What’s happening with the AIG bonus scandal?

Congressional action to recoup the $165 million in bonuses already handed out to AIG employees has been derailed. On March 19, the House responded to public outrage by voting 328-93 to approve a bill that would impose a 90% tax on any bonuses given to employees at AIG and other firms that received more than $5 billion in bailout money. However, when the White House expressed concerns about the bonus tax, the Senate punted the issue until after the April recess. Sensing the loss of momentum behind bonus taxes, the House voted on April 1 to approve a substantially weaker approach. The new bill, which passed by a 247-171 margin, would place some limits on future bonuses, but would otherwise allow Treasury Secretary Timothy Geithner to determine whether employee compensation at the bailed-out firms was “unreasonable” or “excessive.”

Who is to blame for the bailout bonus scandal?

There is plenty of blame to go around. Executives of AIG and other Wall Street firms have acted like modernday Marie Antoinettes, so disconnected in their own little bubbles that they can’t respond to the crisis with human decency. But we can’t let Congress off the hook. They had ample opportunity to prevent this from happening by putting strict, measurable limits on compensation in the original bailout plans. Instead they backed down to pressure from Treasury officials, first in the Bush administration and then in the Obama administration. Congress’s inaction on excessive compensation over the past two decades has led to an increase in the gap between CEO and average worker pay from 41-to-1 in 1980 to 344-to-1 in 2007.

Should Congress tax back the bailout bonuses?

The House proposal to tax bonuses at 90% was a “better late than never” option in response to their failure to protect taxpayers from such bailout profiteering. Congress should also begin a debate about how to restore greater progressivity to the federal tax system, with steeper rates on higher incomes across the board and rolling back some of the Bush and Reagan era tax cuts at the top. At some point, there needs to be a clear plan on how to pay for the substantial investments our nation is making to address the recession and improve health care, education and energy systems. We had high income taxes between the late 1930s and the early 1960s that accompanied a period of middle class prosperity and stability. Progressive taxes are one of the ways we can discourage speculation.

Is the public acting like crazed pitchfork populists?

The public is waking up to the unaccountable and reckless practices and culture of Wall Street. And they are furious at the ways in which politicians from both major parties have accepted this Wall Street mindset (along with millions in campaign contributions). The American people don’t resent fair compensation for hard work or innovative achievements. But for decades, we’ve watched a powerful elite rig the rules of the game in their own favor. We should channel this anger into long-lasting reforms to ensure such abuses never happen again — and that the economy works for everyone, not just the superrich.

Isn’t the problem of executive compensation just symbolic?

Runaway excessive pay is both a contributing cause of the economic crisis and a symptom of what is deeply off kilter with Wall Street culture. Our executive pay system contributes to what President Obama has called the “quarter by quarter mentality” that has infected corporate American for several decades. When top managers are rewarded for short-term gains — and not long-term stewardship — they are more likely to pursue fast gains through stock price manipulation, outsourcing, speculative investments, and other actions that have jeopardized the stability of our economy.

What are immediate reforms Congress should implement?

There are several immediate actions Congress could take today to remove the perverse incentives in the executive compensation system.

First, Congress should eliminate incentives in the tax code that encourage excessive pay. They should pass the Income Equity Act, which would cap the amount of pay a company can deduct off their income taxes at either 25 times the pay of the lowest paid worker at a firm or $500,000.

Second, Congress could allow shareholders at publicly traded companies to vote on executive compensation. While “Say on Pay” won’t solve this systemic problem, giving shareholders this authority might stop some of the most obscene pay packages.

Thirdly, Congress should pass corporate governance reforms that require democratic elections at corporations, truly independent compensation committees, and prohibitions on compensation consultants that have other business with the firm.

How can we address this problem over the long term?

Ultimately we need to radically change the culture of Wall Street and transform the economy. Too much of the activity on Wall Street has been about speculation and gambling, not productive economic investment. With all the focus on Wall Street greed we forget a fundamental truth: Wall Street is NOT the economy; people are the economy — local and regional businesses are the economy.

Should we be bailing out big banks like Citigroup and insurance companies like AIG?

Not the way we are. The problem with these “too big to fail” companies is when they make money it goes to private shareholders — but when they mess up — we taxpayers are on the hook. Right now, the timid approach of Bush/Obama Treasury officials has given us the worst of two worlds. Taxpayers cover all or most of the losses but have insufficient management power. U.S. taxpayers now own 80 percent of A.I.G., yet we don’t have the power to dictate compensation? The answer is for our government to aggressively step in as receivers and break up these companies into smaller units. Big banks should be broken up and assets allocated to regional and local banks. Or we should create quasi-public authorities to manage these entities for public purposes.

What is the alternative to Wall Street?

It is very important to make a distinction between the casino economy of Wall Street and the real economy of Main Street. The real economy includes the millions of small- and medium-sized regional businesses that produce and provide useful life-sustaining goods and services. These businesses are rooted in communities and concerned with livelihoods. Local banks and credit institutions — a key part of the real economy — are for the most part healthy because they are subject to state-level regulation and were not engaged in the Wall Street casino binge.

The casino economy has been focused on betting on the movement of money and expropriating value out of the real economy. Wall Street has been focused on phantom wealth creation. The Main Street real economy is about creating real wealth, livelihoods, and useful products and services.

What is the role of government in fixing the economy?

Government must create a firewall between the parasitical casino economy and the healthy real economy. It must do this by confining such activities to regulated casinos and providing aggressive oversight to the rest of financial marketplace. Examples:

• Strict reserve requirements for all financial institutions and instruments
• A financial transaction tax on purchase and sale of financial instruments

Won’t the recession be over within a year and everything be back to normal?

The economy has suffered a system failure and needs to be transformed into a new and hopefully sustainable economic system. The forces of Wall Street, however, and the politicians, media and think tanks that serve them (and who got us into this mess) want to quickly bring back the old system. They want to restore the bubble economy and start funneling wealth to the top one percent again. They hope to goose the system with taxpayer dollars and extract more phantom wealth for themselves and a small elite. The challenge is to make sure a replay of the events that led to the current crash never reoccur by reengineering the economy to ensure broader prosperity and ecological sustainability.

Sarah Anderson and Chuck Collins of the Institute for Policy Studies (IPS) are also members of the New Economy Working Group, an initiative to stimulate bold thinking about a New Economy that serves the long-term needs of all our children, families, communities, and natural systems. IPS is also helping to form Common Security Clubs to help people come together to study the changing economy and help one another take action. For more information on actions you can take, see IPS’s website on extreme inequality.