The A.I.G. bonuses and altruistic punishment

James SUROWIECKI

Rick Newman of U.S. News makes a key point about the rage unleashed by the A.I.G. bonus mess: it’s easy to understand. Americans are unsurprisingly angry about the economic chaos of the past year and a half, and certainly there’s been no dearth of righteous fury and populist outrage.

But it hasn’t quite had a good target: yes, people can rail against the banks, but they’re a kind of amorphous villain, and in any case we’re relying on those same banks to get the economy moving again.

And yes, there was John Thain, with his eighty-seven-thousand-dollar rug, but those expenditures had happened before Merrill received any bailout money, and in any case he hadn’t been at Merrill Lynch when it had made all of its awful bets.

The A.I.G. bonus-getters, by contrast, were responsible for helping run the company into the ground. They are being paid with taxpayer money. And they’re getting compensated despite, by all indications, performing badly.

The whole thing seems designed to demonstrate Wall Street at its worst: short-term profit being put ahead of the long-term health of the company (that’s why this small division of A.I.G. made these massive bets which put the firm on the hook for hundreds of billions of dollars in losses); pay for not-performance; and a refusal to change even after everything has fallen apart.

It may be true, as Andrew Ross Sorkin has argued, that not paying the bonuses would actually end up hurting taxpayers, either because we’d be setting a precedent that contracts can be easily broken or because we need to keep the A.I.G. employees in-house lest they start trading against the company. (I don’t buy either argument, but I can see the logic behind them.)

But I think it’s pretty clear that even if the “this will hurt you more than me” argument were true, it would not prevent people from wanting to get the bonuses back. Myriad experiments in behavioral economics have found that people are willing to pay to punish members of a group whom they believe to be shirkers or free-riders.

In other words, people are willing to make themselves worse off (they have to pay their own money) in order to ensure that others don’t get undeserved rewards.

Economists call this “altruistic punishment” (because the punishers are putting the interests of the group ahead of their own interest), and argue that it played an important role in fostering cooperation.

So even if people believed that getting the A.I.G. bonuses back would be a net loss for the economy, chances are they’d still want to do it.

To be sure, cutting off your nose to spite your face is generally a bad economic strategy, which is why the legion of bailouts we’ve made since last September (including paying off A.I.G.’s counterparties) have, for the most part, been necessary.

It’s been expensive to bail out the banks, but as Lehman Brothers demonstrated, it would have been far more costly to let them go under. But when it comes to the A.I.G. bonuses, the costs of clawing them back are trivial at best, while the public satisfaction at seeing what feels like justice being served will be great.

Getting all worked up about this money may not, strictly speaking, be rational, but I think that paradoxically, if some of this money is clawed back, it’ll increase the chances that we’ll be able to keep dealing with the ongoing crisis in a rational way in the future.

Courtesy: The New Yorker