Let these people go!
They're a drain on our economy and their greed and recklessness cause serious harm.
If these were scientists or doctors I might feel different, but this is a group of people that, true, generate lots of income (which helps the economy), but clearly cause more damage than benefit. Let them go ruin someone else’s' companies and economy. By definition the leaders of the companies we’re talking about have failed.
The trillions they have cost so far exceeds any taxes they might contribute I can only wish they would go somewhere else…
It's beyond me why people are worried about trying to keep them around and want to pay them lots of money. The last thing we need is people selling more CDSs without proper capital reserves. This is a group of people who undeniably have caused incredible harm. Why do people want to make sure they can be paid plenty to keep ruining our country? Yes, not everyone in these companies is bad of course, but again, the facts are clear that AS A GROUP they have failed and we are BETTER OFF WITHOUT THEM – even if we lose a few good apples among all the bad ones.
Nate, your logic only works if bonuses are actually tied to performance. Wall Street bonuses ARE NOT tied to performance. Is that not what you revealed in your post about how AIG negotiated these executive contracts such that their employees would receive bonuses at the same level they did in previous years REGARDLESS of performance?
Give me a break here. If people deserve more money for a job well done, give them a raise. Simple. I honestly don't get the caterwauling.
wavydavy... I'd like to add that while I think our country would be much better off if these people did go to another country... I, reluctantly, agree that creating a special tax for these people is wrong.
I just get all fired up when people suggest these are people we want to keep around - it's just so insane. These people did the equivalent of selling earthquake insurance, spent the premiums and then asked for a government bailout and bonuses when the earthquake hit. In any other industry and country they'd be in jail. Selling insurance (aka CDS) without keeping a capital reserve is just fraud. So is knowingly manipulating a bunch of crappy B- assets into an AAA security. These people ruined their companies, ruined our economy... and yet, somehow smart people and are willing to pay them lots of money (tax payer money we’ll have to pay for decades) to keep them doing the things that ruined the economy... it's just so insane.
If a company fails lots of good people – who could be great at their jobs – are hurt. Why should a failed bailed out company be any different? So, yes, the tax rule could hurt a few good people, but to suggest it’s helpful because it helps keep these people around (i.e. keeps them around causing more damage) is just so insane. The government with its infinite resources should just keep suing them until they win… the tax law is bad precedent.
They should be sued for fraud, gross neglect, etc (and if necisarry we can just keep suing until they're broke), but having the government create a special tax like this after the bonuses were paid seems wrong.
> Where was all of this anger when the congress passed the multi-BILLION dollar bill with all of its 9000 earmarks?
Largely limited to the rants of John McCain because:
1) earmarks represented a relatively small portion of the total bill
2) an earmark isn't inherently bad, just because there were 9000 earmarks doesn't mean there was 9000 BAD earmarks
3) it was time to move forward, while there were likely improvements to be had the time it would take to [properly] rehash all the work that had already been done was likely to have poor return compared to the bigger fish to fry
To everyone on here who is talking about changing the rules in the middle of the game, these bonuses are for 2009, which is this coming fiscal year. The tax code has not yet been finalized for 2009. These taxes will affect them in the next cycle. If they want they can spend all the money now -- they'll just have to answer to the IRS at the end of the year.
This whole defense of changing the rules in the middle of the game is a sorry excuse for an argument. The rules are constantly being changed and maneuvered to favor those at the top of the income ladder, and it's about damn time that there was a public outcry over all this.
Is this situation ideal? Absolutely not. Frankly, the more this goes on, the more I'm starting to think that we should have let all of these companies collapse under their own weight and go bankrupt. This would have created a market vacuum to let new companies emerge out of the rubble. Why does General Motors have to make the new hybrid-electric vehicles -- why not Green Motors or some other new brand?
They sold us the argument that they needed to prop up these companies to leave the markets stable and keep everyone's 401(k)s from going to hell. Why didn't the government actually take over these organizations and do some trust-busting, breaking them up into smaller local organizations and forking the stocks amongst the splits so that small-scale investors could retain some of their value? Then the pieces could have been sold back into the private sector. This whole thing is so out of hand, and reaction to these bonuses is just a way for the public to channel their frustration into something palpable.
Yes, there are more outrageous things that have occurred in the financial markets, but that doesn't mean that this issue should be ignored. It's very similar to the argument that we shouldn't focus on prosecuting the Bush administration because we have bigger issues to worry about. We need to punish the crimes of the Bush administration -- it's about precedent, and making sure that the public isn't abused similarly in the future. For all we know, next time the bonuses could be 10% of the total bailout funds received.
@sugerfunk --
So far as I know, these bonuses were negotiated, contracted for, and paid in 2008 (Liddy said he has asked for money to be returned; I presume that means it's already been given), so, yes, this would be changing the rules in the middle of the game. Any bonuses paid out in 2009 and thereafter obviously fall into a different category.
As for the overall solution, however, I agree with you: I fail to see what would be so bad about either bankruptcy or nationalization (or some combination of both). First of all, companies file for bankruptcy all the time; it almost never means that they cease to function, it usually means they "reorganize".
Second, and this is what really galls me, we, the taxpayers, OWN some or most of these companies (I believe the equity participation in AIG is 80%). That means that we, the taxpayers, get to MAKE ALL THE DECISIONS. You don't like the working conditions we come up with, tough -- go ahead and leave, and don't let the door hit your ass on the way out.
