This letter from a highly pissed-off AIG senior staffer is worth reading. My own take is that if an employee, under an agreed contract, gets paid a sum of money that later attracts the evil eye of the political class and that money is retrospectively seized, then the rule of law is crumbling. Admittedly, it has been crumbling for some time. I note that those who berated the former Bush administration for its high-handed treatment of legal principles are less noisy about Mr Obama’s own behaviour or that of his colleagues in Congress.
I have been reading Amity Shlaes’ interesting book about the Great Depression, and among the many themes of the book is how FDR, in order to whip up support for his measures, sent his legal attack dogs after various people associated, in his eyes, with the excesses of the preceding boom years. In particular, his victims included the likes of Andrew Mellon. History repeats itself: when politicians run out of money, the easiest option is to bash the rich, bleat about “tax havens”, and the like. We are seeing that now. And of course the politicians are getting away with it so far because they calculate, probably rightly, that the broad public cannot be interested or is not sympathetic.
To get the public interested, we have to figure out how this sort of looter behaviour by those in public office can be shown to be dangerous to the average Joe. That is not straightforward, but a bit of thinking is needed. Today, talking to a friend of mine who works in the City, he pointed out that as a result of the mass bailouts and the central bank’s printing of money, a spendthrift who had a 100 per cent mortgage is being subsidised by a careful, elderly saver who is now struggling, say, to pay for a nursing home. By drawing attention to these sort of regressive transfers from the careful to the spendthrift, and from the productive to the unproductive, we can get the message across. And yes, Mr Cameron, that means support for cutting spending and taxes.
Update: Alex Singleton, who also blogs here, points out that the vandalism to the house of Sir Fred Goodwin, the former CEO of Royal Bank of Scotland, can be indirectly blamed on the government for encouraging hatred of bankers. I am not sure that Gordon Brown can be directly blamed but in his usual, cowardly fashion, he has found it convenient to pin the blame for the crisis on private banks rather than accept that the crisis was in large part driven by recklessly cheap credit as set, ultimately, by central -state – banks.
This is becoming increasingly ugly. Demonstrations are planned in the City to coincide with the totally pointless G20 gabfest in early April. Someone might actually get killed or seriously hurt.
Update: Mark Steyn’s Orange County Register article about the AIG issue confirms what I now fear, that Mr Obama is, even at the most basic level, unfit to hold executive office. And Joe Biden is just down the corridor…..
It is not possible to simply tell the ‘average joe’ that this dog has teeth, they have to feel it bite or they simply won’t believe you.
At the moment, the man on the street has little sympathy for those that state is stealing from in such an egregious manner as this. His mindset, cultivated by the state and their media lap-dogs, is that it is only fair and equitable. Everyone should feel the pinch of these trying times as much as he does. Until his assets are seized, and the product of his labour taken from him by the looter state then he simply won’t care. He has to feel the dog bite, then he might take notice.
All this retrospective taxation stuff is highly unconstitutional of course, but if we are to look at it morally, what’s worse, robbing the taxpayer to bail out AIG or then robbing a small part of it back from highly (over-)paid executives at AIG?
It’s also interesting that you now rail against “regressive transfers … from the productive to the unproductive”. That’s exactly what I’ve been complaining about for ages.
I’m somewhat torn on this issue – I think what the government is doing is unconstitutional, but I’m not sure it’s morally wrong. AIG shouldn’t have received any bailout money, so the letter writer and most of his colleagues should have been unemployed months ago. Giving them the money was morally wrong, taking some of it back is stupid, but not wrong.
Mark, you keep trying to keep the flag flying for LVT, and yet as we pointed out previously, repeatedly, there are plenty of examples of how someone saddled with a big LVT bill would be unfairly taxed, at least in some cases. The case of the guy who buys a retirement home and finds that its value skyrockets so his tax bill shoots up is a case in point (and no, saying he should sell up and leave is hardly an answer).
You might find this (Link)interesting, by the way. The comment thread is also interesting.
Oh and Mark, this paragraph from Murray Rothbard is one that I find particularly sharp on LVT:
Quite.
Anyway, we are straying off topic.
How do we show that Congress unleashing the hounds of public opinion on financial professionals is hazardous? Through the lessons of history.
