Public anger over the bonuses paid by AIG was well-deserved, but the resulting tax action by the House was unwise.

The House voted 328 to 93 on Thursday to confiscate via the tax code 90% of retention bonuses paid by recipients of TARP funds.  Though it is a moral hazard to reward bonuses for huge losses, the White House has even admitted that nothing in the TARP rules prohibits recipients from writing out such hefty retention checks in the first place.

Rep. Charles Rangel, the chairman of the House Ways and Means Committee, the committee that writes the tax code, was at first possessed by a rare fit of good judgment in cautioning his colleagues against using “the [tax] code as a political weapon.”  However, as public outrage mounted, Mr. Rangel himself sensed which way public opinion was going and introduced the confiscation measure.  (Mr. Rangel himself is beset by his own tax, rent-control, mortgage, and car scandals, but that’s “none of your goddam business.”)

This tax risks poisoning the TARP program altogether since banks will balk at terms that require them to abrogate existing contracts and that force them to lose necessary talent to competitors. It also sets an example that all future business decisions are subject to political, not economic, scrutiny.  Though it is fair that recipients of public money be held to public standards of accountability—as politicized as that may be—it is important that Congress and the Treasury view these banks as investments; when they lose, the public loses.

Even if both houses pass the measure and the President signs it (his press secretary says he’s open to the idea), it will face Constitutional challenges in the courts for several reasons:

It is a bill of attainder, which punishes people or a group of people without the benefit of a trial.  Since Members of Congress have already publicly expressed that the purpose of the bill is to punish a particular group of people, they may have unwittingly proven the case to a court that their intention was never to set a national tax policy, but rather to react against an act that benefited a short list of people.

Similarly, the bill denies due process.  The Fourteenth Amendment stipulates that the government may not “deprive any person of life, liberty, or property, without due process of law.”  However unwise the bonuses were, they were lawfully distributed, and an explicitly confiscatory tax against this group of recipients without any sort of trial deprives the recipients of any sort of due process.

Furthermore, the tax is an ex post facto law, confiscating income already lawfully distributed.  Though Congress certainly has the authority to tax and to tax income already distributed (i.e. existing wealth), the power to tax involves the power to destroy, and there is no doubt as to the inention of this onerous 90% tax rate.

The bonuses amount to a tiny fraction of a sliver of the TARP, but as we have argued before, even a small portion misspent is still irresponsible.  Nonetheless, some commentators on the Right have labeled this row “cosmic myopia” and a “bonfire of the trivialities.”

Ideally, Congress and the Administration would tie future compensation packages to performance, but in the rush for due accountability, we cannot ditch the rule of law.

Photo: Susan Walsh, AP

The revelation of AIG’s extravagant bonuses is renewing calls for the Treasury to replace the leadership of bailed-out firms.  If these people brought their banks to such dire circumstances in the first place, so the thinking goes, they have proven their incompetence.  Fire them all, many say.

Though Monumentality hardly defends failed enterprises, one must wonder if the latest calls for executive firings would bring about the same calamity as de-Baathification did in Iraq.

When in 2003 the Coalition Provisional Authority, under L. Paul Bremmer, dismissed all senior officials of Saddam Hussein’s government, the result was a national Iraqi government devoid of leadership.  By categorically branding former officials as tainted, their replacements— a melange of political hacks, amateurs, and empty seats— ran the new Iraqi government FEMA-style.  We all know how that turned out.

Similarly, in the frenzy for well-deserved executive accountability at AIG and other firms, the Treasury should avoid repeating the mistakes of Baghdad.  Though executive boards and management (and the rank-and-file, too, to some extent) oversaw dodgy deals, they are ipso facto the people with the most knowledge of what deals need undoing.

Certainly it is possible for new-hires to gain the necessary institutional knowledge to lead these firm to a recovery, but it takes time.  Though the President is fond of solving all problems all at once, retribution and recovery are best served in separate courses.

The Treasury must not damage the viability of its (well, our) investments tomorrow for the sake of exacting a pound of flesh today.