Say it, Obama -- we are going to nationalize the banking industry. It's our money they're pissing away, and they have clearly demonstrated that they have no idea how to operate in the current economic climate. They should be nationalized if only to get a better (they certainly could not be worse) group of managers, officers, and directors; let's have them be OUR employees (i.e., government workers).
And I have been saying since their nominations were first just rumors: Geithner and Bernanke are not part of the solution, they are a HUGE part of the problem (tell us about Goldman Sachs, Mr. Treasury Secretary). They should be kicked to the curb as soon as possible; they are not right even as often as a stopped clock.
@Dwight:
Agreed; when the market is losing 2-4% a day, 2% of the bill being earmarks is a bargain, especially since if you scan a random sample of those "9000 earmarks" you find that only about a quarter of them, less than 0.5% of the bill in money, is actually bad spending.
When you compare that cost to the potential loss in market indices in the weeks it would take if Obama vetoed the bill, the opportunity cost of the veto would have been ten or twenty times the "savings" made.
If we don't call them earmarks we will call them something else; they won't go away. McCain is an old man yelling at clouds. People should just realize that this is how it works; earmarks help politicians and they get distributed roughly equally across districts and states, so we all get benefits from earmarks. It is just that their teen center is our new library, the other guy's landmark rehabilitation project, and yet another guy's upgraded water treatment facility. Whatever. Different districts have different priorities, and they will be met one way or another.
Earmarks are usually 1% or so of the spending bills, and spending bills will always contain this 1% extra for pet projects whether you call them "earmarks" or not, and McCain is just up there putting on a show of fiscal conservatism by focusing on the 1% puddle in the sand and ignoring the entire lake of spending behind him.
Nate, I love your site, most of the time, but this is the stupidest thing you've ever written.
You write of some noble worker toiling away and deserving of a bonus who doesn't get that bonus and becomes demoralized and the economy tanks because we discouraged the good guys from doing a good job.
Please. Talk about a strawman.
Do you think if employees of companies had been doing a great job we'd even be having this conversation?
If pay is tied to performance, the bulk of the people who are in line for bonuses should actually be required to *refund* the bonuses they got over the past decade.
Nate,
I essentially agree with your position but would like to add another point (with apologies to anyone who has already noted this). Aggregate compensation in financial services is too high for the same reason that aggregate compensation in professional baseball is too high: too little competition in the industry has created large monopoly profits, and these profits are spent by the firms bidding for the best workers. Not all workers turn out (after the fact) to have great seasons, but the contracts are largely (or entirely) negotiated before the fact and represent the firm's expectations concerning the value of the individual relative to the next most qualified available person. No fund manager or Financial Services Division executive "deserves" a $5 million bonus, just like no professional basebal player "deserves" $10 million for playing a season. Firms (and teams) want to hire the best people available and they use their profits to bid against each other to get them. In this way the monopoly profits of the organizations in each sector are transferred to (a subset of) the workers in the organizations.
If we could force league expansion individual organizations in both industries would see their fees and revenues fall, and with the reduced profits they would not enter into such contracts in the first place.
This would mean that sometimes teams (financial service firms) would fail and close, but because each team would be a smaller proportion of the entire sector, such failures would have less catastrophic consequences.
Your suggestion of a salary cap would leave monopoly profits unchanged - just making it easier for them to be retained by owners. League expansion - more competition in financial services or a limit in how many different sectors of financial services an organization can offer - would be a better approach to the problem.
> Earmarks are usually 1% or so of the spending bills, and spending bills will always contain this 1% extra for pet projects whether you call them "earmarks" or not
In fact, in this moderation, it's a GOOD thing because it represents a small amount of fine control by directly elected officials that isn't otherwise there. Earmarks are a small point on the otherwise very blunt tool that is Legislation.
It is a MUCH more realistic and ultimately helpful attitude to just get earmarks out in the open and let the electorate of each member of Congress pass their own judgement on the earmark's merits, if their representative is accurately addressing his constituent's needs. Being there to field this feedback is traditionally very much a part of an elected official's role. Bureaucrats, who would be making these decisions (or not making them as the case may be), typically aren't set up for that sort of responsiveness.
According to glassdoor.com, the average salary for a "Senior Project Engineer" at GM, as posted by Senior Project Engineers at GM is ~$94,000.
Rarely will you find an engineer making $250k+ per year.
So far I've only seen them as senior chaired professors at top tier universities.
It's a shame people are questioning Nate's progressive cred based on this excellent post.
His proposal for a soft cap on aggregate compensation is eminently sensible and has not been mentioned by one commenter, as far as I see.
That, and of course the suggestion that we address the question of wealth distribution through marginal tax rates, are progressive proposals that, if implemented, would do much more for economic fairness in the United States than a punitive tax on a handful of targeted individuals. Of course, they don't make for a catchy chant while marching with a pitchfork.
All you self-styled "populists" are shooting your load of outrage for a lousy $165 million; Nate is talking about ideas to change the economic structure of the country in a fair, thoughtful, forward-looking way.
Who's the real progressive?
@steve:
No offense, steve, but this is simply not true; these are not "monopoly profits."
No particular studio has a monopoly on making films, yet they pay Julia Roberts $25M a picture. The only "monopoly" in that formula is Julia Roberts' monopoly on her time.
She gets those rents because she puts ten million butts in seats and moves tens of millions of DVD's, literally, and it is her name and her image that does it. No other actress in the same role would do it; Julia has recognition power. As do fifty other actors, as do a hundred singers or musicians, or for what you are talking about, athletes.
