Warning: This is a post about economics and politics; it is a reader response post; but (here’s the warning), it’s also one of those annoying self-referential posts you only see on the Internet discussing a debate among the commentariat.
Last week went something like this:
- We learned about the $165 million in retention bonuses at AIG Financial Products.
- A lot of people, up to and including President Obama, got mad.
- Various commentators, including Ian Bremmer (on Planet Money, around the 14-minute mark) and Joe Nocera, said, in Nocera’s words, “Can we all just calm down a little?”
Their argument is basically that $165 million is small change, the government should be working on bigger issues, and the demonization of AIG is making it harder to solve the real problems.
Andrzej Kuhl, a former colleague of mine, put it well in an email to me after reading our New York Times op-ed:
I feel that the timing of the piece is harmful and its final conclusion is too limited.
Don’t take me wrong, I am a strong believer in compensation plans being tied to performance. And not just a short term – one year – window, but a performance measured over a multi-year period. Ideally, compensation enhancements should have multiple parts, ranging from evaluation of the performance of an individual, to that of a larger unit within which the individual performs. I also believe that all individuals are replaceable and should be moved aside if their performance has been sub-par (and bringing a company to the brink of bankruptcy is definitely below par).
Having said that, I strongly believe that the current brouhaha over bonuses at AIG, and other TARP recipients, has reached the level of a national hysteria. What should be an effort for some lower level functionaries, has been occupying front pages of newspapers, tying up valuable time of top government officials (including the president), as well as encouraging members of the congress to pontificate in circus-like hearings and propose retroactive tax legislation of dubious legality. In effect, our leaders are following, or being forced to follow, the angry crowds. But history also teaches us that such crowd-pleasing games, just like feeding a few Christians to lions, only obscure current problems and defer their resolution.
Ironically, those same historical facts described in your article could have been used to present a much broader set of recommendations. Rather than adding fuel to the fire (focusing on the lack of justification for retention bonuses), you could have called for a radical restructuring of the financial services industry and its compensation practices.
After all, even if we claw back the $165M (or even the $218M reported by Reuters today), the economy will still be in shambles and the mind set among the leaders of financial services establishments will not be much changed. On the other hand, if we can muster as much bi-partisanship into congressional work on budget, economy rescue plans, financial services regulations, etc. as we witnessed on the “bonus tax” proposal, we could be a step closer to the real solution.
I think there are two separate issues. On the first issue, I agree completely with Andrzej, and in large part with Bremmer and Nocera. I began my first post on this topic with these words: “$165 million, of course, is less than one-tenth of one percent of the total amount of bailout money given to AIG in one form or another.” I agree that the bonuses have an insignificant direct economic impact. I also agree that the furor that erupted over the bonuses has made it harder to solve our big problems. Not only have the president, his economic team, and Congress been distracted by Bonusgate, but the public backlash will make it much harder for the administration to get money from Congress when they do need it – not only as the economy deteriorates, but even when it comes time for things like health care and education.
At the same time, let’s not forget that Bonusgate has also had some positive effects. First, though small in itself, it strikingly illustrates a broader issue of tolerating business at usual in a failing financial sector. Scond, it has finally made the administration realize that there is a political cost to repeated generous bailouts of the financial sector.
The second issue is more complex. Bremmer and Nocera basically say, “calm down.” (Andrzej says something more subtle, which I will get to in a bit.) In Bremmer’s words, “if you are a subsistence worker, outrage is a luxury you cannot afford.” I’m not sure what this is supposed to mean. Outrage is an emotion, not a rational choice. Blaming outrage is like blaming greed: it’s an unavoidable part of the human condition. The question is whether we can do anything about it.
Bremmer, Nocera, and (to some extent) Andrzej blame our political leaders in Washington for indulging in populist bonus outrage instead of acting like responsible adults. But this raises an interesting question about the relationship between economic policy and democratic politics. I’m no expert on democracy, but I can make a couple of basic observations. We live under a democratic system. We want our elected officials to be sensitive to the concerns of their constituents. We don’t necessarily want them to do everything that a majority of people want – they are supposed, to some extent, to resist popular pressures and instead do what is in the public interest – but at the same time we get very upset when they seem to ignore popular opinion, or seem out of touch with popular opinion. When that happens, an administration can lose popular legitimacy, and without popular legitimacy, it will find it very difficult to get Congress to cooperate.
This is the risk the Obama administration now faces, as eloquently described by Frank Rich. Even if the administration officials believe that Bonusgate is a distracting sideshow – as they probably do – they cannot simply ignore, or belittle, the concerns of Main Street; if they do that, they lose whatever ability they have to solve our “real problems.” I think that the last administration was at fault for not dealing with the bonus issue back in September, and the new administration is at fault for not dealing it when it learned about it. But that’s water under the bridge, and Washington has to meet the public partway. And I think that is what Obama was trying to do.
This is not a country where technocrat-economists can design perfect policy solutions and implement them without regard for public opinion, nor would we want it to be. As I said in a recent post, I have made the mistake of thinking that an ideal solution could be imposed without taking proper consideration of the political difficulties involved. In the country we have, the ability of the government to implement the “right” policy solutions depends instead on its popular legitimacy, which means at a minimum feeling the public’s pain.
Now, Andrzej raised a slightly different issue: whether I (and, by extension, the many commentators who piled onto this issue) am at fault for helping to stoke bonus outrage. President Obama has to be sensitive to popular opinion; I don’t. In my case, Simon and I wrote an article trying to debunk one of the arguments for the AIG bonuses. We wrote it first because we believed what it said, and second because we thought its relevance went beyond AIG, since it dealt with the broader question of whether failed institutions can hold up reform by insisting that only they can fix the problems they created. So the question is whether we should have published it or not. (I agree with Andrzej that a better outcome of Bonusgate would be a systemic fix for flawed incentives in the financial industry. But publishing the article you most want to write, for reasons I won’t get into here, usually isn’t an option, unless you have your own column.)
Perhaps from a narrow utilitarian perspective one could argue that the article did more harm than good, because it contributed to the outrage that is making it harder for the administration to get real work done. From a broader perspective, however, one could argue that the value of the free exchange of ideas outweighs the short-term costs generated by the article. Of course, there is no way of quantifying and weighing these costs and benefits. And in any case they are probably relatively small either way; I don’t want to make the mistake of exaggerating my own importance.
In summary, I agree that Bonusgate has had some negative consequences (along with its positive ones), but I’m still comfortable with my small contribution to it. If we were much, much bigger, then perhaps I would pay closer attention to the potential consequences of what I write. But for now I’m willing to write pretty much anything I believe to be true.