Three Thoughts on the AIG Bonuses

I don’t have a degree in economics or law, but there are three things about the nationwide AIG bonuses outrage that have to be recognized.

1. Whoever authored the bill allowing the bonuses to be paid is to blame the most – not the people accepting the bonuses. If there is a legally binding contract that says they get the money, then they should get. That’s how contracts work. If you’ve got a huge carrot (several million dollars of ‘bail out’ money), then you use that carrot to get what you want (removal of huge bonuses). But this has to happen before all terms are settled upon. In fact, removing the bonuses just becomes one of those terms. You don’t, after you realize you screwed up the negotiations, make a moral issue out of people following through on a contract all parties agreed to and then ‘legislate’ that moral issue because you look like a fool.
2. What you especially can’t do is void such a legally binding contract. If you do, what reason would companies have to begin investing in our economy? They’d be quite aware that even legally binding contracts aren’t actually binding if the government is involved. The last thing you want to do is provide disincentives for future investment.
3. Since just voiding the contracts (or that part of them) isn’t a good option there’s now a push to tax 90% of those bonuses. This option is just as bad as the previous one because the same disincentive for future investment remains. If the government is able to retroactively enact taxes on whatever the current ruling party wants, then why should anyone think their projected bottom dollar for their business will be the actual bottom dollar? If it’s determined that your company was too successful, then the government can just increase your taxes going backwards. If the proposal was to raise taxes on all 2010 bonuses, then this is much less problematic. Enacting retro-active taxes on people that are not politically popular is a very bad precedent to set. (And I know the AIG issue is related to personal bonuses, but there’s no in-principle way of keeping the two apart.)

In sum, voiding the contracts or levying huge taxes are both bad options and send a very bad signal to the business world. What the economy needs now are businesses willing to invest their capital, but both of these actions will make execs that much more hesitant to do so.

The federal government should have required that AIG not pay these huge bonuses as part of the terms of the bail out. But now is too late to demand the bonuses not be paid. Handling this before the bail out terms were settled would have been acceptable because both parties would have agreed that re-working the contract is in both of their interests (and this is precisely what happened concerning the auto-industry). Now that there is a valid contract one party can’t decide to renege to save face politically.

What Obama Said about Meeting Without Preconditions

In the last two debates McCain and Palin said Obama was naive for saying he would meet with the leaders of Iran, Syria, Venezuela, Cuba and North Korea without preconditions. Obama and Biden have responded by saying that those remarks were taken out of context and that Obama said he would seek high level, non presidential, diplomacy. Well thank God for the internet.

The USA Today has the relevant quotes from the Obama conference call in which these remarks were made (you can read it here). During this conference call Obama said, “If I sit down with the leader in Iran, I will send him a strong message that Israel is our friend, that we will assist in their security and that we don’t find nuclear weapons acceptable… That’s not going to be a propaganda coup for the president of Iran.”

Here Obama said he would meet with Iran and that doing so would not be a coup for the president of Iran. I don’t know how else to take “If I sit down with the leader of Iran.” I’m not sure how “I” can be misconstrued. In light of this the question he is asked,

“Would you be willing to separately, without precondition, during the first year of your administration, in Washington or anywhere else, meet with the leaders of Iran, Syria, Venezuela, Cuba, and North Korea, in order to bridge the gap that divides our countries?” To this question Obama responded, “I would.”

Feel free to read the linked article and see everything in context and then make your own honest decision as to whether or not Obama meant he himself would meet with these leaders or if he would have high level diplomats do it.

If he misspoke, that’s fine, but come out and admit it as misspeak. But please don’t insult my intelligence by saying he was referring to high level diplomats.

Obama and Annoying Spouses

Anyone that has been with a “significant other” for some time will have experienced a moment when the drive to some destination is complicated because of a wrong turn or two. Growing up, we often joked that any time it was unclear if we should turn right or left, whatever my mother said we should, we should probably do the opposite. My mother had a knack for directing us the wrong way at crucial moments. Thankfully, we often would just laugh at ourselves for listening to her again when we knew we should do just the opposite.