You are wrong to say a top athlete doesn't deserve $10M a year. When Michael Jordan was at the top of his game, how do you know what receipts would have been without him? Well, look at some team at the bottom of the league, I suppose, minus any games they played against Jordan.
Jordan got the money because he did deserve it, he sold far more than he got.
The majority of team owners don't bid for the best and throw away money for their egos. They understand that those profits are generated by fans entertained by world class skill. The players know that too, and they get their fair share of the revenue based on an implicit agreement between them and the owner as to how much they increase the revenue by playing. The owner tries to control the costs of the product, which includes the salary to the player.
You are wrong about expanding the leagues. Not a lot of fans are clamoring to see second-rate players fumble around the court. You might even reduce the fan base by doing that; in football some of the best moments are watching the best quarterback on the planet hit the best receiver on the planet, and if you dilute the talent per team, you may split up those perfect partnerships and eliminate too many of those crowd-roaring moments.
Now entertainment aside, I have been in business for 30 years and seen what I regard as astonishing feats of salesmanship; guys that generated millions of dollars in new revenue in a matter of a month or so. In the cases I have seen, I have no doubt this was skill. What are they worth? A fair share of the new profit, I'd say. It wouldn't be there without them.
Agree with the author. It is bad public policy and bad ownership on all of our parts.
We want traders and bankers who have a strong track record of profitability to work for these firms that we now "own".
There may not be a lot of jobs out there, but there are no shortage of traders and bankers who would be happy to set up their own shop and take the risks in exchange for an even bigger reward. Paying them a percentage of their profits, even if it adds up to millions and comes in the form of a "bonus" just makes economic sense.
People are unhappy becuase they don't realize that there are still plenty of professionals on Wall Street that generate huge profits for their institutions. They think that all of us are money losers who are stealing. That just isn't the case. By punishing everyone with these 90% taxes on bonuses, the good traders/bankers will simply leave and either work for someone else or set up their own shops, to the detriment of the very institutions we now own.
Society is the way it is. As has been pointed out, certain professions generate more economic value than others, even ones that have greater social value. In our system, the particularly talented people in these professions are going to generate huge profits and will get paid large amounts. That is our system and most people, including those who are now throwing stones, are happy with it and don't really want to see it changed.
We do need, reform, however. Just not this kind. I would support greater regulation, particularly in the areas of disclosure and risk managment. I would also strongly support keeping incentive pay on Wall Street but basing it on longer term performance metrics, not just annual performance.
The point of a bonus is not as a salary addition.
The most experience I have with bonuses, per se, would be at a law firm. If you know how firms work, associates who are made partners split the profits of the firm, and that's their salary, or bonus. If the firm doesn't do well, the profit per partner goes down; even if you do quite well for yourself. Every lawyer who works in such a firm knows this, and I would assume everyone eligible for a bonus at these corporations should know this, as well.
With no offense to you, I don't expect others to realize that bonuses in firms and corporations are very rarely personal, but I do expect you to know that nobody at these corporations will take it personally.
The alternative for them was bankruptcy. They kept their jobs and lost their bonuses. Not a bad trade.
You speak of the individuals who may have performed well in their job but would not receive a bonus for their work. While it's great that they're working hard and helping their company, a bonus is essentially a split of the company's profits. When your company is not making any profit, a bonus doesn't make any sense. These people are not waiters making under minimum wage with the assumption that their bonus will carry them above poverty level--everyone who is affected by this bonus cap is making enough to support themselves very comfortably.
Chris Matthews yesterday was on MSNBC talking about how this may violate ex post facto- an idea that's completely incorrect (Ex post facto does not apply to taxation, see United States V Carlton). While I agree such a law is dangerous (as Leno said yesterday) and would prefer the government use their leverage in AIG to instead force them to pay back the bonus (after all, they do have the public on their side), what they're doing is not illegal and certainly not a violation of ex post facto.
Great observation, however I'd like to add that when someone is working at a start up company, where money is slim, then tend to work for the reward of "potential" fame, "potential" fortune. There is no guarantee. So in the case where it's an established company there should be an exception?
Just a thought.
They had their chance. They bit the hand that feeds them instead up showing a little humility, as you normally do when having to ask someone to bail you out.
Obama has big plans, and these idiots gave his administration the perfect opportunity to start paying for it. This is one of those times when the population would encourage this kind of behavior.
I say go for it. You won't get another chance
A lot of angst being shown here about 'ex post facto', and renegotiating contracts.
But where was all that anger when the Rethugs DEMANDED that the unionized auto workers had to renegotiate THEIR contracts with the auto companies, otherwise no money to the auto companies?
The tax on the AIG thieves will affect those AIG thieves who accepted a bonus in the past two weeks. The renegotiated UAW contracts will affect all current, and all former UAW workers, even those who retired 20, 30 or more years ago. It also affects the widows and widowers of those retired UAW workers who have since died.
Further, just how many of those UAW workers annually make $250,000, either individually or as part of a family? ANY?
And how many of those who DO make more than $250,000 (are there any?) made a large, or ANY bonus, above and beyond that $250,000?
If all the discussion is centered on the bonuses being taxed as 'ex post facto' changes to already negotiated contracts, I think a lot of people need to re-examine their philosophical and moral bearings.
I thought bonuses were paid to people who performed above and beyond the original agreement they signed up for? Where has America gone? At one time Americans were proud people. Now we're are no better than a third world country and the crooks and criminals that run them! Bonuses for running a company into the ground, whoever heard of such?