“First they came for the bankers, and I did not speak out because I was not a banker…”
How long will it be before we have our very own Kristallnacht at the hands of ACORN or other groups with similar ideas? The tinder has been laid, and only awaits a match.
Contractually, taking the money from the AIG bonus-receiver is wrong.
One could say that the bailout was wrong also. Two wrongs, as they say, do not make a right.
We do need to see how the looting is going on. Quantative Easing is looting – it is theft, pure and simples, but the MSM are pretty much ignoring the stealth devaluation it causes, wishing to focus on the “shiny-shiny” of bonuses.
JP: “The case of the guy who buys a retirement home and finds that its value skyrockets so his tax bill shoots up is a case in point (and no, saying he should sell up and leave is hardly an answer).”
1. I never said “Sell up and leave”, I said “Roll up unpaid tax and pay when you die”, the same as living off any other retirement savings – you live in it/off them as long as you live and then some or all of it is used up.
2. And why does the value of the house shoot up? Who are the people who are to pay that higher value in future, and how have they managed to scrape this money together unless out of productive incomes? Nulab have run the experiment of everybody selling everybody else houses for ever more ridiculous values and look where it has got us.
Paul writes: “AIG shouldn’t have received any bailout money, so the letter writer and most of his colleagues should have been unemployed months ago. Giving them the money was morally wrong, taking some of it back is stupid, but not wrong.”
That is completely wrong. First, these retention contracts were entered into a year ago, after AIG had begun to experience financial difficulty but long before there was any federal bailout or even any thoughts of a bailout. Second, while I agree that there should have been no bailout money and these people should have been unemployed months ago, once the company didn’t fail they were enticed to stay by the (repeated) promises of these bonuses. Otherwise most would have left, and obviously the company felt that somone needed to stick around to unwind the trades and generally clean up the mess (a mess, as was noted, had been created entirely by others). Whether these were the correct persons for that job or the promised payments were (in retrospect, in the uninformed judgment of some) too high, is irrelevant. Promises were made as inducements, and people relied on those promises, and it is illegal, probably unconstitutional, and most definitely morally wrong to renege on them now.
The Wall Street Journal had a good editorial on this subject today. It’s worth reading.
The DJH article is pretty stupid, what the heck does the fact that Stepehen Hawking has ‘unearned’ cleverness or Michael Jordan has ‘unearned’ basketball skills have to do with anything?
Do Stephen Hawking’s neighbours contribute to his cleverness? Would his cleverness increase if the local police managed to get crime rates down? Are Michael Jordan’s basketball skills enhanced by the fact that he lives near a railway station? (clue: no, no & no).
That quote from Murray Rothbard misses the point as well. We know that a) income tax/VAT/National Insurance are bad taxes because they takes away some of the income that each single individual earns for himself b) they have deadweight costs and c) with income tax there is a Laffer Curve anyway (and the top appears to be about 50%, let’s say).
Applied to LVT a) it does not take away income that one individual has earned for himself b) it has no deadweight costs and c) the top of the Laffer Curve is in the region of 80% to 95%. Which is why e.g. Milton Friedman agreed it was the least bad tax.
Yes Laird, worth reading indeed. I found this bit disturbing though, unless I am missing something:
Why is it so hard to believe?
I suspect that the WSJ editors are merely being polite. They tend to do that. (Archaic, I know.)
Laird – If the company had gone bankrupt, and a bankruptcy judge had decided that they should be paid, I would agree entirely. But as you say, promises were made, and AIG failed to keep them. That someone has now decided that we should keep those promises for AIG doesn’t make it morally right, even while I agree that taxing the bonuses is unconstitutional.
For the Henry George stuff – see Murry Rothbard’s “Man Economy and State” and his “Power and Market” it is a solid refutation.
As for AIG.
AIG (at least the parent company) is bankrupt.
As it is bankrupt it can not pay its bonus contracts.
“But Paul the government did not allow the company to go bankrupt – it bailed it out”.
That is the problem.
The bonus payments (about 0.1% of the total bailout – a one thousandth) is a (deliberate) diversion from the real issue.
Of course Comrade Obama is trying to stir up hatred of the high paid executives whenever he can – whilst (at the same time) telling them he is their protector.
Dick Morris has been laughing at people who can not see the method in all this.