Others, however, are not as fortunate. Instead of moving on and figuring out , given the wrong turn, what the best course of action is now, they focus on that mistake and never let it go. Instead of saying, “We made a wrong turn, what’s the best thing to do to right the course”, they say, “I told you then that we shouldn’t go this way, now we’re all screwed up; we might as well just go home.”

This latter, annoying, spouse seems strikingly similar to Barak Obama and the war in Iraq. We all know, because he can’t go five minutes without reminding us, that he voted against going to war with Iraq while McCain and Clinton voted for it. What Obama seems to not get is that, we are at war in Iraq right now! Focusing on what we should have done is not going to help us to decide what to do now. Even if we grant that going to war was a mistake, that doesn’t mean the best thing to do is just go home. If it is, give us an argument for it that doesn’t depend on the earlier decision to go.

What Obama needs to do is convince us that the best course of action now is to leave Iraq. That is a completely separate issue from whether we should’ve gone in the first place. If he wants to bring that up in addressing Clinton’s ability to make decisions, that is fine. But, again, that’s different from addressing what we should do in Iraq, given that we are there now.

Obama is fortunate to not have any tough questions from the main stream media because what he says about this just makes no sense. Obama says we should get out of Iraq and focus on Al-Qaida in Afghanistan. He justifies this by saying that going to Iraq diverted our attention from Afghanistan and we need to get back to that original mission. That’s all fine and dandy, except there is one big problem. Al-Qaida is in Iraq right now.

I wish someone would ask Obama just this one question, “Why do you think fighting Al-Qaida in Afghanistan is a good thing, but fighting Al-Qaida in Iraq is a bad thing?” I would love to hear if he could respond to such a question without pointing out that we shouldn’t have gone to Iraq in the first place. What would make things really difficult, if someone in the media would push him on it, is that he’s said that staying in Iraq would be an option if there were Al-Qaida attempting to establish a base there. So, what exactly does he think Al-Qaida is doing in Iraq right now, shopping? (Earlier in the week McCain mocked him on this, and should continue to do so.)

So, am I misreading Obama’s remarks on Iraq and Afghanistan? Am I wrong to think his argument for leaving shouldn’t rely on whether we should’ve gone?

Cartoons & Socialized Health Care

I happened upon this cartoon the other day and I think it does a nice job of clearly showing the problem that we are in today. No, I don’t think not having universal health care is the problem. I do think that people are increasingly of the mind that it is the government’s job to take care of them. This never has, and never should be, the central role of our government. The proper role of the government is to set the framework in which we can live freely. It is to protect others from infringing our rights to do as we ought (not as we want) and that is it. (For an outstanding argument demonstrating this point, see F.A. Hayek’s The Road to Serfdom.)
With that said, I would like to address a few of the depictions in this cartoon.

First, the roads. The majority of our roads are not federally funded. Most of them come from property taxes, sales taxes, and income taxes. And this is how it should be. The local governments are able to best decide what roads need to be built, repaired, and ignored. It is not the federal government’s role to do that for us. No one is advocating a local government ran health care system so the comparison to roads is really bad. But, if that’s what someone was advocating, and succeeded in getting it implemented (think Massachusetts), then make that clear. It’s a lot easier to move a state over than to move a country over.

Second, the army. Many don’t know this, but Milton Friedman (an economist) was one of the most influential people in getting the U.S. away from a conscription-based army and to a volunteer army. His reasoning was simple. If the military has to get people to choose to go into the military, the military will have to compete for their service. They have to offer better training, pay, etc. than the other options out there. The result, we have a much better trained and equipped military now than we ever did then. So, what does that have to do with health care?

Well, no one is forced to serve in the army. After we transitioned to a volunteer military, it has gotten better and more sophisticated. The military can’t just say “You have to join us”, instead they have to say “Here’s why you should join us.” Notice that if we switch to an Obama or Clinton-esque national health care, we are doing just the opposite. No longer do you get, “Here’s why you should join us” but instead you get “You have to join us.” So, the army example is bad for two reasons. First, the army is volunteer and national health care would not be. And second, when military service was mandated, there was no reason for the military to work to make it better. People had to join. Why think the health care industry would be any different?

