For the past few weeks everyone in Washington has been obsessed with the AIG bonuses debate. Politicians and the public demanded that the insurance giant rescind bonus payouts that they said rewarded recklessness and greed at a company being bailed out with $170 billion in taxpayer funds. Keeping with the long American tradition of vilifying Wall Street, President Barack Obama lambasted Wall Street bonuses as "shameful" and unequivocally pronounced, like many of his predecessors, that such excesses will never again be allowed. The debacle reached a climax last week when the House of Representatives passed a bill designed to take back as much of those bonuses as possible by imposing a 90 percent tax on the recipients, a rather crude way of dealing with the problem. The debate seems more like political theater that distracts us from the more important issue: the increasing cost and role of government in the economy. And it further hides two fundamental lessons that ought to be learned as a result of this whole episode.
The first is that the government has no business running businesses because it's not very good at it. The second is that there needs to be a set of rules and a system - probably an agency - to handle situations like this when the government does need to step in during a time of distress and take over a financial firm. Before the inauguration, President Obama himself said that he did not want to be in the business of having the government running private corporations because it's something in which the government doesn't have a very good track record. This is one of the problems that we are witnessing today as the government struggles to figure out what to do with AIG when the taxpayers have essentially an 80 percent stake in the firm.
The problem is that corporate and government cultures are very different. Incentives are different, as are rewards. Businesses are run with crisp, clear decision-making at the top whereas government is best run when there is consensus. The inevitable culture clash makes it difficult for the government to run or even own a company such as AIG. But sometimes, as is the case now, this is unavoidable and at least in some areas there is a system set up for the government to handle these situations. If AIG were a bank, the Federal Deposit Insurance Corporation (FDIC) would move in, put the bank into receivership, bring it down in an orderly fashion and disperse its assets. If it were an ordinary company, a bankruptcy court would step in and do the same thing. The problem with AIG, Citigroup and other large financial institutions is that they're unique entities; they're not really banks and not really businesses. And they're too big to fail because their tentacles are spread so far out across the economy.
But as Hank Paulson said before and current Treasury Secretary Tim Geithner has echoed, no system currently exists to deal with failing financial institutions that are too big to collapse. The legislation designed to deal with this inadequacy will come when the dust settles on the current economic crisis. And when that happens, everyone will likely remember the AIG bonuses debate as one of the reasons for finding a legal solution to this problem.
In many ways, the AIG bonuses distract us from the real debate of increasing government influence in the economy. As Washington moves towards its goal for more power and stewards of liberty are accused of tilting at windmills, this is no time for economic liberals to concede. The fingerprints of big government can be found all over today's economic problems. As Gary Becker, winner of the 1992 Nobel Prize in Economic Sciences, recently said at a special meeting in New York, the Federal Reserve is the first culprit in the housing crisis - not Wall Street greed or lack of regulation. Low interest rates set by the Fed and government policies designed to extend home ownership to low-credit, low-income families together contributed to the housing bubble. As President Obama pushes to increase the fraction of taxpayers paying no income taxes from 38 to 50 percent, he will create a permanent voting majority that has no stake in controlling the cost of general government. The Congressional Budget Office reported last week that Obama's proposed budget will increase the federal deficit by $2.3 trillion more than the White House had claimed. While it's true that Obama inherited a trillion dollar deficit, he has hardly been an innocent observer. The president is seeing that $1 trillion deficit and raising it again and again. And if his budget passes unchanged, America may well be on an express train to the European welfare state.