Today’s New York Times article on Massachusetts’s universal health insurance plan reveals one major obstacle to a nationwide plan:

Those who led the 2006 effort said it would not have been feasible to enact universal coverage if the legislation had required heavy cost controls. The very stakeholders who were coaxed into the tent — doctors, hospitals, insurers and consumer groups — would probably have been driven into opposition by efforts to reduce their revenues and constrain their medical practices, they said.

Though the President and many in Congress promise a universal coverage plan for the nation, they have not publicly acknowledged that the only feasible way to implement it will require the costly appeasement of various lobbies opposed to cost-controls.

The President rightly criticized Medicare Part D’s statutory inability to bargain down drug prices from pharmaceutical companies, but will he stand up to doctors and hospitals and bargain down fees for doctors visits and hospital stays? Will he propose limits on malpractice damages thereby limiting the cost of malpractice insurance, but also limiting lawyers’ incomes? Will he demand that insurance companies accept everyone regardless of condition, even if it raises the premiums for everyone else? Will he try to relieve medical school debt by forcing down tuition costs?

If not, or even if these necessary financial controls are delayed a few years, where does Pres. Obama intend to find the money for this?  He is considering taxing employee-provided health benefits, a part of the McCain platform he criticized while running for office.  Though a wise idea, the reality of any tax he would impose would contradict his campaign rhetoric (though this wouldn’t be the first time).

A nationwide health insurance plan, though politically popular, would require taxes and fees that would likely prove unpopular, not only among the general public, but among key Democratic constituencies (e.g. lawyers, doctors, professors) as well.

Larry Summers on ABC's This Week

The hypocrimeter dinged loudly this morning when Larry Summers, the President’s top economic adviser, described the folly in rewriting bailout terms with A.I.G.  after the ink had already dried.  George Stephanopoulos brought up a breaking story that A.I.G., which had received a bailout loan from the Federal Reserve in late 2008, was issuing $1b in bonuses to some of the same employees who drove the company to the brink.  Since the terms of the Federal bailout did not preclude such compensatory profligacy, Summers said it would not be possible to force the company to withold the bonuses.  Summers told Geroge Stephanopolous on This Week,

Look, if you start changing the rules ex post [facto] on financial contracts— these kinds of contracts— you may get a feeling of satisfaction in the short-run, but the President said something very, very important, George, in his state of union speech: he railed and spoke very powerfully against what has happened, then he said but we can’t govern out of anger. And what’s being done here— no one wants to be doing these things, no one wants to see money going for this purpose with all the needs that our country has— but at the same time if we don’t, um, contain this situation, if we don’t respect laws on which people reasonably rely, the potential chaos, disruption, lack of credit, resulting unemployment will be that much greater.  Those are the agonizing judgments that our financial authorities have to make.

Summers is right.  Upholding contracts is a key part to upholding the rule of law and it reduces the risk of economic ventures.  When contracts are enforced properly, both parties have greater faith in the system and are thus more willing to invest in ventures whose risk would otherwise discourage investment.  If debtor banks learn that the terms of their bailout loans will blow with the political winds, banks will be less likely to take the necessary loans and stockholders in existing banks will lose faith and sell their shares.

The hypocrisy, however, lies in the Administration’s support of “cram-down” provisions that would allow bankruptcy judges to modify the loan terms (principal and interest rates) of mortgages for bankrupt homeowners.  If it is calamitous to rewrite financial contracts ex post facto, as Summers says, why does the Administration support rewriting the financial contracts between lenders and bankrupt borrowers?

A cram-down provision raises the uncertainty of mortgages, since a bankruptcy judge could rewrite the terms in a way unfavorable to a lender.  Lenders will likely respond to this added risk preemptively by adding a risk premium to interest rates.  Thus, to save some current insolvant borrowers, future borrowers must suffer.  But as we have written before, handing out political favors now at the expense of the future is easy. After all, the future can’t vote yet.  At least the Administration will, to quote Summers, “get a feeling of satisfaction in the short-run.”