The entire idea behind the bonus idea was to keep peopl that were actually worth more than what they agreed to get paid, that outperformed the standard to which they argreed to work, that went above and beyond.
Somebody once asked me for a job with a pay of $40 an hr. I told him I had no jobs for $40 an hour but I have two jobs for $20 an hour. The deal is this you can make $200 an hour and not work any hours or you can make $20 an hour and get 40 hours a week in which case the man making $20 an hour makes more than the man making $200 an hour.
Americans have priced themselves right out of the market, they have gone and figured out that they can vote themselves gifts from the coffers of government, this is why a democracy only lasts so long. We are now entering into socialism which doesn't work either. People that sit home and don't care about working and how they live will be given the same money you are out working hard for. You will never get ahead and the rich will continue to get richer. All these government officials continue to make more money and ren't subject to the laws and rules which the rest of us are subject to. Congratulations Democrats, you've done a terrific job of screwing up the country quicker than Carter did when he was in office. It's only a matter of time before True Amercians stand up for True America.
Timothy Geitner is the problem for me. How politically stupid do you have to be to REMOVE a provision to prevent excessive compensation from a bill that was UNANIMOUSLY approved by people who get elected?
If he is going to make a big mistake, why does it benefit the wealthy executives?
Geitner's heart is NOT on our side.
“These contracts rip the rug from under AIG’s excuses -- revealing no basis under Connecticut law for these mega taxpayer-funded bonuses,” [Connecticut Attorney General Richard] Blumenthal said. “AIG’s own documents reveal that it turned an emergency bailout into a meritless handout, paying windfalls to employees as reward for financial failure.”
http://www.bloomberg.com/apps/news?pid=20601103&sid=aDxyHD5244VE&refer=us
I'm still waiting for anyone who is screaming ex post facto about AIG to explain why that same scenario does not apply to the auto workers. I'm willing to admit there might be a difference, but someone is going to have to explain it to me, and so far, no one has.
And if no one here can or will, will the GOOPers on Capital Hill be able to do so?
Nate- Your article could not have been more cogent. This kind of reactive legislation and populism is extremely dangerous. Obama, who I volunteered for and donated to and have great faith in, needs to step up, show some leadership and calm the barbarians at the gate. We cannot let the pendulum swing too far back here or we will soon live in a country where the free market and opportunity are rewarded. Please, people, take a deep breath and lets not lurch around trying to soothe populist anger. This is a very dangerous time. We need true leadership now more than ever.
Here is my two cents on this issue. To me this is just one more test from the gov. to the tax payers. How far can the government pushes us around and squeezes every penny out off our pockets with no resistance whatsoever. That piece of legislation is just part of the game to show tax payer that the gov. is doing something about the bonusses. First of all the gov. has not power to limit or control private enterprises, "Capitalism" By the same token neither has the power to use the supposedly people's or tax payers money for the use or support of private bussineses. But it did it with no strings attached. So now the gov. is making believe that something is being done. If the gov. had any inttentions in protecting our money then it should had loaned it to AIG with collaterals and the condition to overseing it's operations as a partner. just like the banks do. But it did not. So now nothing is going to happen to stop AIG and all the others who laundered our money. This issue will die soon enough and those who are getting the bonusses will walk away and then share their fortunes with Board of directors, politicians and every one involved in this scam. Then Mr. pesident will be taken care off once he leaves his office, just Like Mr. Clinton, who made ten millions in one year just on speaches. Wow, Mr. Clinton must be a top notch in his area of expertise. Wonder how much can a Harvard professor can making this days? Investors have been cleaned, tax payers are been cleaned by gov. and everyone else as gov. fails to provides us the protection it assured us in exchange for the tax money. Atleast some of the crime families used to honor their promises. No luck this one.
i feel like way too many of the people in the conversation are disagreeing with nate because of a semantic argument over the meaning of "bonus". that is dumb. if you agree with the bill, fine, but don't agree with it because you disagree with how AIG and Citi defines "bonus".
I was directed here by another blog, and I have to say - I am one of those without sympathy for the "poor souls" who will suffer under this taxation.
Anyone who is making over $250,000 a year can probably afford not to have their entire bonus. Especially since, in the case of AIG, it was handed to them by the tax-paying American public, many of whom are in danger of losing their jobs, houses, etc.
You can only bend the Working/Middle Class tax base over so far before they break. And $250,000 would put a lot of working and middle class people back in financially secure positions. THAT is why people are angry. And there is nothing intellectually inferior about having and expressing emotions regarding this issue.
I find it quite absurd that people cannot "understand" why others would be upset. Obviously you non-believers are in a position of privilege where you don't need to "understand" the fears, concerns, and frustrations of an American who works just as "hard" and is just as "talented" as those who make $250,000 a year.
You must be blithely unaware of what it might feel like to work your heart out at two or three jobs, to come home, turn on your TV, and discover your taxes are going to provide Clifton Atwater with another private jet trip to the Bahamas.
I'm sure if the situation were reversed - and the rich class were asked if they would tax bonuses of those making under $250,000 - the resounding call would be absolutely not. I'm sure their moral outrage would be pure and immediate.
They would argue for the poor McDonald's employee working 60+ hours a week, making minimum wage, barely able to keep up with his rent and utilities. They would worry about how all his precious talent was being squandered.
Gimme a break. Rich people don't care about poor/working/middle class, except to figure out how to exploit them. And this is true across the world. Rich Americans have no loyalty to other Americans. Don't think your citizenship, skin color or gender makes you exempt from being screwed over.