Laird: I don’t think so, Omaba is the only person among many in Jenkins’ piece to whom he is polite at all. As if The One was the only innocent sheep among this big pack of bad wolves. Weird. In fact, if there is anyone there to whom I’d be willing to cut any slack, its Geithner. Not that he is any kind of sheep, but he comes across so lost and terrified as to look pitiful. He looks like someone who’s been chained to the front of a train that’s headed towards a blown-up bridge at full speed.
Alisa,
The WSJ is using the time honored way of avoiding blaming the king/emperor. After all, the king/emperor cannot be at fault, God/Heaven chose him. Therefore, he must be listening to evil advisors.
In fact, right now it is not possible for a major media outlet to criticize Hussein Pasha himself. First, there will be a tsunami of PC backlash. Second, there is the eminently justifiable fear of retaliation by the Federales.
If we ever see a major media outlet openly criticize him, or hold him responsible for something he did ….. and not retract it in a panic within a couple of news cycles, we can believe that he is losing his immunity. Until then, the king can do no wrong.
You just have to get into the same mind set that the Kremlin watchers were in, noting articles in Pravda and Izvestia.
Subotai Bahadur
Alisa, I agree with you about Geithner. He does have that “deer in the headlights” look, doesn’t he? And deservedly so; he’s clearly out of his depth, and Obama didn’t seem to care that he had no help. One could almost feel sorry for him (but please note that “almost”).
Timmy’s a grown-up now. I doubt if there is anyone out there who had more information than he did about the mess he was letting himself be talked into taking on.
He may have been surprised about how quickly he’s been exposed for the vultures to feed upon his flesh, but he’ll serve as an object lesson to the next rube who decides he wants to climb into bed with the DC elite.
We have to stop sympathizing with these feculent narcissists and hold their feet to the fire at every opportunity; indeed, we need to point our fingers and denounce them as loudly as we can, as often as we can.
Whoops. /rant off.
Great Myths of the Great Depression (pdf) (Link)is well worth a read if you learned in school that FDR saved the US from the worst of the Depression and then WWII came along to the economic rescue.
Bod: sure. My point was though that Timmy is just another useful and totally disposable idiot. If Subotai is correct, and no one in American MSM dares to criticize Him directly (unlike, say, the BBC), then holding the feet of the likes of Geithner to the fire is beside the point, as his boss in fact couldn’t care less if he is burned alive.
Laird, originally I had “almost” there somewhere, but it kept screwing with the syntax:-)
It is a witch-craze. Something terrible has gone wrong that the people cannot understand. Evil Ones must be to blame.
It is a political phenomomenon in the widest sense that has less to do with party ideology than you’d think, because it has very little to do with reason. Much the same thing happened under Bush in relation to the dot-com bust. The executives of Enron, WorldCom, etc, faced charges because their companies collapsed and someone must be punished as a sacrifice to popular anger. The use of the law there was highly ‘creative’, let us say. It’s just this time around is worse.
Mark writes:
.
Desperate stuff. So, to deal with such cases, a person, rather than actually pay tax for possibly many years, will only pay it – or rather his inheritor’s will – after his/her death. Riiiight. So what happens to the state’s need for revenue in the meantime? Suppose, for instance, that property values fall off again just as a new generation takes up mum and dad’s property? This is actually happening now.
I really don’t see how such deferrals get around the problem. Nor, as Rothbard writes in his essay and several books, is it possible to put property values in some walled-off category from other value changes that affect the ability of people to earn money, such as human capital. And people are scarce. As Ian B said in another thread, you cannot grow folk in vats. At least not yet.
Mark, I don’t want to dislodge my own thread, so I’ll only repeat the point that when a landowner develops his land in some way to raise its value and rental earning power, that counts, surely, as earned income, just as if that person had gotten an MBA to raise his earning power.
Back to AIG: what Laird said.
This is quite an interesting thread. does it not show the classic symptoms of people making a lot of claims, but not actually thinking very hard. Are they not jumping to conclusions, accepting received wisdom, using hero worship used to justify a claim by referencing work that has already been much disputed. Ask yourself this question:
“If you received a $1bn a year for producing almost zero wealth in the economy, would this be in the spirit of a functioning society and do you think that society would advance or decline over time if this practice continued.”
Brgds
JP, “when a landowner develops his land in some way to raise its value and rental earning power, that counts, surely, as earned income”
I completely and utterly agree. When have I ever said otherwise?
