Imagine an America where contracts were only valid so long as the political winds out of the District of Columbia blew in the right direction: a world where the government could circumvent any contract that attracted the ire of politicians, or that politicians could use to redirect attention from their own failings. In such an uncertain world, who among us would put any faith in contracts, and who among us would be willing to put our livelihoods at risk on the basis that the government would protect our interests?
As uncertain as free markets may seem, certainty is one of the bedrocks of a free market system. A free market can only thrive in a moral society (note: “moral” here not necessarily in the sense of a religious morality), governed by a legal framework which establishes certainty in economic transactions. Certainty is then derived from the laws being enforced by a governing body with the authority to use force in order to enforce the rule of law, which ideally is a direct reflection of agreed upon social mores. As long as outcomes within the rule of law are known, a free market economy can then function, and market participants are able to speculate about the unknown, with known legal outcomes upon the outcome of the unknown.
We speculate every day. One such speculation that we all experience in our lives is the speculation about our worth in the workplace. As employees, we believe that our services have value, and we demand to be paid for the value of our services. We know that we will do our best and that we will provide value to the company, but the prospective employer can’t possibly know what type of employee we will turn out to be. When we agree to work for a company, we take on some amount of risk: what if the person offering us a job has lied to us about how much we will be paid? What if our job will be different than described during the interview process? On the flip side, the employer also has risks: What if the employee doesn’t work the full time for which he is paid? What if the employee is dishonest and steals from the company?
To solve these issues and to help mitigate risks associated with employment, the employer and employee enter into a contract. The employer specifies salary and job requirements, and the employee agrees to perform services in a manner as defined by the employer. Both sides gain some amount of certainty from having agreed to a contract.
Employment, like all contracts, can only exist in a moral society with a well-defined rule of law, and here is why: If no social mores exist by which the majority of people function, neither party will trust that the other party will perform on the contract, yielding the contract ineffective on its face. A rule of law cannot compensate for a lack of social mores, because adjudicating contracts is not costless – someone must pay for attorneys, judges, court clerks, courthouses, officers of the court to enforce judgments, etc. At the margins, people will not enter into contracts if they believe they will have to resort to the legal system to resolve a dispute, because they cannot afford the very real costs of having an issue adjudicated. Without morality, the odds of reliance on the legal system increase. However, in a moral society, the rule of law ensures that the few who do not abide by social mores will be forced to comply, and, thus, odds are that contracts will be honored sans adjudication. Both morality and rule of law are necessary, but individually insufficient conditions to ensure a proper framework for contracts to exist.
Recently, there has been much ado about the bonuses given to AIG executives: bonuses that were contractually agreed upon by both AIG and the individuals who were given bonuses. These were not, by all accounts, discretionary bonuses that AIG lavished upon these executives, but contractually owed bonuses of a specified amount, which AIG could not legally alter. To be sure, AIG didn’t pay these executives in excess of what surely was a guaranteed minimum bonus. Most likely, AIG had discretion to pay these executives more than the minimum, but, given the performance of the company, AIG did not pay in excess of the bare minimum.
For the past few days, the news media has not been able to stop covering these bonuses. In fact, the news media continues to beat the war drum against these “greedy” executives, all but demanding that something be done about these “outrageous” bonuses. Fox News’ Greta Van Susteren, who is… ahem … a lawyer, vows to “get to the bottom” of how we let these bonuses be paid. I guess the fact that these are contractually owed bonuses eludes this lawyer.
It is our own greed and envy that outrages us about these bonuses. What’s worse is that, because we, as taxpayers, have taken 80% ownership in AIG, we feel that we have the right to control the company and demand that these bonuses not be paid. We feel a certain amount, and rightfully so, of righteous indignation that our tax dollars are going to pay the bonuses of people who were involved in running AIG into the ground, but our greed and envy are distracting our attention from the people who are truly deserving of our ire. In fact, one might think that politicians are intentionally calling our attention to these trivial bonuses, which account for less than one-tenth of one percent of the money allotted to AIG, so that we will not focus on the fact that the government is busily spending us into debt and circumventing laws that were established to keep us all safe from the government intervening in our lives.