I get tired of hearing that rich people deserve money more than poor people. Cause they work harder. Everyone works hard, but only some of us get to be rich.
You can't fall back on, "well if they broke the law, they should be prosecuted," because the financial industry has spent 30+ years throwing their money at our reps and presidential administrations (Ken Lay paid Bush's way into the Governorship, remember) to get the laws rigged in their favor. Much of what is sinking the global economy Credit Default Swaps were specifically removed from all regulation during the last republican congress.
Arguing that the bonuses are a fraction of the total bailout is utterly meaningless. The totals have no bearing on the bad incentivization schemes of these companies. That's the issue. These guys trade on our collective future, lose the bet, and still get rewarded. That's the crux of the problem. 10% or 1 millionth of 1% matters not at all to the issue and is a bogus talking point distraction from the real problem.
Lastly, no one is discussing the issue of the bonuses already collected for the last *six years* of paper profits on all these creative financial instruments that were no more real than Madoff's.
Yes, what the house did was a clumsy way to address a tangentially-related problem, but they are taking heat from the constituents for very valid reasons. People know they've been ripped off, their futures canceled and they know the financial industry is responsible. The government should have taken real action back in August 2008. By dragging their heels they've sacrificed the faith of the people, and rightfully so. There is absolutely no assurance that those responsible for this mess will see anything but immense wealth in return for their behavior. If you want to see real mob rule, keep arguing that the government should avoid trying to enact any kind of fairness measures. We are at a tipping point and quickly running out of time. Congress, as dense as they are, finally noticed this.
I agree wholeheartedly with this tax. This is the perspective I think people should look at it from. When you take bailout money because you would close without it, your company becomes property of the government. Its pseudo-nationalization. Thats fine for now, see any of Bernanke's 4 speeches on the "too big to fail" problem. In the entire government, there are only a handful of government employees that make more than $250,000. (The president, the senators, NOT congressmen, cabinet members) For all intents and purposes, there are no "upper class" salaries in the government. That means if you get bailout money, you should not be expecting an upper class salary until you're fiscally solvent again. Fair is fair. If you don't like it, quit. There's about 5 million unemployed american's who would be more than happy to do your job. If you're wondering if they're qualified, most financial services employees have only a bachelor's degree.
We cannot let the pendulum swing too far back here or we will soon live in a country where the free market and opportunity are rewarded
I assume you mean "not" rewarded. Based on that, what do you propose our leadership do? No one here, Nate included, has provided an alternative idea to calm those 95% getting royally screwed here. Give over an idea. Any idea.
The people this legislation targets are employed by taxpayer-owned organizations. It only applies to them. The opposing precedent, I would argue, is way more dangerous . . . yeah, let's absolutely reassure those who gamble with the nation's economic future that they have no worries for their own personal economic future, no matter how badly they mess up. Great precedent that.
Thanks for pointing out my error Wez. I did mean "not." (Do you know how to go back and fix that?)
Your second paragraph though states the facts incorrectly. The legislation targets all companies that received any bailout money not only those like AIG that are now 50% plus government owned organizations.
For instance, JP Morgan Chase, a bank that did not make big bets on the subprime market, did not trade in the quasi-criminal derivates market still received TARP money because the government asked them to step in and keep Bear Stearns from failing which may have created a worldwide financial panic. They are now subject to this reactive and dangerous legislation. So what do you do with them?
My idea, as you asked for ideas, is for our elected leaders, our pavlovian mass media and our entire nation to take a deep breath and think these things through before demanding passing reflexive and potentially dangerous legislation which will have unintended consequences. Find the real culprits here and garnish their wages or prosecute them, but don't fix the leak by knocking down the house!
The last point I want to make Wez and others is that this legislation and this anger feeds the same kind of primordial urge for instant gratification which got us into this mess. This kind of mob mentality and opportunism is not that different from the greed of the last 15 years that got us into this mess. And its no less dangerous for the long term health of our great nation.
What strange times we live in. The GOP is the party I've always associated with defending ultra rich bankers and the Democrats are the ones I've always associated with defending the working class and the poor.
Now, the rage of working America is being channeled by the Republicans while the Democrats are the ones opposing it as populist 'chattering classes' rhetoric.
This is very dangerous, because the working classes are Obama's base, and you have mid term elections coming up here shortly. It'd be a shame if the Democrats lost all those votes because they were seen as the 'Screw the Poor' Party.
I hate to break it to you, but Joe Six Pack doesn't know what a Bill of Attainder is, and doesn't care about ex post facto laws being unconstitutional.
My recommendation is this: Channel Barney Frank for the moment. Let the Bill of Attainder pass, and have Obama sign the thing into law. I guarantee you it's headed to court. The SCOTUS can sort the whole mess out before anybody pays one dime of the tax. In the end, no real harm will be done- the SCOTUS will reassert the unconstitutionality of ex post facto Bills of Attainder before it becomes a trend. The public will get their catharsis, banksters will be duly shamed and perhaps chastened to the point of becoming more cautious about bonuses int he future. The only person who will need to do damage control is Geithner.
Right now, the general public's anger is a political freight train. Only an idiot would stand in the middle of the tracks with his arm raised screaming, "Halt!"
The final bill is yet to be passed, but I think the house version only applied to companies that took federal money greater than five billion dollars. I'm sorry, but the underlying premise of Nate's rant seems misplaced that *successful* companies cannot pay their executives enough.
