This article, found in the New York Times, details a recent poll on whether or not the companies that received bailout money from the United States government should have the ability to pay bonuses. Most of the Americans polled say companies that receive federal bailout money should not be awarding bonuses to their employees. Furthermore, the American public reject the arguments that bonuses are necessary to attract and retain the best employees. This CBS News Poll showed that 65 % of those surveyed said that “federal bailout money should not be used for any bonuses.” This issue was sparked just over a week ago when it was announced that American International Group, the ailing insurance company that received upwards of $ 170 billion in loans from the federal government, paid $ 165 million in bonuses in employees. The main point of the article is that the public strongly disagrees with the contention that bonuses are required to draw and then hold on to the best employees. (Article site: http://thecaucus.blogs.nytimes.com/2009/03/23/poll-public-wants-government-to-recover-bonus-funds/)
The first thing that I want to mention about this article is the validity and accuracy of the poll. This CBS News Poll was “conducted…by telephone with 949 adults nationwide and has a margin of sampling error of plus or minus 3 percentage points.” We discussed that the number of people used in the survey is an appropriate amount. However, the means in which the survey was conducted seemed to be a cause for concern for most of us. The main problem that can be attributed to telephone surveys is refusal, which can be the cause of this relatively small number of respondents.
Aside from the validity and accuracy of the poll, I agree with the majority of the public in their defense that bailed out companies should not pay bonuses. Finding out that American International Group paid $ 165 million in bonuses is a slap-in-the-face to the American public. Americans now know that our tax dollars are not all going towards helping the company, some of the money is going towards padding the wallets of executives and employees who were the ones who got AIG into this problem in the first place. Bonuses are supposed to be a reward for when the company is doing well, which means the employees are clearly doing their job correctly. However, by having a failing company paying bonuses – what are they rewarding exactly? Inefficiency and failure? What kind of message is going to ring out into corporate America as a result? That we are rewarding both successful and failing companies? Though this may seem like an extreme inference, there are several people that are enraged by the bonuses AIG paid out – evident in the survey conducted by CBS.
In a related article written on March 18, 2009 (http://thecaucus.blogs.nytimes.com/2009/03/18/obama-criticizes-aig-bonuses-calls-for-greater-regulation/), President Barack Obama criticized AIG for giving out bonuses, calling it an “inappropriate use of taxpayer funds.” This validates my opinion and the opinion of the public that AIG should not have paid out bonuses and, rather, should have reinvested the money back into the company. After we “cleaned up A.I.G’s mess,” we now have to see them misuse the money that most Americans worked hard to get, but they lost from taxes. It is a true slap-in-the-face to the American public and Obama has every right to be upset because of it. Wouldn’t you be upset if the money that you worked hard to earn was handed to executives and employees of a bailed out company as bonuses - which are supposed to be used reward profits?
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It is somewhat true that bonuses are necessary, especially considering foreign competition for talent. AIG Execs can use the excuse that the bonuses were required to retain top talent. This may be true, but a logical response is that the “talent” at AIG is not exactly characterized as “top.” Because of their failure, I agree with Stephen; the bonuses should not have been issued. That, however, is in the past. What to do now is a completely different question.
A NYT article entitled “Tax on Bonuses will hurt sector” (http://www.nytimes.com/2009/03/23/business/23views.html) addresses the issues facing the administration. The author’s strongest point is that the banks who received the TARP money do not actually need it so survive. He says, “They could repay enough to exempt them from the strictures of the bills wending their way through Congress.” This is the last thing the government should want, because it would reduce their tier1 capital. That would be determental because it would allow them to lend less and investors will have less confidence in them. Both of those will prolong the recession, which is not what the people want. Also, a retroactive tax would be terrible because it would discourage investors from putting their money into the market, also a terrible thing. This would undermine Geithner’s plan to get private money back into the economy (http://www.nytimes.com/2009/03/23/business/economy/23toxic.html?ref=todayspaper).
We cannot change that the bonuses were issued. That immoral act is done and in the past. What we can change is what happens from now on, and to do that we must make rational decisions based on both sides of an argument.
If you read the aforementioned article, it provides a strong case for the bonuses not being taxed (the surest way of legally getting the money back). This case goes to show that the public’s initial reaction to something may not be what is in their best interest. They wanted the money back, but it may not be that simple. I am sure that most people just picked up on the sound bite of “bonuses” but did not research any further into consequences. Their initial (and in many cases final) opinions would then be misinformed, and as a result they would not be able to make the best decision, even for their own interests. Thus, public opinion is overrated. Most people are ignorant of the bulk of information behind an issue, and therefore should not be trusted.
