It’s not the bonuses, stupid

The AIG bonus flap is an unwelcome distraction from the main event, for more than one reason, not least because, if the “bonuses” are clawed back, somebody might be deluded into thinking that something has actually been accomplished.

First Hilzoy:

HR 1586

Even though I am furious at the people who brought down AIG, along with all the other Masters of the Universe, I do not support the House bill that passed yesterday — the one that would tax bonuses at 90%. For starters, it’s badly targeted. On the one hand, it leaves out the incredibly troubling Merrill Lynch bonuses, along with any other bonuses paid before Jan. 1 of this year. On the other hand, it hits people who were just writing life insurance policies at AIG. Moreover, it also hits anyone AIG hires now. Suppose, for instance, that AIG were to hire Paul Krugman to supervise the liquidation of its Financial Products Division. And suppose AIG wanted to pay him a bonus if he did his job quickly and well. His bonus would be taxed under this bill, even though he had nothing to do with the financial crisis (which is why I picked him), and is being given a bonus for helping to solve it.

The bill would also allow firms receiving TARP funds to avoid the tax by simply paying their employees exorbitant salaries. Bonuses are bad, but exactly the same amount of money paid to exactly the same employee in the form of a salary is apparently fine. This seems exactly backwards to me. Part of the problem with the AIG bonuses was precisely that they were not tied to performance in any way: the people at AIG-FP, who had gotten enormous amounts of money when times were good, supposedly on the basis of their performance, locked down the same level of compensation when it looked as though their trades were about to go bad. Now, apparently, we want to give people an enormous incentive to decouple their compensation from performance in exactly the same way. Oh goody.…

Then Robert Reich:

Congress’s Potemkin Populism

… Angry populism thrives on stories about the rich and privileged who use their influence to get cushy deals for themselves at the expense of the rest of us. AIG’s bonuses provide a perfect example. It’s too bad the same populist outrage doesn’t extend to issues involving far more money, affecting many more people, and entailing far more insidious abuses of power. Congress’s potemkin populism over AIG’s bonuses disguises business as usual when it comes to the really big stuff.