Rarely does our culture explicitly extol the virtues of money.  It’s a bit crass, we’re told.  Money concerns, however, have a way of focusing minds on things that matter and away from faddish diversions.  There is only so much airtime and so many op-ed pages and so many emails to Congressmen that could ever be generated during the lifespan of any political controversy cycle.  When there’s nothing else serious to talk about, “cultural” issues (e.g. God, guns, gays, etc.) are afforded their fifteen minutes.

Mark Rich in the Times writes that in this economy, where concerns of money trump all others, the culture warriors of the past 20 years are getting laid-off, as President Obama reverses the global gag rule and stem cell policies of the Bush Administration.

What has happened between 2001 and 2009 to so radically change the cultural climate? Here, at last, is one piece of good news in our global economic meltdown: Americans have less and less patience for the intrusive and divisive moral scolds who thrived in the bubbles of the Clinton and Bush years. Culture wars are a luxury the country — the G.O.P. included — can no longer afford.

Yes and no.  While the moral scolds are still scolding and their followers are still reiterating their specious talking-points, other issues are crowding them out.  Rich is wrong to think that “Americans have less and less patience” with those who want to teach creationism in school (a majority of the public wants this), or to keep the gays for marrying (even a majority of Californians won’t allow it).  These erstwhile “values voters” still exist in large numbers, but are distracted by more pressing economic concerns.  It’s not so much a matter of patience as it is a matter of attention.  When the economy’s decline has settled, the silent majority (Rich admits their silence, but not their majority) shall once again savor the luxury to take offense to Janet Jackson’s exposures and other such non-issues.

* * *

There’s one curious contradiction in Rich’s article:

As Michael A. Lerner writes in his fascinating 2007 book “Dry Manhattan,” Roosevelt’s stance reassured many Americans that they would have a president “who not only cared about their economic well-being” but who also understood their desire to be liberated from “the intrusion of the state into their private lives.” Having lost plenty in the Depression, the public did not want to surrender any more freedoms to the noisy minority that had shut down the nation’s saloons.

F.D.R. did not end “the intrusion of the state into … private lives.”  F.D.R. presided over a massive expansion of government intrusion, mandating all sorts of new taxes and social welfare schemes, not to mention the extensive economic regulation.  Whether or not one thinks the New Deal was wise, there is no doubt that F.D.R. expanded government intrusion.

Today The Post and the Gray Lady are publishing several good op-eds on Obama’s policies and methods.

Michael Gerson argues that Obama’s promise of change now rings hollow.  While Gerson’s criticism of Obama’s governing style and the Limbaugh affair are largely irrelevant, he rightly notes that the President is continuing with business-as-usual, i.e. promising everything for the price of nothing:

The pledge of “honesty” and “sacrifice” has become the deceptive guarantee of apparently limitless public benefits at the expense of a very few…. None of this is new or exceptional — which is the point. It is exactly the way things have always been done.

Charles Krauthammer argues that Obama’s stem cell and science policy is unsophisticated and contains a significant logical contradiction:

[The President declared] that we must resist the “false choice between sound science and moral values.” Yet, exactly 2 minutes and 12 seconds later he went on to declare that he would never open the door to the “use of cloning for human reproduction.”

Does he not think that a cloned human would be of extraordinary scientific interest? And yet he banned it.

Is he so obtuse as not to see that he had just made a choice of ethics over science?

Eugene Robinson defends Obama’s method of confronting all challenges (i.e. banking, health care, entitlements, infrastructure, education, etc., etc.) all at once.  He astutely dismisses the critics:

What these critics really want, though, is to delay or derail the progressive reforms that voters elected President Obama to carry out.

Judging by the scarcity of fiscal discipline over the past few years, it’s probably wise to characterize the opponents of the all-at-once agenda as really just opposing the agenda part, not the all-at-once part.

We, however, still hold by our belief that when governments rushes policy, the results are rarely wise (e.g.).

David Brooks (a conservative!) praises Obama’s nascent education policy as recognizing the importance of familial influence, teacher accountability, and charter school competition.  He writes that the President “has broken with liberal orthodoxy on school reform more than any other policy”.