Awarding employees bonuses, even in a time of economic crisis, is a necessary evil in the financial world. These employees are given comparatively small salaries that are paid no matter how the company does, and they should be given some form of incentive to stay with AIG instead of just leaving the firm without any experienced employees. It is true that these employees did make many mistakes in the subprime mortgage crisis, but they also made it to these high positions because they are good at what they do. It is better to leave AIG with its same workers that know how the company operates in a time of crisis rather than having the disgruntled and underpaid employees leave for greener pastures(there are many) and send in inexperienced workers to manage a company billions of dollars in debt.
With that said, the government should not tax the bonuses given by AIG to the employees in a different way than any other worker. President Obama has recently commented on taxing the bonuses as much as 90 percent, which is completely contradictory to what the government should e allowed to do(http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_woolner&sid=a4n5b.9iX6Bw). The government was way too quick to give money to several companies without mandating what the money should be used for. Without any rules, companies are going to do whatever they feel is best with the money, and that is not always in the best interest in the company. If the government had laid down a specific set of rules before giving AIG the money and these guidelines had been violated, the tax would be justified. However, the government is stepping way over its boundaries in unjustifiably taxing anyone they want just to cover up their own mistakes.
The arguments on this issue are strong on both sides. However, even though there are good points made both for and against, like Ross said: “bonuses are a necessary evil”. It can be seen why the public is outraged by this because they in effect paid for the bonuses with taxes. However, there is no added tax to people’s paychecks that is entitled bailout fund and specifically designated to a fund that is used to bail out major corporations. Taxes are taxes and the government does with them what they will. This country is already in so much debt that it doesn’t even matter at this point. The money that went to bail out AIG didn’t all come from taxes. Maybe some of it did, but a lot of it went to the war in Iraq, human resources, federal employees’ salaries and national parks. The majority of the money probably came from China where money is in abundance and they are glad to loan to us and collect interest. They are going to make a killing. So first off, people need to calm down and stop saying that they paid for the AIG bonuses. They do not understand how things work. Bonuses are needed to keep employees motivated and working hard. Now more than ever they are needed to help get this company out of its ditch. Without them there is no incentive for them to stay and work hard. Why not leave the company, take a job somewhere else where they do get bonuses and let their previous employer fall into the abyss.
The government decided that it was a great idea to give these companies, including AIG, these enormous amounts of money and imposed very few regulations. They can’t complain now. They should have made stricter regulations on the money. In fact, they shouldn’t have given the money in the first place. It has shown to be doing very little in helping AIG to get back on track. If AIG had announced bankruptcy they would be forced to restructure in a more efficient way. The regulations and rules for bankruptcy are strict and would have been better to get the company up and going again. But this is the past and there is nothing that can be done about it now. AIG believes that the bonuses will help their company and this is completely legitimate. Hopefully, they do not take this out of control and realize that they do have a responsibility to apportion the bonuses appropriately. It would be a shame to see the high executives taking more than the average bonus for their position.
The argument over the AIG bonuses have been a little dramatized. The truth is that these bonuses only make up 0.097% of the bailout loan given; that’s $9.70 out of every $10,000. What the government is doing by enforcing the 90% tax on bonuses is micro managing the companies they have bailed out, reinforcing the worries concerning the nationalization of the financial industry. If the company thinks that these bonuses are necessary for them to retain their main source of revenue, their employees, then there is no “Slap in the Face to the American tax payers”. The tax payers should feel some reassurance that the company is serious about their long term stability which significantly relies upon their ability to retain and recruit top earning employees. The only way that this entire bailout will be a waste is if AIG is able to survive in the long run and the nation voted their confidence in the company when they voted on the bailout just as any investor could have. Many people feel that it is actually the investment banks that are now receiving payments from AIG for their insured securities should be the ones punished for their faulty investing tactics. (http://www.slate.com/id/2213942/) The federal government needs to keep separate from the private sector and make sure that their bailouts continue to be loans and temporary sources of finances.
The idea that bonuses are needed to continue motivating higher level employees is completely valid. Many of the following points have already been made, but they remain of high importance. Without providing these bonuses, AIG may very well have lost some of their most valued high-level executives. They remain instrumental to the success of the company regardless of past failures and mistakes. Whether an extremely high level of taxation should or should not be implemented on these bonuses is up to debate. It seems valid in the sense that their standard income is taxed at a regular level and the income from bonuses is simply additional. However, bonuses are often customary in high-level positions and are therefore “expected” as part of annual income; this may deter the government from inflicting extreme tax rates on bonuses.