There are a few interesting points with this.
Taking the long view of history, we have suffered the same fate as other empires, inflation destroyed industry and lead to a financial economy, which has now crashed.
The law at this time is not neutral, it has been changed to benefit the finance economy. Enabling greater risk taking, weak punishment for fraud and so on.
Under the current law, the government is allowed to loot the tax payer by diluting the currency via inflation.
You seem to suggest that we should respect contract law, when that law allows peoples life savings to be stolen from them.
I would suggest that there is no reason to respect the rights of the criminal class (Parliament and banksters) that are in the process of robbing the people. Let’s not forget, in the very near future we are going to see people starving, as the price of food rockets up and their savings become worthless.
There are a few interesting points with this.
Taking the long view of history, we have suffered the same fate as other empires, inflation destroyed industry and lead to a financial economy, which has now crashed.
The law at this time is not neutral, it has been changed to benefit the finance economy. Enabling greater risk taking, weak punishment for fraud and so on.
Under the current law, the government is allowed to loot the tax payer by diluting the currency via inflation.
You seem to suggest that we should respect contract law, when that law allows peoples life savings to be stolen from them.
I would suggest that there is no reason to respect the rights of the criminal class (Parliament and banksters) that are in the process of robbing the people. Let’s not forget, in the very near future we are going to see people starving, as the price of food rockets and their savings become worthless.
Mark, if it is “earned income”, then please explain the difference, as far as its taxation is concerned, between an increase in the earning power of land and say, an increase in the earning power of a person. The point I am making – which the LVT crowd simply will not grasp – is that it is illogical to single out land for special treatment as a factor of production when it comes to deciding on tax.
Anyway, I might choose to write a separate post drawing together my thoughts on this. The Henry Georgists are a strange bunch and should be treated as cuckoos in the libertarian nest.
Jim writes:
.
I don’t follow your reasoning. Upholding contract law is one of the necessary steps to getting out of this mess. Take the contract, spelled out on a Bank of England note, that says “I promise to pay the bearer on demand the sum of X”. With fiat money, that contract is to all intents and purposes a lie. As a promise, it is worthless. That has to change.
So sticking up for the importance of contracts is not a side issue or a piece of legalistic nitpicking. It goes to the heart of the problems that we face now.
[off topic]
Posted by Mark Wadsworth at March 25, 2009 07:26 PM:
Looks like a back door death tax to me. Mustn’t dare allow farmers to pass the family business to their children. Tisn’t fair, you know. Wicked kulaks are stealing from us all. They are why we suffer, comrades!
When it is impossible to acquire a guaranteed right of place at any cost, all property – not just land – is held at the pleasure of whoever administrates right of place (property). LVT denies rights to all property (and therefore even life itself) unless exception trapdoors (like the death tax) are placed in it to make it more palatable to its detractors.
[/off topic]
JP ” it is illogical to single out land for special treatment”
1. Tax scarce resources with inelastic supply, not abundant ones with elastic supply.
2. Apply taxes with the lowest deadweight costs.
3. Simple and easy to administer (despite what detractors say) and impossible to evade – you can’t take land offshore!
4. Dampen boom bust cycle in property prices.
5. Prevent windfall gains being privatised due to the efforts of third parties e.g. the physical value of a few hundred square yards of agricultural land is a few hundred £ and hardly worth taxing, as Adam Smith explained (and I agree, but farmers can whistle for their CAP subsidies), but if you own a house and they build a new railway station near you, it shoots up in value by tens of thousands of £s.
6. You fail to distinguish between rent on the buildings/improvements element (which is indeed earned income) and the extra rent that people can collect if they happen to own a site on a High Street on a town centre (which is in no way down to the efforts of the owner), i.e. the location element. All we are talking about is the rental value of the location element.
7. As an aside, there is a Progressive Property Tax on commercial buildings in the UK, it’s called Business Rates – LVT would not tax the buildings element, just the location element, so that’s more a less like-for-like (some winners, some losers, tough).
8. Despite all the shock-horror-little-old-ladies objections (which Winston Churchill had tired of a century ago, and which I have answered time and again), such a tax is broadly related to ability to pay because high income people not only have the nicest cars, send their kids to the best schools etc, they also tend to live in the biggest and nicest houses. But if they are happy to live in a smaller house, then they save tax, good luck to them.