Remember Sen. Obama’s campaign promise to examine the Federal buget “line-by-line” to eliminate wasteful spending and earmarks?  Shamefully, the president has gone back on his promise and instead signed the mammoth $410-billion omnibus spending bill.  An amazing 8,500 earmarks sit like barnacles on $7.7 billion of the bill.  One must suppose Senator Obama didn’t think it fair to impose burdensome campaign promises on President Obama.

While a presidential veto would have embodied the spirit of this new “era of responsibility“, the President has decided to play along to get along rather than ruffle the blue feathers at the other end of Pennsylvania Avenue.

Wait, haven’t we seen this movie before?

Ah, yes!  President George W. Bush waited five years to issue his first veto, preferring to work with Congressional Republicans quid pro quo.  The result was runaway spending and unexamined executive power.

Sadly, Pres. Obama had a chance to give us some change we could believe in.  The only change he gave us was his promise.

Pres. Obama has wisely proposed reducing agriculture subsidies, particularly to farmers grossing more than $500,000 annually.  The idea is naturally running into opposition from pols from states that benefit handsomely from the hand-outs.

Rep. Collin Peterson of Minnesota points to the fact that income limits on sole-proprietorships can be misleading, as we have noted before.

Mr. Peterson, Minnesota Democrat, scoffed at a proposal to eliminate direct payments to farmers earning more than $500,000 annually as a misguided idea from “some bean counter over at [the Office of Management and Budget].”

“This is a very stupid idea,” Mr. Peterson said Monday at a farmers convention. “If you got a 100-cow dairy, you’re probably going to have over a $500,000 gross [income]. So you’ll probably surprise the Minnesota 100-cow dairyman that he’s a millionaire.”

While it is true that judging wealth based on gross income alone is no good measure of poverty or wealth, agriculture subsidies paid to anyone are a waste of taxpayers’ money.

Robert J. Samuelson in the Post reiterates my point (though I doubt he reads Monumentality) on how the President’s budget, entitled A New Era of Responsibility, is anything but responsible.

If Obama were “responsible,” he would conduct a candid conversation about the role of government. Who deserves support and why? How big can government grow before higher taxes and deficits harm economic growth? Although Obama claims to be doing this, he hasn’t confronted entitlement psychology — the belief that government benefits once conferred should never be revoked.

Is it in the public interest for the well-off elderly (say, a couple with $125,000 of income) to be subsidized, through Social Security and Medicare, by poorer young and middle-aged workers? Are any farm subsidies justified when they aren’t essential for food production? We wouldn’t starve without them.

Given an aging America, government faces huge conflicts between spending on the elderly and spending on everything else. But even before most baby boomers retire (in 2016, only a quarter will have reached 65), Obama’s government would have grown. In 2016, federal spending is projected to be 22.4 percent of GDP, up from 21 percent in 2008; federal taxes, 19.2 percent of GDP, up from 17.7 percent.

I’m still waiting for a President willing to tell the truth: that we should pay the higher taxes necessary to fund the services we demand, or, more broadly, that we can’t always get what we want.

Now that would be an act of responsibility.

D.C. City Councilman Harry “Tommy” Thomas (Ward 5-much of northeast) is threatening to hold the advertisers of a small Brookland newspaper “accountable for [their] role in underwriting the Brookland Heartbeat.”

The newspaper’s “crime” was to report that Councilman Thomas isn’t that great at securing neighborhood improvements from the city government.  Thomas’s objections do not dispute any of the facts of the news story, which was widely distributed in Ward 5 in July.

Though Thomas’s letter stating his objections is obviously a political stunt, what is most worrying (and possibly illegal) is his threat to hold the paper’s advertisers “accountable,” without specifying what that means.

Does Thomas plan to exert undue pressure to deny these businesses their rightful licenses? Does he intend to send city inspectors on daily fishing expeditions to look for trifling violations?

This veiled threat is inexcusable and should be investigated by the appropriate ethics authorities in the city government. Such ambiguous threats run the risk of chilling political debate among citizens. Who will stick his neck out and rightly criticize those in power if losing his livelihood is a consequence?