Pass this and be prepared to pass the gun powder. This will set off powder keg. Washington politicians are the new Red Coats.
Sorry, Nate, but this one made me have to post.
No, they do not "deserve" bonuses for doing their job. They deserve their pay and they deserve to keep their job for doing their job.
If their work is worth more than they are getting paid, and the business they work for wants to account for that, give them a RAISE.
If a company is making enough money to give individuals millions in bonuses, that company can also (instead) pass some of that profit onto ALL of their employees (higher wages for all) and onto their customers (lower costs for goods and services.)
To constantly filter that money at the top, as if a CEO or a lead engineer doing his or her job well deserves extraordinary compensation but a bank teller or a computer tech or a clerk doing their job well doesn't even warrant a yearly raise is the height of unbalanced wealth distribution.
Our tax money, the tax money of people who have debts they cannot pay and families they cannot take care of, is going to insure and resuce failing companies so some business elites can continue to GAMBLE on stocks, financial razzle-dazzle schemes and more piss-poor decisions they make.
Those bonuses would not be possible without the tax money used to bail out those companies. Those bonuses, in the best of times, only exist at the lack of fair compensation to the company's workers and lack of competitive prices for the company's customer base.
I'm sorry Nate, this may just be a matter of personal ethics, but I strongly disagree. No one, no matter how talented, deserves bonuses when they fail at their job, contract or no. And very, very few deserve any bonus compensation, especially those far in excess of their salaries, whilst the average worker in the same company either sees their wages stagnant or, worse, lose their jobs.
If the worker saves the company or greatly increases profits, and the rest of the workforce plus the customer base sees the benefits, then said worker can see a nice bonus. A bonus should not only be paid for doing above and beyond your job description, but it should never come at the expense of the customer base and the rest of the company's work force.
A bonus should be post-event recognition for a job well done, performance above and beyond what is expected.
Contracts that 'guarantee' a bonus, prior to any work being done, should be outlawed, or at the very least, extremely restricted.
Some will say "How about the salesman working on commission?"
Simple - the bonus is paid after the sale, not paid before the sale. No change from current practice. So no problem.
And if this bill gets to the SCOTUS, and SCOTUS rules the bill is unconstitutional, then expect that within 72 hours the UAW and other unions at the auto companies will be in court to overturn the provision in the auto bailout bill requiring a renegotiation of their contracts. If the AIG bill is ruled ex post facto, the UAW shouldn't have much problem in getting a court to rule in it's favor.
BTW - I still haven't seen anyone denigrating the current bill as a 'ex post facto' bill come up with any reasoning the auto bailout bill is not subject to the same ex post facto determination. After all, the union contracts were - [drum roll] - CONTRACTS. Congress ordered the auto companies to renegotiate those contracts before any bailout money was given to the companies.
What's the difference between the auto bailout situation and the AIG conracts? The only difference I can see is that the AIG bonuses would go almost exclusively to those already well off, and the auto union contracts would go to regular Joe six-pack workers.
Anyone going to defend the auto bailout not being ex post facto? If so, start explaining. If you can't or won't, then please STFU about the AIG bill being ex post facto.
Damn. I hate this bonus/"retention pay" crap as much or more than the next person, but I hate even more this ridiculous House bill and all the brouhaha surrounding it, which makes our Representatives look like the biggest half-assed, grandstanding knuckleheads ever. Congress has had MULTIPLE chances - the initial passage of the TARP bill, the vote on the second half of the TARP money, the stimulus package, etc. – to prevent that money from being paid. They did nothing. And now that the public is oiling the guillotines, we get phony righteous outrage and phony legislation that they know has a snowball’s chance in hell in the Senate and the courts. What a farce. Nate is right, what we need is to address income/wealth equality at a far more fundamental level (via marginal income tax rates and compensation/bonus caps) than yanking back essentially drop-in-the-ocean money from the clowns at AIG. All this current drama serves only to deflect attention from that need.
Perhaps the main cause of the current crises is the emergence of the "too big to fail" financial institution. Increasing tax rates on employees of the largest firms encourages them to leave for smaller firms. Independent of the current outrage, this is a very good thing because it might impede the growth of the largest companies. Far from being apprehensive of employees leaving AIG we should rejoice at the prospect.
@Jeremy:
The legislation targets all companies that received any bailout money [...]
No, just those receiving more than $5 BILLION dollars of bailout money.
My idea [...] is for our elected leaders, our pavlovian mass media and our entire nation to take a deep breath and think these things through before demanding passing reflexive and potentially dangerous legislation which will have unintended consequences.
Why do you assume we have not thought this thing through? I am an academic that thinks for a living; I assure you, this isn't that hard. The tax applies only to firms that have gotten $5B or more in government bailout funds and only to families earning over $250K a year. This is restrictive enough. What else do you need to "think about?" Do you think we are going to be giving a lot more firms $5B+ bailouts? Are you concerned that if we do, somebody earning over $250K in those firms will be undeservedly stripped of their bonus? I am not.
Find the real culprits here and garnish their wages or prosecute them,
Ha! First, you can't prosecute anybody because deregulation under Clinton and Bush made it all perfectly legal to perpetrate this fraud.
Second, isn't a 90% tax a form of wage garnishment? Aren't you proposing the solution you are decrying? The guys receiving bonuses ARE the culprits, knowingly or not, that represented their companies as sound when it was all a house of cards. We ARE garnishing their wages, but are kindly protecting the first $250K in salary so we don't leave them destitute.
