I had to run some errands this afternoon, and was in a bit of a hurry. Otherwise I think I would have stayed in the car and called in to NPR’s Talk of the Nation to disagree vigorously with Charles Calomiris, an economist at Columbia University, who argued that public anger with AIG bonuses is an unnecessary distraction and that there isn’t really a strong case for taking away the bonuses anyway.
Three basic things seemed wrong about Calomiris’ position on AIG.
1) Calomiris argued that the public, including himself, are too remote from the AIG situation to judge properly whether the bonuses are deserved or not, and as a result, it’s best to leave the matter in the hands of people within the company, as they know best. In particular, he pointed out, AIG’s current CEO wasn’t in charge when the company suffered its losses, and so his judgment isn’t tainted by that failure.
This is a bad and rather trite kind of defensive argument that can be used to defend virtually every kind of policy or action from public scrutiny. It’s true, of course. In the same way that if I was not present at the scene of a crime, or indeed, if I was not the criminal who did the deed, I don’t truly understand what happened. In fact, many of us don’t even understand our own actions, let alone the actions of others. If Calomiris means to be veering off into the kind of solipsism that makes one unable to judge anything at all, I guess he’s welcome to do so, but there’s no reason to talk about AIG as anything special if that’s the case. But if human beings are capable of making reasoned judgments from a distance, then the AIG case also doesn’t seem special. I think the public knows enough to know that the managers of the London unit deserve no bonuses. Surely some members of the U.S. government should know enough at this point, given that it now owns the company.
2) It’s not too surprising to find out that Calomiris is a fellow at the American Enterprise Institute. But I will be surprised if the day comes when he or anyone else at AEI adjust their general line to accomodate the implications of his remarks on AIG.
Calomiris argued that traders have small base compensation which is topped off by bonuses in order to incentivize them to make more money. Fine. He seemed to have a hard time closing the circle: the flip side of that system is accepting that risk has its consequences. I have no problem with the proposition that AIG’s many accidental counterparties should be saved from risks that they never agreed to or were aware of. I have my retirement funds in a money market account and have for some time precisely because I valued safety over what seemed to me to be enormous risks in other kinds of funds. (Not to brag, but it turns out I had a point.) If AIG’s catastrophic risks had rebounded upon me and others like me, that would upend the entire idea that there is a reasonable way to manage your investment risks in this economy: the 21st Century equivalent of a large empire letting trade caravans be ambushed at will by bandits.
But AIG’s traders should expect to suffer personally for the risks they took. That’s the whole point of accepting a compensation package with a small base salary and a large bonus potential. The moment Calomiris concedes that this is intended as an incentive to perform, he must accept that it exposes those who accept it to risk. He doesn’t, of course. Risk exposure and consequences are for peons. There’s no way to take him or anyone like him seriously unless they announce that they’ve rethought this whole exposure-to-risk thing completely and they concede that it’s a lousy way to run a society or a company.
3) Another apostasy that Calomiris should be confessing to, given his remarks, is a reconsideration of whether labor markets can be left on their own to judge the value or worth of individuals. He argued that you’ve got to leave AIG alone and pay the bonuses because there people there in the London unit who are just too valuable and if they’re denied their bonuses, they’ll probably walk. (Now who’s micromanaging?) Where’s the hard-nosed thinking about labor markets that capitalists are supposed to be so good at?
Let’s say you’re in the London unit of AIG, and you were one of the professionals who oversaw the credit-default swaps that killed your own company. I grant you have a valuable special expertise when it comes to unravelling your own failures, but what’s your market value in general? Let’s go over a few of the relevant points to consider before you quit in a huff and put your resume up on Monster.com: 1) your entire industry is in the toilet and you’ll be competing with thousands and thousands of other job-seekers and 2) your most recent and relevant professional experience is the destruction of your own company in a line of business that is now likely to be treated by global governments roughly the way that Rome treated Carthage. If you’ve got a long history in the business before you were working on credit-default swaps, you’re probably an expensive hire and your old experience is likely not too valuable in a rapidly changing world. If you’ve got a short history, you’ve got nothing else to show an employer that’s worth the trouble of hiring someone whose career now smells like a six-day old whale corpse in the summertime.
So you really want to quit when they don’t give you your bonus? Right now I’d say your only strong value is to the company you screwed up, so if I were you, I’d take whatever they’re offering and suck it up. I shouldn’t have to walk someone with Calomiris’ alleged expertise through this pretty basic bit of economic realpolitik.
Sure, pissing about AIG’s bonuses is populist grandstanding on some level. Beneath the momentary gratification of looking for villains, however, there are some more serious principles at stake. If you’re the kind of person who argued that folks who take economic risks should accept the consequences and that labor markets dictate the value of skilled employees, you should be the first person throwing rotten tomatoes at bonus payments to any managers at any of the bailed-out companies. The companies themselves are the front lines where risk and markets are being tested. But people like Calomiris are in a great rush to punish the innocent bystanders who took few or incidental risks instead, all in the name of “making tough decisions”.