Many small businesses such as shops and doctors’ offices are sole-proprietorships, meaning the income of the store is counted on the owner’s tax return as his own personal income. As a result, many small business owners are grossing more than $250,000 annually in income, even though they must pay rent, insurance, and employees’ salaries from this income, leaving only a modest sum to remain for the owner.

These business owners, because their personal income is combined with their business income, may face higher taxes under Pres. Obama’s tax proposals. What makes this coming tax debate interesting is that tax increases will heavily fall on people who voted for the President in the first place. Is this an instance of betrayal or an instance of you get what you vote for?

Victor Davis Hanson at RealClearPolitics, addressing the new President, discusses the implications of classifying small-business owners as “the rich”. He very smartly identifies the Democratic constituencies that will face higher tax bills under the President:

In fact, for your [spending programs] to succeed, you must go after the upper, upper middle-class, those making between $250,000 and $600,000 who are restaurant owners, home builders, labor contactors, architects, surgeons, engineers, hospital executives, college administrators, Ivy-League law professors, and many dentists.

These households are wealthy, yes; but they don’t own or even fly on $50 million private jets or host private Super Bowl parties. Their income is all reported, and with such good salaries come high insurance and, in the case of business, constant reinvestment and expensive inventories. They are not greedy, but the bulwark of the United States’ productive classes who in aggregate pay over 40% of the collective income taxes, and provide most of the jobs in the country. Under your plan many in these high-tax states will pay nearly 70% of their incomes in FICA, Medicare, federal income, and state income taxes. Why gratuitously mislead the American people that those for whom you will lift FICA ceilings or up their IRS bites to 40% are in any way synonymous with the super-rich? Remember the very, very wealthy voted overwhelmingly in your favor precisely because their riches gave them immunity from high taxes, and in many cases they were far removed from the everyday risk and worry of owning a hardware store or trying to keep together a family-owned construction firm. George Clooney is a world away from a paving contractor, just as making $400,000 a year on call 24/7 is not quite making $40 million investing or $2 million for a cameo.

So please no more intellectual dishonesty, Mr. President. Those in great numbers who will pay your higher taxes are not really the rarer Warren Buffets, Bill Gateses, Diane Feinsteins, Teresa Heinz Kerrys, Sean Penns, George Soroses, Oprah Winfreys, or Tiger Woodses, whose mega-wealth really does result in private jet rides, and yet exempts them from worries that increased taxes might wreck their small businesses. (my emphasis)

Some business owners facing higher taxes may find it more economical to incorporate their businesses and file taxes separately for their respective businesses. If this is the case, the President’s plan to boost revenue to pay for all his programs may not collect as much as he anticipates.

(No worries, though, since we can always foist these financial burdens on the unborn. Since when do they vote?)

The President’s opponents highlight that his aim is to redistribute wealth downward à la Robin Hood, but the President himself prefers to highlight his aim to provide such necessities as universal health insurance coverage. However, if the President’s aim were merely to provide necessities, it’s only fair that he come clean with the true costs of these programs.

The Bush Administration, wanting to hide its deepening budget deficits, cynically and dishonestly refused to count Iraq spending as part of the normal budget, instead requesting the money as “emergency” appropriations. Though Pres. Obama is rightly including Iraq spending as part of the normal budget, he is underestimating the costs of his forthcoming health care plans, somehow imagining that taxing “the rich” (celebrities, hedgefund managers, as well as roofing company owners) can somehow finance the all-ages version of the most out-of-control government medical insurance program in the nation.

There is no such thing as free healthcare and the bill must be paid somehow, be it through escalating private premiums or through escalating tax rates.  The President is wisely persuing cost reductions through large-group bargaining of drug prices, digitization of medical records, and research into best practices to reduce mistakes.  These are worthy goals, no doubt, but like earmark reform, they will merely dent expenditures slightly, leaving hefty bills to be paid through the public treasury.

The super-rich can afford marginal increases in their tax bills, but sole-proprietors grossing more than $250,000 may find this President rather taxing.

I have emailed my Congressman regarding his opposition to passing a resolution to investigate $300 million in questionable defense earmarks arranged by a lobbying firm last year.