The position that the AIG bonuses have been dramatized is completely true. The majority of the American public is ignorant about the country’s general financial state. This, coupled with a telephone survey that hopes to represent the American public, presents figures such as “65% of Americans disagree with these bonuses.” While this may represent the views of the public, those views are likely uninformed. This relates to our class discussion about how much public opinion polls should affect policy decisions. In instances such as this, they should have little to no effect on what the federal government decides to do.
This article and the fact of AIG bonuses seemed to spark significant discussions on both sides. Though I can understand the arguments made by saying the bonuses are necessary to retain top employees, due to the increasing amount of competition – both foreign and domestic. However, in agreement with what Ross said, these bonuses should not have been paid in the first place. Like I previously stated, rewarding mistakes and failures is not the direction that our economy wants to be going toward. I just want to reiterate a comment made by Ross Milne dealing with the taxes that would be imposed on the bailed out funds, “If the government had laid down a specific set of rules before giving AIG the money and these guidelines had been violated, the tax would be justified.” This comment is very true and can probably be agreed upon by all of the contributors to this discussion.
It is also important to reiterate, as Ross did, that we cannot change that the immoral bonuses were given out. What we can do is change what happens from this point on, paving the course for the future of our economy. This can be done, as Ross said, through “rational decision-making.” This is the one thing that can ensure the survival of our economy. The statement made saying “This country is already in so much debt that it doesn’t even matter at this point,” is not the attitude that our country needs at this point. This will only create a worse problem in the future through not caring now. I think it is now more than ever where we need to refocus and rededicate ourselves on repairing and nurturing our economy.
In response to the last comment made by Dave, even though the public maybe be uninformed, this generalization does not hold true for ALL members of the American public. Though some civilians are less informed than others, they still should be heard and have the ability to voice their opinions. Diminishing the importance of polls such as these would be the same thing as diminishing the aspect of democracy in our country – a pillar in which our country was built on. Our country is ran “by the people, for the people” and if you take out the opinions of the people by not listening to them, you are taking out the most important part of our democracy – the people.
This issue raises two huge issues: economic incentive (the very basis of classical economic theory) and the rights of a creditor.
As a creditor you have every right to stipulate certain duties and responsibilities that must be met in order to receive a loan. These rights extend even to the point of specifically detailing the manner in which the money can be used. However, this power over the loan ends after the contract is signed, unless the other party breaches the contract by failing to comply with stipulations, the creditor has no further power besides what they stipulated in the loan contract. This is to say that unless the creditor specifically mentions how the money can be used to the very last detail, then the money will be used at the discretion of the debtor. As this relates to the bailout, the government (the creditor) failed to specifically detail the manner in which the bailout money could be used. As a result, the companies (the debtors) used their discretion to use large sum of it to give bonuses to overpaid CEO. Quite simply, the beat the contract and in no way breached any stipulations. The Government failed to issue an effective contract that would require the debtors to use the money as the public saw fit. Also, seeing as the companies did not breach the contract, the government has no right or ability to now stipulate that the money cannot be used for bonuses. The time for attaching strings to the money has passed and now the government has no more say, legally speaking of course.
In terms of the general argument about bonuses and bailout companies, the companies have every right to allocate their money how they see fit and by doing so with bonuses they are actually adhering to the golden economic law of incentive. People earn wages and contribute to the economy based on personal interest and greed. They work jobs that they often do not enjoy so that they can make a living. They only work to receive compensation and reward. Thus the only real economic incentive one has is money. The higher up a job is the more compensation it requires. This is the proper mentality of the workplace. Those who work hard earn more responsibilities and thus earn further reward. Robbing economically deserving employees of incentive based on government loans is not only detrimental to the workplace environment, it is economically misinformed. While there are other ways that the money can be spent, there is financially nothing wrong about rewarding workers for their contributions. This is how the economy works and this is how it has always been. Regardless of the economic cycle we are in (boom or recession); proven economic theories do not change. Simply because the country is doing poorly while CEO's are enjoying bonuses from the loans that our elected body issued does not change economic theory. This issue is a small wrinkle in the grand scheme of economic progress. People will earn massive rewards, perhaps undeservingly, while others struggle; this is the very nature of capitalism. However, because some prosper immensely, the average standard of living for our country increases. So instead of chastising these individuals for taking huge bonuses we should be thanking them for employing hundreds of thousands of our neighbors, for paying ridiculous amounts of taxes, and for increasing the standard of living for the average American.
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