@Statler:
... the SCOTUS will reassert the unconstitutionality of ex post facto Bills of Attainder ...
No they won't, taxes are not ex post facto; this has been established by law already.
A Bill of Attainder is declaring somebody guilty of a crime without a trial, and then assessing a punishment.
Taxes are not a punishment, also by law, and no crime by bonus recipients has been declared by Congress. All they have declared is irresponsibility on the part of AIG management.
Unless politically motivated the SCOTUS will likely not even consider this case. The USA has had 90% marginal rates for the rich in the past; it doesn't meet the basic definition of Bill of Attainder; and the SCOTUS is not going to get into whether tax law passed during 2009 can apply to income which is only finally determined for tax purposes at midnight on Dec 31st. Ruling that it cannot would invalidate almost the entire tax code. And I doubt the SCOTUS will get into what the maximum allowable tax rate shall be.
This bill has precedent and is legal, I believe all of the law in question has been previously challenged and decided.
@Merin:
This is not a very well reasoned position. People are worth more if they contribute more, that is what most compensation negotiation is all about.
A janitor employs a minor amount of skill and knowledge at their job, and almost anybody can be trained to do it within a few hours. Same thing for a cashier, or shelf-stocker, or forklift driver or warehouse worker.
Now if I have two companies, A and B, and A is doing much better than B, why exactly do the janitors in A deserve more than the janitors in B?
It seems very unlikely to me that the janitorial staff is the key difference between A and B. Much more likely is A's buyers, or salesmen, or managers that invested in better equipment, or A's programmers, or something.
It isn't like Joe is out there generating twice the revenue by driving his forklift around the warehouse twice as efficiently. Look at him load those boxes!
Tellers, computer techs and clerks are in jobs that do not exert any leverage on the bottom line. They chose this line of work, for whatever reason, but the fact is they cannot generate much of an economic boon to their company no matter how quickly or diligently they work; the company is happy if they just get their assignments done.
It is the people that have unusual skills that deserve both credit and reward for making A do better than B. The clerks and janitors at A have done nothing and contributed nothing that makes them deserve more money than the clerks and janitors at B, I don't understand why you think they should be paid more just because A is more profitable.
@Bruce:
A pretty good observation!
In some sense, these firms have formed a trust, or monopoly, even if they didn't collude to do so.
This is a basic problem with capitalism; the natural outcome over a few decades or centuries (depending on the industry) is monopolistic rule, which destroys competition and all the supposed benefits that Adam Smith was talking about. Those benefits come from the competition for customers, but eventually this competition tends to produce a big winner that dominates the market and no longer has to compete for customers, and can crush any new competition with price, lawsuits, legislation or just economies of scale. They have a monopoly, and this is not in the best interest of customers.
At this point, big banks have monopolized our financial industry, and are holding us (the taxpayers) hostage to fund their multi-million dollar salaries, extravagant buildings and offices, corporate parties, jets and much more. If we don't fund it, they will trigger a great worldwide depression.
The problem is a wage and compensation system that is disconnected from the contingencies of performance that is tied to quantitative and qualitative measures aligned with company/corporate goals (which can be regulated; e.g., a goal to increase productivity by utilizing smoke stack technology or outsourcing labor. A performance-based system eliminates bonuses and excess salaries being paid out despite the success or failure of an organization.
Well, if it is legal then, WTF are we arguing about?
I'm so confused by this whole mess.
1) Why are Democrats defending rich banksters and Republicans decrying the fate of the working poor? This is something like seeing gravity reverse itself spontaneously, and yet nobody seems to be bothered enough to comment on this bizarre, sudden political switcheroo.
2) If it's legal and constitutional like Tony says. why is it that Nate here, and even the folks on Washington Week are calling it an ex pos5t facto Bill of Attainder? I mean, if it were a muddy part of the law like what exactly constitutes pornography, the debate would be more amusing. But both sides are saying it's not muddy at all, and it seems crystal clear tot hem: Nate says obviously it's not, and Washington Week and Nate say it is clearly so. As a non-lawyer, I am developing a headache from watching the two sides in action.
Nate understands the issue perfectly.
The punitive aspect of this is astounding and makes little sense in an arena where the affected class most likely earns a median income of $2,000,000, and would also sweep in the highly professional admin assistant who adds all the sizzle to presentation, putting together the books, suggesting graphics and layout suggestions and getting paid over a 100K for it. No bonus for her if her husband is a NYC Fireman pulling down the bucks it takes to attract America’s Bravest.
You cannot design fair compensation packages with a blunt instrument like this. Would this prevail the industry would be done and inside of ten years there would be one Bank, the Bank of the US. The Post Office of Banks. It would mean a virtual return to the pre-industrial revolution. This moment would be looked at as the Zenith, perhaps the beginning of the coaster falling just over the apex of the highest hill, an exhilarating, terrifying race to the bottom, from a height never to be equaled again.
That the United States House of Representatives, the people’s house (!), would act so categorically against the tender interests of the people (all the people) and would ignore glaring evidence of Constitutional infirmity, sullying its place in the annals of democracy, is beyond my comprehension. What a venial political calculus that would rather subvert the people’s freedom than see its agenda defeated and use class warfare to distract from the real policy issues that should be vetted, but few are allowed to understand.
Make no mistake: this tax bill is not intended to be made into law. It is meant to distract and throw some bones to the people, the popular version of Bread and Circuses. All parties do it, but until now none had been so inept as to throw the financial markets of the United States under the bus at the very time that the administration’s plans are so dependent upon the market’s resiliency and ability to absorb yet new trillions of debt in a short, short period of time. Inside of a few years there will be no one left to sell those Bonds to the Chinese and then one way or the other we will be working for them.
