Obama and the AIG bonuses

The Obama administration seems to be retreating from the populist craziness that took over Capitol Hill last week as the House of Representatives sped through their 90% confiscatory tax on the AIG bonuses. Some sanity seems to be taking place among the President's advisers.

The Obama administration appears to be dialing back its support for the bonus tax legislation generally, and particularly the bill passed by the House last week.

After the House passed the bill, the White House issued a statement from President Barack Obama saying “I look forward to receiving a final product that will serve as a strong signal to the executives who run these firms that such compensation will not be tolerated.''

But on Sunday, a top administration economist was much less enthusiastic, calling the bill “dangerous.”

“The president would be concerned that this bill may have some problems in going too far – the House bill – may go too far in terms of some legal issues, constitutional validity, using the tax code to surgically punish a small group of people,” Jared Bernstein, Vice President Joe Biden's chief economic adviser, told George Stephanopoulos, host of on ABC News' "This Week.”

Bernstein continued “That may be a dangerous way to go. That said, let’s see what comes out of the Senate. He has not said he won’t sign this bill. Let’s see what comes out of the Senate. Let’s see what gets to his desk.”

....Also on Sunday, Christina Romer, chairwoman of the White House Council of Economic Advisors, would not say whether Obama would sign bonus tax legislation.

“That obviously is a decision for the president,” Romer told Fox News Sunday host Chris Wallace. “What he has said is that he is going to look at any legislation and I’m sure he will do that.”

Administration officials have privately expressed concerns that both the House and Senate bills could lead to an exodus of employees or whole companies from TARP, as well as other government-sponsored financial rescue efforts, the Wall Street Journal reported last week.

The Senate bill is less punitive, but could affect more companies receiving bailout funds. It would impose a 35 percent excise tax on the companies that paid bonuses and a 35 percent tax on the employees receiving them.

But Sunday’s comments by Bernstein and Romer were the first public acknowledgement by the Obama administration of opposition to the bills, which may face a tougher ride in the Senate.

Well, couldn't the President exercise some actual leadership and publicly state his position as to where he stands on the tax on bonuses. Is that like, you know, sorta his job?

As Suzanne Garment writes today, it is part of the President's job to try to sensibly channel populist anger, not be out in front leading it.

Precisely because the president speaks for the country, it is his job, and not just Mr. Summers's job, to weigh the economic consequences of his words. The president's job is not to express populist anger but to address the anger and talk sense to it.

As the Secretary of the Treasury unveils his long-awaited plan to involve private companies in winding up the bad bank assets in the TARP program, the administration is going to need the involvement of private companies to help government out. It's probably not a great idea to have the President out there demonizing the sorts of people whose help he's going to need in the TARP plan. Already Congress is looking to see what other recipients of government bailout funds gave out bonuses to their employees. The Presdient continued to walk back from the House resolution in his appearance on 60 Minutes.

Still, Obama would not endorse legislation moving through Congress to tax nearly all the bonuses of executives at AIG. Asked if the measure is constitutional, the former law professor said: “Well, I think that as a general proposition, you don't want to be passing laws that are just targeting a handful of individuals…And as a general proposition, I think you certainly don't want to use the tax code—is to punish people.”

“So let's see if there are ways of doing this that are both legal, that are constitutional that uphold our basic principles of fairness, but don't hamper us from getting the banking system back on track,” Obama said.

Well, if that's the way he feels, why doesn't he put forth his own proposal instead of just reacting to the House bill. That is what leadership is. But Obama seems to prefer being in reactive mode as he outsourced his stimulus plan to the Democrats on the Hill and is planning to let them take the lead on health care. And now he's sending forth his own contradictory smoke signals on these executive bonuses instead of proposing his own solution.

Be assured that AIG is not alone. And from one side of the government's mouth, Congress will be demagoguing those companies, and with another, the White House will be asking those companies to help out with the bad bank assets. Don't act surprised when companies listen to both sides of government's voice and decline the opportunity to work together with the government to unwind those toxic assets.

UPDATE: The WSJ expresses very well why the House's bill is so dangerous.

With such a sweeping assault on contracts and punitive taxation, Congress is introducing an element of political risk to economic decisions that is typical of Argentina or Russia. The sanctity of U.S. contracts has long been one of America's competitive advantages in luring capital, a counterpoint to our lottery tort system and costly regulation. Meanwhile, the 90% tax rate marks a return to the pre-Reagan era when Congress and the political class behaved as if taxes didn't matter to growth or incentives. It is a revival of the philosophy of redistributionist "justice" of the 1930s, when capital went on strike for an entire decade.

The financial system will suffer in particular, just when the Obama Administration is desperately seeking more private capital to ride out future losses. Facing such limits on the ability to reward talent, every bank CEO will try to pay off the TARP as soon as possible, whether or not this leaves the bank with a weaker capital base. Hedge funds and other investors that Treasury needs for its new Public-Private Investment Program, or for the Federal Reserve's TALF, will also be warier, if they'll play at all. Treasury may promise nothing punitive for these programs, but that's also what it said about the TARP.

The other Smoot-Hawley comparison relates to our new President. Herbert Hoover sent mixed signals about the tariff until he finally bent to a panicked GOP Congress. President Obama has behaved in the past week as if he can appease and "channel" Congressional anger without being run over himself. So not only did he incite the Members last Monday, he welcomed the House bill on Thursday. By the weekend, cooler White House heads were whispering that the mob had gone too far, but it will take more than words to kill this terrible legislation. Mr. Obama will have to fire a gun in the air -- which means threatening a veto.

He needs to show that he's tough enough to stand up to not merely Republicans and Rush Limbaugh, but his own party when it is in the midst of enjoying their phony populist outrage.