Monday, March 23, 2009

targetted hatred

Microsoft, Wal-mart, AIG. What is it about certain overly-specific targets that attract so much virulent hatred?

Microsoft was a bit greedy after revolutionizing the personal computing industry and gaining a vast majority of the market share for operating systems. It tried to sneak in some insurances on maintaining that market share that didn't quite pass muster with anti-trust law, and more relevantly when it comes to public image, they made a lot of money on a product that was hard to compete with. Of course they would acquire a nickname like the Evil Empire.

Wal-mart suffered from the same suspicion of any business that takes over market share (even if it's making millions of lives better in the process. Billions of people with more affordable costs of living isn't as good a news story as the old lady who owns the convenience store down the road and is going out of business because she can't get as favorable of a contract with vegetable suppliers.) To make things worse, there were a few labor scandals. Considering how much Wal-mart jobs are coveted by everyone I know who works jobs in that wage category, I think this must not be an issue anymore. This article makes my point much more elaborately.

Now AIG. Sure, the $165 million in bonuses they're paying are completely despicable. There is absolutely no way they can be justified by a firm that nearly just brought down the national economy and accepted $170 billion in government money to survive. I don't think keeping on old management with attractive bonuses should really be such a priority! Nonetheless, is this really the battle our entire legislature should be fighting? We're talking about an amount less than one thousandth the amount provided by the government. As Greg Mankiw notes, if time were spent on spending in accordance to its percentage of GDP, these bonuses should take up less than a minute of the government's time this year. There are bigger fish to fry.

Even more than that, do every-level AIG employees deserve death threats? Of course not. Maybe a deliberately destructive individual like Bernie Madoff does, but a low-level mostly-clueless pawn isn't responsible for the catastrophic groupthink propagated from upper management down, even if he went along with it on some vague level (wouldn't you, if your other option was to be out of a job?) And how about the proposed legislation that would tax at 90% any bonuses at firms receiving bailout funds? The bone-headedly obvious problems with such a plan are worth repeating: 1) We just bought a huge stake in these companies. We should be trying to HELP them, not strangle them, or risk losing an enormous sum of taxpayer money on a sabotaged investment. 2) This will encourage higher baseline salaries, which is exactly the opposite of what is needed in an industry where compensation is already too disconnected from performance. 3) Only firms that are truly screwed will accept bailout money under these terms, further sabotaging the taxpayer investment in these firms.

Anger gets in the way of reason. But I don't want to fight human nature (this is exactly why I'm an economist - real incentives are the most effective tools we have to elicit desirable results, and a deep understanding of incentives is essential not to wreak secondary havoc while trying to accomplish a goal.) Overblown outrage is inevitable enough in the masses that I can tolerate it once in awhile, but the legislature should both be smart enough to avoid it and have enough integrity not to go along with it just because the constituency is in a temporary huff. The media will always respond to financial incentives created by aggregate demand from the aforementioned huffy masses, so while I wish integrity trumped money, I'm not stupid enough to expect it to. I guess there's nothing left to lament except flights of passion, and nothing to hope for but a cultural revolution that glorifies measured rationality.

3 comments:

Anonymous said...

Even the basic point that the bonuses are inexcusable is wrong: see the excellent article at http://www.nytimes.com/2009/03/25/opinion/25desantis.html . Unwinding a huge arm of a multibillion dollar corporation is not an an affair for hapless government bureaucrats; that would waste billions more. AIG needed to keep some of their good executives who had nothing to do with the CDS mess to unwind the messed up parts of the company. Many of those executives were taking no salary and had good offers from better firms. One thing that is for sure: in these situations, the outrage is sometimes pretty arbitrary.

Ben

Vera said...

yeah I agree, I read that article last night and nearly edited this to include the link since it was so perfect.

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