President Obama risks losing his legitimacy by losing the consent of the governed. He fails to use his power to command our attention to educate us, he only is motivated by a desire to inflame us to support him and his agenda for visceral and personal reasons that, like the reaction to the AIG Bonuses, seems apt and just, but in their implementation would lead to total destruction.
Reason from the margins and figure out at which pole you might survive.
(You can now follow me on Twitter: PeteKent01)
It's like the criminal complaining about how the laws are written!
He may be right but I just can't muster alot of sympathy.
Bonuses that have no connection to performance shouldn't be called bonuses.
Company performance should always be a factor to individual incentive pay.
I'd love the topic to focus on the fact that the credit default swaps that killed AIG were COMPLETELY unregulated. This was because Phil Gramm wrote into law an explicit prohibition to it's regulation. A Republican House and Senate passed the legislation with broad Democratic support and Clinton signed it.
We need to understand where this problem came from in order to fix it.
Well, I've always said to myself that I will vote with the Party that favors the disadvantaged over the rich.
If Nate is representative of the Democrats that have started to favor the Wall Street Robber Barons over the working class, fuck you Nate, I'm voting Republican.
And before you all start howling at me (and I can sense already that the liberal posters here will) I vote according to the issues not the party. You've already started talking about abandoning GLBT rights as a plank int he platform, then the environment and now this. Why should I vote for a wannabe Republican when I can get the real thing?
Betray your base and you only have yourselves to blame when the whole shithouse goes up in smoke. And bitching at me isn't going to make me vote for you either-get back to your core values and show me you were sincere when you promised us an agenda that favors the disadvantaged instead of the elites.
Before we remember that y9ou first noticed food prices were going up while shopping at Whole Foods for arugula and not while shopping for the food working class people eat at a market we can afford. Unless you just send the butler out to do the shopping while you hobnob with the Wall Street execs.
It's not a question of whether these executives sulk and leave. The law imposes a more-than-90% tax on earnings above $250,000, regardless of source. Why work any longer, once past that point?
Also, the law taxes any compensation other than hourly or weekly wages, at over 90% (including state and medicare taxes). So someone who left one of these firms years ago, who makes over the limit at their new job -- gets taxed at 90% on compensation deferred in earlier years. Compensation that has nothing to do with incentive bonuses.
The example of the administrative assistant making $40,000 a year, whose spouse makes >$210,000 at their job at an unrelated company, is truly scary -- why is he taxed at 90% on his admin's salary?
The scope of this law is so much broader than its target, that it's scary.
@Statler N Waldorf:
Why should I vote for a wannabe Republican when I can get the real thing?
If you want the real thing, by all means go ahead and vote for the real thing. Please. Be my guest.
However, two things.
Firstly, it's been fundamental to Obama's approach from the beginning that the executive should attempt to govern from the center of consensus rather than by radicalizing and rewarding a self-identified 'base' that can deliver 50% + 1.
Secondly, if you want to ensure that government focuses on an agenda of helping the disadvantaged rather than fulfilling the expectations of the wealthy, you need to get in there and become politically active yourself. You live in a country with a two party system. Like the Republican party, the Democratic party is full of the 'advantaged', many of whom are not as strongly aware of the plight of the 'disadvantaged' as you are, and most of whom have — between each other — multiple conflicting concerns, all of which they would allow to take precedence. It's an inevitable consequence of how political power works, and rewarding them for 'favoring' the disadvantaged concedes the point and moves the social dynamic not towards equality but towards a system where there is a perpetual constituency of the disadvantaged who rely upon the Democratic party for patronage.
This isn't due to anyone's plan, or anything; it's just where equilibrium lies. If you want to change the world you need to go change the world. I'm not sure how you're going to do that by voting Republican, but I guess you'll think of something.
Emma @102 might as well be Madame Defarge. She writes:
"It's like the criminal complaining about how the laws are written!"
Note how quick some people are to presume that everyone who works in the financial services industry is a criminal, and even if they are not it is okay to punish the innocent as long as we don't miss any of the guilty.
That might make sense if it had anything to do with restoring the economy or creating jobs, but instead iit s caluculated to destroy the very powerhouse that makes our economy run.
I understand the outrage. What I don't understand is the ignorance and the lack of self-interest.
Statler at 149 struggles with coherence, but he makes a good point: "Why should I vote for a wannabe Republican when I can get the real thing?"
Indeed wisdom eventually comes to us all. The laws of economics cannot be repealed any more than the laws of nature. The Republicans have always respected such laws, the Democratics seek to change them.
They might just as well sponsor a giant public works program to change the tides or the direction of earthly rotation.
I may have been to harsh on Statler.
"Well, I've always said to myself that I will vote with the Party that favors the disadvantaged over the rich."
I think sometimes you can make your selction simply, especially in a binary system like ours.
For me its I've always said to myself that I will vote with the Party that favors popular freedom over the imposition of government control.
@PeteKent:
For me its I've always said to myself that I will vote with the Party that favors popular freedom over the imposition of government control.
Indeed, the Republican party will give you any freedom you want, so long as it's popular.
muddletoes,
In case you don't know, the TROLL who signs in as 'PeteKent' is exactly that - a TROLL.
Please:
Do
Not
Feed
The
TROLLs
DNFTT
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