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March 20, 2009
The Problems with Demonizing Bonuses
Among the problems with demonizing bonuses is that it seems to inadvertently make populist out of otherwise conservative commentators and politicians. By engaging in an argument about the validity of AIG executives receiving bonuses, one has already moved to the populist side of the argument and missed the larger problems.
No company should have been bailed out. Truly free markets require a natural process of evolution and survival of the fittest.
As an example: There is no longer a commercial whaling industry. Harvesting whale oil to light our homes became obsolete because John D. Rockefeller of Standard Oil made a technologically better product. Kerosene was a better, cleaner, cheaper alternative to whale oil. Later, Thomas A Edison was even more evolutionarily correct and his technology triumphed.
If we, as a nation, had believed in the concept of government bailouts then, there would be no more whales; they would have gone the way of the DoDo Bird, harvested to extinction.
But what of Standard Oil? Why didn’t it need to be bailed out by the government as Thomas Edison’s incandescent light proved to be the better alternative to kerosene lamps?
The simple answer was that, Henry Ford invented the assembly line. This invention reduced his automobile’s production cost. The reduced price created a huge market for gasoline and other products Standard Oil manufactured.
The government was nowhere to be found in that chain of events (except for the Patent Office). All of those events happened during a period of laissez-faire (government hands off) capitalism. When government eventually got involved in the auto industry, it forced unionization, over-regulation, and over taxation. Within three generations the auto industry has collapsed domestically, except in right to work states, or it has moved offshore.
The entire problem with government bailouts is the bailout itself. Anything that happens after that is irrelevant. Businesses fail for two primary reasons: incompetent management or government interference (or both). Failure to see technical advances that make one’s products uncompetitive is poor management. Capitalism works because the free market decides the best alternatives far more quickly than any bureaucracy.
Demonizing bonuses is simply the latest step in the Democrats’ march toward socialism. Do not forget that it was the Clinton Administration that made any corporate salaries above one million dollars, no longer tax deductible to the corporate entity. Hence, the use and abuse of stock options as way of making the enterprise worthwhile to management employees. This was businesses’ end run around government price fixing. Corporate decisions became based on short term stock market gains not long term corporate best interests.
The stock and insurance brokerage businesses have always functioned on a draw plus commission basis. The draw was a small salary to live on; the real compensation was the bonus, based on performance. Now employment contracts are written to circumvent government interference; this produces all sorts of unanticipated results.
Witness the absurdity of the AIG fiasco: This is what socialist, government run businesses look and function like.
Let’s not forget that it was FDR, Jimmy Carter, Bill Clinton, Barney Frank, Chris Dodd, Freddie, Fannie, the CRA, Jamie Gorelick, Franklin Raines, James Johnson, ACORN and Elliot Spitzer who gave AIG the sub-prime cancer in the first place. Why should we be surprised that it has metastasized and spread that cancer throughout the entire economic system?
Demonizing bonuses, salary caps and all other populist equality schemes will destroy cities, bedroom communities and resort areas because “Trickle Down” works.
I live in East Hampton, one of Long Island’s beach communities. The economic life blood of the area used to be farming and fishing. For the last century, this area has relied on the payment of those Wall Street and Manhattan bonuses. Much of that money was spent in the second house market, where it trickled down to architects, builders, maintenance companies, landscapers, grocery stores, caterers, real estate sales and rentals, retail stores, restaurants, bars, marinas, motels, local newspapers, etc. almost all economic activity.
Remove or stigmatize bonuses and you have destroyed the incentive for achievement and destroyed the economic lives of hundreds of thousands of other people. I would like to think that this is inadvertent but Obama and Congressional Democrats are proceeding in such an Alinskyesque fashion that it must be purposeful .
Why is it that the populist “progressives” among us want to apply Darwin’s Theories to religion, eugenics, and abortion, where its validity cannot be proven; but not to free market economics, where it provably does work?