When populism goes too far

It will be a great event if the bonus tax does not pass the Senate.

I am not defending most of the financial services sector in the above sentence, as I do believe that is has been led by intellectually vapid individuals incredibly undeserving of their renumeration.   It is important to realize, however, that the fracas of the previous ten or so days is a symbolic display, nothing more.  $170m is not that much in the scheme of this crisis; we are protesting the symbol of the money, not the money itself.

Likewise, the symbolism of taxing all large bonuses would have caused much more damage than the recouped value of the bonuses.  The bill which passed the House would have taxed GM executives, Goldman executives, Wells Fargo executives, anyone with a household income over $250,000 receiving a bonus whose company has received money from the government, and possibly anyone taking bailout money in the future.  Worse, it would demonstrate that the government does not desire to respect the rules of the game.  We would become much closer to Venezuela by breaking contracts to seize assets in response to populace infernos.  Surely none of our lawmakers want to emulate Venezuela, but the prioritization of cable news soundbites over contractual obligations (the rules of our game) suggests otherwise.

Passing the bonus tax would thus scare not only the financial sector – which, as difficult as it is to admit, is fundamental to the functioning of our economy – but any sector interacting with the government.  (Taken to the extreme, one could argue that the government’s willingness to abrogate the AIG contract indicates it would cancel any contract if it felt like it.  This is an extreme view but one probably held by many in business.)  So, as much as I hate the scene of rich imbeciles becoming richer, I think we must let AIG executives keep their bonuses and focus on repairing our financial system.  The bonus issue is a red herring, and, if it prevents us from pursuing necessary measures to restore our economic system, it will ultimately hurt us normal people more than the already rich executives at whom we are mad.  If retribution is to be sought, let it be obtained through increased regulation, higher marginal tax rates, and stigmitization.  But let us not establish that the only law of the land is arbitrary.