Monday, March 23, 2009

Not Fair and Not Economical

So this is life in Obama's America.

You make a deal with your employer. If you stay with him for a year, you will be paid a bonus.

It is a difficult year because your employer is suffering from financial difficulties. These difficulties are due, in part, to the damage to your company's credit rating done by an overambitious prosecutor and whorehouse patron who went on to resign the New York Governorship in disgrace. Nevertheless, you keep up your end of the bargain, and collect your bonus.

Then the government, which is now the majority stockholder in your employer, decides that the company made a bad deal.

The President of the United States instructs the Secretary of the Treasury to "pursue every single legal avenue to block these bonuses."

The Chairman of the House Banking Committee calls you "incompetent" and demands your name be made public.

The leading Republican on the Senate Finance Committee suggests that you "resign or go commit suicide."

The CEO of your company pressures you to "voluntarily" return your bonus.

Legal experts writing on CNN.com recommend that your employer play "legal hardball" against you, aggressively search your contract for loopholes, and threaten you with expensive court procedures if you try to retain your earnings.

The House of Representatives, ignoring the Constitution's protection against ex post facto legislation, passes a bill to confiscate your bonus via a 90% tax (The Supreme Court has ruled in the past that this protection doesn't apply to retroactive taxes. I'll deconstruct that in a future entry).

Angry protestors demonstrate outside your home and issue death threats against your children.

This, of course, describes the furor during the past week over American International Group's (AIG's) payment of $173M in retention bonuses to its employees. Since this blog concerns itself with arguments, I will focus on a premise implicit in President Obama's, Senator Grassley's, and Representative Frank's argument that these bonuses should be recovered. The premise is: it is ok to renege on a contract if you decide it was a bad deal, even if the other party already performed his obligations.

This premise is wrong, on grounds of both fairness and economics.

The fairness argument is that it is not right for a company to refuse to pay its employees after they have done the work. They may have passed up other opportunities or incurred financial obligations in the expectation that their bonuses will be paid. It is certainly not fair to publicly humiliate them.

The economic argument is that we enjoy enormous prosperity in this country because individuals and businesses invest enormous quantities of capital, energy, blood, toil, tears, and sweat in exchange for promises from their partners. But they will not make these investments, and consequently they will not generate wealth, if they cannot reasonably expect those promises to be kept.

I do not know whether AIG made a bad deal. I do not know whether the bonuses went to key employees who needed combat pay to be retained, as the company says, or whether the bonuses went to the "incompetents" who were responsible for the company's problems to begin with, as Mr. Frank says. Either way, it doesn't affect the fairness argument or the economic argument. It is unfair for a company to withhold pay after the work is done, even if it decides it had offered too much. People will be reluctant to make deals with a company that welshes on them, even if it welshes "in the public interest". I realize that Messers Obama, Grassley, and Frank are new to the business of running an insurance company, so perhaps they are unaware of this. The Logic Critic gives them…

Coherent structure, but relies on assertion, emotion, or faith rather than genuine argument.1 Blade - Not even an argument.

6 Comments:

Anonymous David Boxenhorn said...

I thought that this was a good commentary on the issues:

http://american.com/archive/2009/march-2009/public-outrage-as-a-systemic-risk

March 24, 2009 2:00 AM  
Blogger Tracey said...

Compelling argument, but I thought the Spitzer thing was a little ad hominem.

March 24, 2009 10:52 AM  
Blogger Li Kim Grebnesi said...

David: I agree with "The American" article the government should let these troubled companies to go bankrupt if necessary. But I also think the government should give them a fighting chance by removing the root causes of their problems: market distortions caused by government action such as the creation of Fannie Mae and Freddie Mac, the Community Redevelopment Act, the Mark to Market Accounting rule, CAFE standards, health insurance mandates, etc.

March 24, 2009 10:25 PM  
Blogger Li Kim Grebnesi said...

Tracey: Yes, I did mar an otherwise well-reasoned entry with an abusive ad hominem. You are right to call me out on it. The Logic Critic gives the Logic Critic one blade.

March 24, 2009 10:27 PM  
Anonymous David Boxenhorn said...

Li Kim, I agree with you. In fact, I would go further in advocating a government-backed reflating of bank deposits (in a market-neutral fashion, such as a tax rebate in the form of long-term savings accounts that can be deposited in the bank of the recipient's choosing). My point in posting the link was that, in fact, there is an established way to abrogate contracts. The difference between that and what's happening is that it's not an ex-post-facto law, and it's not (unconstitutionally IMHO) directed at a specific population (first they came for the traders, but I did not object because I wasn't a trader...).

March 25, 2009 3:13 AM  
Blogger Li Kim Grebnesi said...

I've been waiting for the right moment to paraphrase that Martin Niemoller poem. You beat me to it!

March 26, 2009 5:40 AM  

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