We should be angry at the politicians who bailed out a company so wrought with mismanagement, not at the company or at the executives who received these bonuses. The free market allows for failure: in fact, failure is like a disease that causes illness but eventually is fought off by the body, which then has antibodies to fight the disease in the future. When the government intervenes, it causes the same problems caused by the over-prescription of antibiotics, which causes the disease to mutate such that fighting it off in the future becomes ever more difficult. Our anger should be focused on the very politicians who are distracting us by pointing to some trivial amount of money given out as bonuses.
We should be even more angry at politicians who speak of finding “legal avenues” to circumvent the rule of law. If even one private contract is circumvented by the government, then all contracts are at risk of being impaired by the government. Our greed and envy may lead us to believe that it’s right to punish these few individuals who received more money than most Americans will see in a lifetime as a bonus for a single year’s work, especially when that work resulted in laying the groundwork for the company’s failure, but we must remember that the rule of law is essential to a properly functioning economy, and that we wouldn’t want the government interfering in our contracts.
What if, for example, the government decided that non-hybrid vehicles are not being sold at a price that politicians feel accounts for the social costs of those cars and increases the amount you, as a non-hybrid car owner, owe for the car? “Absurd!” you say “The government can’t do that!”
Oh, but they can. What if anyone who owns a non-hybrid car suddenly becomes subject to a new tax for non-hybrid car ownership – even if you purchased the car 10 years ago? You might think this was unfair; that had you known this when you were purchasing a car, you might not have purchased the car. You’d probably think it was unfair that the government passed this law after you purchased the car.
You’d be right to be upset, because this is exactly what the Constitution attempts to avoid in Article I, Section 9 where it states, “No bill of attainder or ex post facto Law shall be passed.” Such a tax would, de facto, be an ex post facto law. Such laws are unconstitutional.
Well, what of the solution that Congress is discussing to “rectify” the AIG situation? Senate Banking Committee Chairman Chris Dodd (D-Conn.) has recommended levying a draconian and confiscatory tax aimed at only AIG executives who received this bonus. Such a tax, so directed at these specific individuals for the sole purpose of circumventing a legally valid and binding contract is, de facto, and ex post facto law. We, as Americans, no matter how disgusted we are by the fact that we are bailing out AIG, cannot stand for the government violating the Constitution to enforce some notion of cosmic justice, because it undermines the very principles upon which the country was founded, and which allow our free market economy to function.
We are moving toward living in an ex post facto world: a world where we address symptoms rather than illnesses; a world where the rule of law changes on a daily basis based on how we feel about outcomes rather than a world where we enforce a rule of law established to make sure everyone plays by the same rules. Such a world is not only an ex post facto world, but an ad hoc world, malleable by the political process, changing daily, and wholly unstable to support a free market economy.
We are being persuaded, both by our politicians and the media, to focus on outcomes, which are mere symptoms of the underlying illnesses causing them. Too often the conversation about “equality” focuses on equality of outcomes, rather than equality of opportunity. We look at those things we see that make us feel wronged, and try to right them, instead of understanding what caused them in the first place. In AIG’s case, it was government intervention that allowed these bonuses to be made. Had the government allowed the rule of law – the system that ensures we all play by the same rules – to solve AIG’s financial woes, AIG would have entered into bankruptcy, ruled by bankruptcy law, and a judge could have legally invalidated the contracts for guaranteed bonuses, in favor of paying AIG’s debt holders and shareholders. Problem solved.
It is precisely government intervention in the free market that has caused this problem. Allowing the government to fix the problem by circumventing private contracts and directly violating the Constitution only creates systemic problems that will certainly cause more problems in the future, because it will create an ex post facto world, and an ex post facto economy.