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Unintended Consequences

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Contrary to the view of many, our government does many things very well. When I am on an airplane flying across the country and can see neither land nor sky because of clouds, I am very comforted in the knowledge that a government air controller is guiding the plane to our destination. This and thousands of other services we often take for granted. And yet they make our lives safer, healthier and even more prosperous. It is a great blessing, but even the government takes actions that often cause unintended results. A few examples–some minor, others more significant–will illustrate the point.

For most of its existence Social Security provided a death benefit of $255.

Funeral homes routinely filed for this benefit as part of their services. A few years back the decision was made to eliminate this payment. The small amount of the benefit did not amount to much in the economy at the time and it seemed a prudent way to save a few dollars for the system. The unintended result: funeral homes no longer notified the Social Security system of the death of one of its participants, resulting in payments continuing to be paid into checking accounts. Confused spouses did not realize checks should have been stopped and payments continued for long periods and much of it unrecoverable. The result: eliminating the benefit cost more than continuing it. By now there hopefully is a back-up system to avoid this.

A more recent example comes to mind. Several months ago the much maligned AIG organization scheduled a conference here at a local resort. The local media got wind of it and in the light of AIG’s financial dilemma deemed it an inappropriate function and crucified the company in print, radio, and TV. Never mind that the meeting was being paid for mostly by outside vendors and that the program was an incentive for increased productivity, a practice deemed necessary for many businesses. The result: the meeting was cut short and 18 other conventions in our area were cancelled by other companies fearing similar criticism. Hundreds of hotel workers lost jobs, sales tax revenues fell, hurting the city, and hotel vacancy rose at the busiest time of the year. After the media expos?, politicians jumped on the bandwagon, spreading the malaise to other convention cities with further negative consequences.

The whole episode reminded me of the effort by then president Jimmy Carter to stamp out the 3-martini business lunch. It got a lot of traction until one of his closest advisors advised him that “the business lunch is to businessmen as fertilizer is to a peanut farmer.” Thus ended the flap.

Shortly after AIG’s predicament the media focused on a gala sponsored by Northern Trust, which was held as a promotional program for its high-end clientele. Since Northern had received funds from one of the government stimulus programs, the media smelled another scandal to ballyhoo. However, Northern Trust returned the government money and in effect said, “No thanks. We will stimulate the economy our own way.” Good for Northern Trust and also for validating the usefulness of company conventions. I am sure the hotel and convention people must have sent up a cheer for action that produced better results for them.

The latest saga in AIG’s troubles stems from bonuses paid to a number of executives, presumably from money made available through the government loan program. The purpose of this column is not to defend or condemn AIG for these payments, for I am not in a position to judge that part of the issue and I suspect that neither is anyone else. There has been no discussion other than wild charges about how these bonuses were earned other than they were payable under their contract or employment agreement. I just want to address the consequences the furor has created. Much of the public outrage has been stimulated by politicians and administration people who themselves were complicit in the payments, either overtly or by negligence, and are now running for cover. Of course the media, not one to miss a good scandal, are amplifying the story day and night.

Considering the result of all the outrage, I can’t help but wonder how this company will ever recover and repay the mega billions it was loaned. It has been widely stated that because of the terms of the loans the government now owns 80% of AIG. Therefore, the unintended consequence of all this may well be the destruction of a company too big to fail. Historically, other companies subjected to far less public outcry have failed to recover. Surely there could have been a more forthright way to handle this issue and without such dire consequences.

And now the latest ploy by Congress to remedy the foregoing debacle is a proposal to tax 90% of the bonuses, thereby returning most of the money to the Treasury. As of this writing, enthusiasm for this tactic seems to be waning, so hopefully this will not come to pass, for the potential for unintentional consequences that could flow from such a tax could be scary. Any such bill, if adopted, would in its final form have to be broadly applied in order to avoid the unconstitutional targeting of specific groups of people. It does not take much imagination to think of other groups that might unintentionally be caught in such a net. It would certainly make any company think twice before doing business with the government.

Again, I want to reiterate that my purpose is not to defend AIG, but to lift up what happens when things are not thought through carefully, and the hazards of panic legislation. Deliberation, which measures all possible consequences, takes time and patience. No wonder Otto Von Bismarck said, “The public at large should not be exposed to the making of laws or sausage.”


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