Tuesday, March 24, 2009

Changing the Rules for Past Behavior is Bad Policy

Changing the Rules for Past Behavior is Bad Policy
The AIG Mess

Submitted by ASO member: Tom Sullivan

Doing business is becoming more complicated by the minute. With a shrinking economy and a growing government , the regulations issued by local, state, and federal agencies, and yearly changes to the tax code are enough to jolt business owners awake at night in a cold sweat.

We know that regulations cost small business more than their larger-business counterparts. And, we have accepted that a certain amount of bureaucracy is the cost of doing business. What do not know is how close we are to creating a regulatory framework so complex it will scare people away from taking risks, the key ingredient to entrepreneurship.

The anger over AIG using a taxpayer-funded bailout to pay executive bonuses has prompted the U.S. House of Representatives to pass legislation penalizing behavior by changing the rules after the fact. We are wise to consider restrictions on corporate behavior when those companies are depending on federal help. There are always conditions, expectations, and qualifications when two parties enter into a contract. When a company enters into a contract with the government to receive billions of dollars, it should expect some pretty tough contract terms.

However, companies doing business with the government should not expect for the rules to change retroactively. Not only is that wrong from a simple understanding of contractual responsibilities, it is bad policy.

The worse thing to happen right now as our country is struggling to get out of a recession is for companies to start second guessing their decisions because the government "might change its mind." Expansion plans, hiring plans, and product innovations will come to a grinding halt for fear of unknown consequences.

Last year, the University of Kansas won the NCAA men's basketball championship. What would happen if tomorrow we decided to ban the 3-point shot? And, what if we decided to make the change retroactive to the 2008 NCAA championship? Who would have won the championship? That is ridiculous. However, we are doing the same thing to the business community by accepting a retroactive tax to fix a problem we failed to address when the government agreed to provide AIG with $152 billion last fall.

With regulatory costs exceeding $1.1 trillion, we can not add to the mess by changing rules retroactively. I am glad that the Senate is considering how harmful retroactive rule changes can be to our regulatory structure and to our economy.


John Kalitka said...

Great analogy. We should recognize the fact that many fans would be willing to revisit such a retroactive rule change, particularly those who--for whatever reason--dislike the Kansas Jayhawks. In the current climate of "Wall Street" demonization, those same types of people appear to be willing to play on the populist message crafted by the White House and its allies in Congress that settled corporate salaries and bonuses can and should be undone in some notional pursuit of "fairness." In either instance the response is emotional and illogical.

Anonymous said...

Of course, that analogy is faulty because there is no injustice in a three point ball. A closer analogy would be this: certain performance enhancing drugs were not banned from baseball when Alex Rodriguez took them ("back then, it was a different culture."). Would you complain if the MLB revoked his 2003 AL MVP award? Think on that.

Back to the topic, I would say that the AIG bonus issue is purely a symptom of the much larger problem of corporate greed. Despite no stipulation that AIG could NOT give the bonuses, they should not have been given in such exorbitant amounts out of respect for the american taxpayer. Bbut for the bailout, there would be no compensation at all.

I am appalled by the notion, seemingly endorsed here, that we expect nothing more than bare compliance with legal requirements from corporations.

I tell you what, though, if AIG had given reasonable wages to these folks, no one would have complained. Million dollar wages are unconscionable, though.

John Kalitka said...

Anonymous (5:22 PM), Really? What are "reasonable" wages? For one thing, some of the bonuses at issue are in the neighborhood of $1,000. Who gets to decide what's "reasonable?" Are you comfortable with the government making that decision? Where does one draw the line? Why are million dollar wages "unconscionable?"

However one feels about the merit behind another earner's compensation package, you cannot ignore the fact that these particular bonuses were specifically excepted from government "interference." Now, of course, we have plenty of interference, class warfare rhetoric, and mob rule protests with physical threats. Now that's "unconscionable."

Thinking back to your analogy, should A-Rod be subjected to a retroactive 90% confiscatory tax based upon some third party's notion of what a fair salary should be? I don't think so....

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