Third, the postal service. By almost all accounts, our federal government ran mail service is a complete disaster. How many times can you remember their raising the cost of postage stamps? Why are they doing this? Because the USPS is losing money hand over fist and they’re trying to stop the bleeding. People thought the idea of FedEx, UPS, and DHL was absurd because the government already offered a mail service. But, the privatized system works so much better, and is cheaper for those that use it, that they are all extremely successful businesses. If the federal government is unable to deliver a package from point A to point B and keep costs down, what makes us think they can figure out a way to transplant a heart from person A to person B any better?

Fourth, the fire department. Once again this is a bad example because fire departments are not ran by the federal government, but local municipalities. Again, if you want a local ran health care system, say so. As far as I know, no one is seriously advocating such a system, and Obama and Clinton are definitely not doing so.

Now I know that this artist was probably doing this tongue-in-cheek, but I do think it highlights to a great deal how many people think about health care. It sounds so easy to just say the government should provide it and then stop thinking. But, it’s not that easy. Yes, they can provide our health care, but you have to figure out how we’re going to pay for it (the doctors, nurses, and staff are still going to get paid either way), who gets to decide if you get to have that life-improving but non life-threatening surgery, and how we can keep the program from becoming bloated with waste (which we still have yet to figure out how to do with Medicare and Medicaid).

Clinton & Other Dems on Terrorism

I’m not sure if I’ve ever said this before, but I think Senator Clinton is right (well, at least about one thing). In the New York Times there is an article describing the widespread disagreement between Clinton and other Democratic hopefuls about whether or not the United States is safer now than before 9/11. Clinton’s position is basically this, we are safer now than we were before, but because of Bush’s bumblings in Iraq and other places, we’re clearly not safe enough. What appears to be everyone else’s position on the issue, because Bush’s bumbling in Iraq has created more terrorists, we are now less safe than before 9/11.

Now I’m undecided if the lack of terrorist attacks on the U.S. since 9/11 means we are safer, though I do think our knowledge of foiled attacks does signify something. But what I think is really queer is how many of the Democratic hopefuls jump from the possibility of there being more terrorists to the reality that the U.S. is less safe. I’m convinced it’s just a red herring that the Dems hope will give them another chance to blast another Bush policy. I think their argument for us being less safe would go like this:

1. Terrorists were a threat to the U.S. before 9/11.
2. Since 9/11 Bush has invaded Afghanistan and Iraq, and in doing so, has created more terrorists.
3. If there are more terrorists in the world, then there are more people with a desire to harm the U.S.
4. More people that desire to harm the U.S. means that the U.S. is less safe now than before 9/11.
5. Therefore, Bush has once again screwed up America and despite all his efforts, we are less safe.

This may not be exactly how their argument goes, but from reading accounts of last night’s debate, it sure seems like it’s the gist of it. So why do I think appealing to the idea that there are more terrorists now than before is a red herring? Well, notice that in the argument above there is no mention about improved methods for thwarting terrorist attacks. Let’s say the rate of inflation continues at about 4-5%. Inflation stinks because if you own a home, if its appreciation rate is not outpacing inflation, then you’re losing money (you know, given insurance, maintenance costs, and interest on the mortgage). But, if the appreciation of your home is outpacing inflation, then it’s not as bad as it could be. I think you see the analogy. If there are more terrorists today, but the U.S.’s efforts at thwarting attacks has ‘outpaced’ the growth of terrorists, then we are safer. Notice this doesn’t mean having more terrorists is a good thing, it just means that having more terrorists doesn’t automatically mean we are less safe. The failure of most of the candidates to even address the fact that most agencies at home and abroad are more effective now is just an attempt to discredit everything Bush does.

I’m not sure if I’ll ever say this again, but, Senator Clinton, I think you’re right.