9. There would be a VERY narrow class of people who would lose out if we scrapped all taxes and just had LVT, mainly because LVT would never collect more than ten or twenty per cent of GDP (unlike the present system that collects well over forty per cent), but hey. If we only passed laws that EVERYBODY was happy with, we wouldn’t have any laws at all.
10. Balance interest of NIMBYs and people who’d love to build more buildings and those people who are priced out of buying or have to pay artificially high rents (because of artificial scarcity).
I hope that’s enough for you to mull over for the time being. If your objections are based on the fact that vulcanoes are hard to value … you try renting a cafe half way up Mount Etna, you’ll see that land half way up a volcano very much has a market value.
Human capital may be more expandable than land, but not totally so. Consider why footballers get paid a fortune: there is a limited number of them with the skill to get into the top flight. Etc.
None of your points get around the point that I made that improvements to physical nature and human skills are fundamentally the same if the purpose of a tax is to capture increases in wealth.
It is not that I fail to make a distinction, it is that the distinction cannot be made. The exercise would result in lots of theological nonsense about trying to pinpoint those changes in land value caused by the actions of the owner and those supposedly caused by say, a new shopping mall being built elsehwere.
Also, it is not just land that can be affected in value by external events. My own earning power is also subject to external influences, such as changes in technology, the arrival of new people in my life who can enrich/impoverish me, etc. Again, what is so special about land apart from that that is fixed in quantity to a certain degree?
Surely it is much easier, if that is the issue, to go for corporation tax on profits. Why the land value has to be singled out is beyond me.
Not an argument that wins my respect. So a “very narrow” group of people lose out if we adopt your Henry Georgist views; that makes it right, does it? No doubt if we seized all the wealth of the top 5% of the population, that would only affect a “very narrow” section of the population as well.
But while the NIMBY point is a good one, do we need to adopt an anti-property tax – which effectively states that we are all really just renters at the state’s sufferance – to deal wth it in some way? Surely there are things like tort laws etc, which deal with the problems of when someone’s property development lowers the value of someone else’s property or vice versa?
Johnathan Pearce: Here we go again – terminology alert, the root of all confusion when reason is being sought: “human capital” – do you mean labour? That which returns wages? Would it not be less confusing if you just used the words we all know well rather than making up new ones that have yet to be defined.
Still waiting for an answer to what seems a simple question, utterley related to the start of this thread:
“If you received $1bn a year for producing almost zero wealth in the economy, would this be in the spirit of a functioning society and do you think that society would advance or decline over time if this practice continued?”
Screw the law, if you are breaking the principles of a functioning society, things that come naturally, it dont matter what the “Human” law says. You will end up with a bust in the end. This is evident all over history especially now. Get it anyone?
Well, as someone said (I paraphrase), I think in this very place, about the bank robbery at the beginning of Serenity, the robbery doesn’t count because it was stolen by the government first.
The fact that AIG/RBS managements were – allegedly – greedy and stupid to the point they destroyed their own businesses is in this context irrelevant. Contracts exist to pay these bonuses and in bailing out these wankers, politicians have to recognise the legal position. Perhaps they haven’t worked out how to lever that sort of money for themselves and are jealous? (Although I don’t recall any recent PM or POTUS leaving office on the breadline)
Robin, I would answer you if your questions were more coherent. I am not really sure what your point is or what you are trying to say.
Well the obvious point is that if a person is paid $1 billion by money seized from taxpayers for doing nothing, that is obviously a bad thing. (I don’t know if you have been reading this blog for long, but it is taken as self-evident around here).
I think the bailouts are wrong. I think the vast expenditures involved will make the problems worse, or at best, delay them, not solve them. But – and this is the crucial point – the folk at AIG who have been pilloried do not, in large part, deserve to be so pilloried. And frankly I am worried that a lot of important principles, like respect for contracts, are being chewed up in the current environment. That’s a bad thing.
As Mark Steyn said the other day, the AIG message is that the US political machine reserves the right to retroactively destroy contracts if they are politically unpopular. That is the behaviour of a banana republic.
Two points:
1.) “I think what the government is doing is unconstitutional, but I’m not sure it’s morally wrong.”
