The Lesson from AIG

The recent fracas about AIG's bonuses is a symptom of what is wrong with Democracy. AIG has been the receipient of $180 billion of bail-out money. It used $165 million of that money to pay contractual bonuses to its employees.

This touched off a firestorm of protests from the public. Frightened by the angry mob, the House of Representatives recently passed a law to tax away 90% of the bonuses.

In my opinion, this law, if implemented, will probably make the company go bust. Thousands of its hardworking salesmen, managers and other employees have been promised bonuses if certain objectives were reached. These bonuses are contractual. If bonuses are given to the people who did dumb things that caused the company to go under, then I think its wrong. But it is unfair and unwise to deny bonuses to employees that they were legally entitle to in accordance to their employment contracts.

If you were promised Y dollars for doing X, then you have to pay them if they have done X. What Congress is doing is to break the contract. Now, employees will be inclined to leave companies that received bail-out money because they contracts are no longer sancrosant. The ones that are likely to find alternative employment elsewhere will be the best ones.

A financial company is not like other companies, say a mining company. In a mining company, your principal asset is your mine. But in a financial service firm, the principal assets are its employees. While a mine cannot walk out the door, AIG's employees can!

This is something the Mob cannot understand. All they know is that taxpayers' money was used to pay bonuses. Now that their employees know they won't be getting paid what they are promised, the best ones are going to resign. How is AIG going to survive a drain of its employees?

This tax law that Congress recently passed may doom AIG. This means that the $180 billion of taxpayers' money that the government poured into it will go down the drain. The US government, and by extension taxpyers, now owns 80% of the company. Its actually in the taxpayers' interest for AIG to retain its good employees so that the company has a better chance of survival. Edward Liddy was appointed to make the tough decisions required to ensure the survival of the company. Its best to let him decide on management issues like compensation and not the Mob who does not understand the business.

It will also affect other companies that accepted bail out money. If contracts are no longer sancrosanct, then its going to be hard to retain and recruit talent.

Liddy had told the Obama administration of his intentions of paying bonuses. I think the Obama administration understood the rationale why they had to be paid. But he and the other votrepreneurs did not have the guts to explain it to the Mob that elected them. Instead Obama told them, "(The House vote taxing AIG bonuses) rightly reflects the outrage that so many feel over the lavish bonuses that AIG provided its employees at the expense of the taxpayers who have kept this failed company afloat.

In the end, this is a symptom of a larger problem — a bubble-and-bust economy that valued reckless speculation over responsibility and hard work," he said. "That is what we must ultimately repair to build a lasting and widespread prosperity."

He is of course not leading the People but is following them. Obama should have used his eloquent oratorical skills to convince them why paying AIG's staff what they were promised was necessary in order to turn around the company now 80% owned by taxpayers.



If as I predict, talented employees leave, the firm is likely to go bust then taxpayers will not get their money back from their "investment" in AIG. The problem is that when governments run companies, they no longer run it for profitability. They run it in a manner whereby the votrepreneurs (politicians) get votes which of course tends to screw things up for the companies they control.

That is one reason why I was dead set against bail-outs in the first place. See my earlier article, "Let the Big 3 Automakers go bust.

Looks like I may get what I wanted - letting nature take its course and allowing failed companies to fail. Too bad for the US taxpayer that in AIG's case, he has to lose $180 billion for nothing.

What's wrong with Democracy by Free Hal

Here is a good article written by Free Hal. It explains clearly some of the weaknesses of Democracy and why it can collapse.

What's wrong with Democracy?

"When the people find that they can vote themselves money, that will herald the end of the republic." - Ben Franklin

"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been about 200 years. These nations have progressed through this sequence: From bondage to spiritual faith; From spiritual faith to great courage; From courage to liberty; From liberty to abundance; From abundance to selfishness; From selfishness to apathy; From apathy to dependence; From dependence back into bondage." - Alexander Fraser Tytler

"Democracy is a form of government that cannot long survive, for as soon as the people learn that they have a voice in the fiscal policies of the government, they will move to vote for themselves all the money in the treasury, and bankrupt the nation." - Karl Marx

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Democracy is the best way, pretty much the only acceptable way, to run a state.

