Opinion & Commentary
Don’t let the lynch mob loose on executive pay and private investment
No financial institution has lost more in the current crisis, or drawn more on taxpayer support, than AIG – the American insurance giant that also gorged on more exotic financial instruments.
This notoriety helps explain why the public reaction to recent bonus payments to top AIG employees resembles the behaviour of a lynch mob in a Hollywood western. The employees in question have received death threats and a suggestion that suicide would be an appropriate course of action, while a union has organised a bus tour of their addresses.
In the Hollywood version, the lynch mob is usually restrained by officialdom, in the form of the sheriff. But in the real world Wall Street version, officialdom from the President down has stirred the public furore with its choice of inflammatory language and extreme actions. Whatever one thinks of the bonuses, the public policy response has been over the top.
For example, there have been threats to name and shame the recipients, thereby exposing them to the risk of acts of vengeance. Then, the House of Representatives passed a bill imposing a 90 percent tax with retrospective effect. This bill is in abeyance in the Senate pending the outcome of other action to ‘persuade’ the recipients to cough up.
The bonuses are an offence, magnified by the fact that AIG is on life support courtesy of the US taxpayer. But the offence is one against moral and ethical standards, not against the law. In this situation, the bonuses are fair game for public comment, but the public policy response reeks of over-reach and abuse of the coercive power of the state.
The response is an arrogant exercise of power born of a mistaken belief in the omnipotence of government – a belief that if government sees something it doesn’t like, it can get its own way even if that involves action that challenges the rights of the individual or the constitutional limits to its powers.
Take for example the mooted 90 percent retrospective tax. Imposing that rate of tax on anyone’s income from any source is bad enough, but imposing it retrospectively crosses a line that government should never cross, under any circumstances. Not in the field of taxation, nor in any other field, can retrospective legislation be reconciled with the rule of law.
The citizen is entitled to know in advance how his actions will be treated under the law after the event. It is remarkable that lawmakers in the US could be led by their own and their voters’ sense of outrage to violate that basic principle. Thomas Jefferson must be spinning in his grave.
Sadly, retrospective legislation is not unknown in Australia. The Carr government threatened it against James Hardie as a stick to extract compensation for asbestos victims. The Fraser government actually used it against ‘bottom of the harbour’ tax avoidance schemes in the early 1980s. In each case the objective was widely supported, but the end does not justify the means.
If lofty ideals about the limits to state powers and the rights of the individual are not enough, the AIG case raises the more practical matter of sovereign risk to private investment. The more instances of government over-reach investors witness, the less likely they will be to make the long-term commitments involved in investing. If government can react in the way it has to AIG bonuses, what else might it be capable of doing in the future?
Private investment is already being discouraged by rhetorical attacks on capitalism, vague promises of tighter regulation and the definite prospect of massive increases in public borrowing in many countries. Adding sovereign risk to the mix will make a dangerous cocktail for private investment when it is needed more than ever.
Robert Carling is a Senior Fellow at The Centre for Independent Studies.