Sorry, but government can only act according to the law. “Moral” has nothing to do with it. Besides, if we’re going to talk about “morals”: every Congressman swears an oath to uphold and defend the Constitution. If Congress acts un-Constitutionally, therefore, they, and not AIG, are acting immorally.
2.) AIG bonuses: it’s easy to say with hindsight that AIG “should never have agreed” to pay the bonuses. At the time, AIG was faced with imminent disaster, and their only option was to get qualified people to try to rescue them. (The fact that they were going to rely on the same people who had got them into the mess is a topic for another time.) Whatever; those bonuses were granted, and contracted for, on two occasions: firstly, when AIG’s compensation committee agreed to the terms, and secondly, when the USGov agreed to honor the contracts — which, by the way, is the way U.S. law is written: when you buy a company, you assume the existing contracts.
All the rest — all of it — is naked wealth envy, and the resultant lawlessness.
I commend to everyone the RS article on the topic. If you ignore the commentary and just follow the story, it’s a bleak picture, far bleaker than the existing wailing about “undeserving” AIG executives.
With respect to the question Robin thinks is so important that it was posted twice, Johnathan began the answer but didn’t finish it. The question is nonsensical. First of all, only the government would pay someone for an activity which truly produced no benefit (which is the point Johnathan addressed). Secondly, it makes no sense whatsoever to talk about a private contract providing any “wealth in the economy”. It is a mutual exchange between the parties; “value” accrues to “the economy” (by which I take you to mean “society”) only as an incidental by-product (this is Adam Smith’s “Invisible Hand”). Finally, if the contract is between private actors, and entered into voluntarily, there is absolutely nothing wrong with it. Clearly the person paying the money would have thought he was receiving equivalent value for it. If the services turn out not to have the expected value the contract won’t be renewed (or the company will eventually fail). In any case, society does not “advance” or “decline” as a result; the money is simply moved from one set of hands to another. It is only when government intervenes, and takes wealth from producers to distribute to nonproducers, or acts to artificially favor one group over another, that societal interests are affected (i.e., retarded).
JP: “improvements to physical nature and human skills are fundamentally the same”
Again, we are completely in agreement. Now read e.g. the recent article in the FT (click my name for link) – if third parties build more railway stations along the Channel Tunnel link in the South East, house prices near the stations will increase by £30,000 (i.e. their rental value increases by about £2,000 per annum). If railway companies have to compensate those whose properties fall in value (and rightly so) why is it perfectly acceptable for other private third parties to bank the gain completely tax-free?
So human skills/ingenuity have increased land values (what else can?) but there is a mismatch between the people making the investment and those who benefit.
And there is no ‘theological nonsense’ involved. House A in Liverpool may be brick-for-brick indentical with House B in London, but there is a massive difference in selling price/potential rental income. This is a function of thousands of different factors, but we need look no further than ‘the markets’ to give us 98% of the information we need (and the other 2% is held by HM Land Registry, who have recorded all selling prices since 2000).
Or to put it another way, once you chuck in Council Tax, income tax and potential IHT or CGT, our landlord is probably paying 40% tax on the rental income he gets from us, and he’s still making easy money*. Why is this any different from charging 80% on the location rent and zero% on the buildings element?
* I was a BTL landlord until a couple of years ago, compared to dragging myself out of bed every morning, going to work and doing something productive for eight hours a day for a considerably higher tax burden, it is easy money, let’s not muck about here.
Johnathan, you brought this LVT diversion on yourself, and you keep egging Mark on. I hope you’re happy.
Laird, I guess so. Mark is a right fucking pain in the arse on the issue, isn’t he?
Johnathan my point is that we do not live in a functioning society. It is disfunctional because it has been taken over by criminals. The law is used to enable the government and the banksters to rob the taxpayer. The ruling elite are not going to give us a libertarian society, it will have to be taken.
There is no reason to respect the the contract rights of crooks, who wrote the laws to benefit themselves.
So ripping the concept of respecting contract law is going to help fix this how, exactly?
Besides, we’re not talking about the “contract rights of crooks”. We’re talking about the contract rights of honest employees who relied on the promises made (by their employer and by their government). Penalizing them serves no rational (or moral) purpose.
Now if you were talking about abrogating the “contract rights” of Congressmen to their salaries and perks I would agree with you.