Dictatorship, theocracy, tribalism – none of them comes within a mile of democracy as a way to steer the coercive power of a government.

The contest has been tried time and time again, and democracies have always triumphed against the over-ambitious dictators (Kaiser Bill, Hitler, Kruschev, Galtieri, Saddam) who convinced themselves that democracy was soft.

Democracies are just nicer than pretty much any dictatorship you can think of. The freedom, order , and consent that western democracies involve are easy to live by, and allow individuals to take charge of their own happiness.

Democracy is Unsustainable

The problem with democracy is that it is long term unsustainable.

The democratic state leads to the welfare state.

The welfare state overburdens and then capsizes itself.

Without a state you have no democracy.
This may sound sweeping. How does it work?

The fiscal effect

The lower earning majority will out-vote for the higher earning minority into buy things for them, such as health care, insurance, pensions.

The maths is simple: if a 1% tax increase will cost you £1 but will buy you £2 of things you want, you will vote for it. The minority for whom that 1% costs £100, and who aren’t eligible for the benefit, are outnumbered.

Everyone will complain about tax increases, but the majority will vote for the politician who convincingly promises them £2 more of services for £1 more of tax. And they will bitterly resist any government hinting at withdrawing freebies already available. This is the tax ratchet in operation. It has no logical stopping point to prevent it going over the cliff-edge.

Lethal side effects

Freebies will create side effects which further undermine the system.

Currently, in Europe, the side effect of utopian welfare promises has been to attract large numbers of less productive migrants, primarily Islamic populations, who don’t want to integrate. The welfare state has thus created a catastrophic and self-widening ethnic divide in Europe which can break the democratic state on its own, and which will continue to grow even after the welfare tap runs dry.

Similarly, the majority, being employees, will also put squeeze the system from the other end of the system, i.e. getting the state to force others to pay them more for working less. This goes under the banner of ‘health and safety’, and – you’ve guessed it – ‘social justice’. These nice-sounding justifications don’t alter the fact that a quart won’t go into a pint pot. An economy won’t survive if too little is put in, especially if too much is taken out at the other end.

Ideological self-destruct

This process adopts ideologies like “social justice”, “progressive deficit”, and “social inclusion” as ways to justify it. And it will be seen as a right. E.g. a reduction in taxation is always referred to as ‘giving money to the rich’ instead of what it really is – desisting from taking it from them. It’s a highly proceduralised shakedown, adorned with fine words and the high academic seal of legitimacy.

This ideological thrust paints the traditional state of things as uniformly bad, as something to be changed, to be got away from. This simplifies in the general consciousness as the idea that western society, not having always signed up to notions of 'social justice', i.e. the forcible transfers of wealth from the minority to the majority, is bad. If it can be undermined, along with the oppressors who impose it, then the welfare utopia can arise in its place. Not for nothing did Mikhail Gorbachev, during a March 2000 visit to London, describe EU as "the new European Soviet".

Over time, the ingrained wisdom is that anything traditional, anything associated with the old way of doing things, is to be torn down. In this environment, western culture, traditional morality, individual responsibility, self-restraint, and self-reliance, are reflexively perceived as bad in themselves. And western society and its towering historical culture are seen merely as irrelevant or oppressive. This explains the self-loathing of western society, particularly welfare democratic society, and its peculiar determination to weaken and undermine itself in the face of any threat.

So what?

Anyone who thinks collapsed economies are some kind of carnival is either a Marxist or a fool, probably both. The effect last for a generation and usually put in train other effects that last for a generation after that. Reflect for a few minutes about what has usually followed economic breakdown in Europe. The state itself usually breaks down, and people resort to the strongest local warlord, or the most militaristic dictator, for protection.


Hal