March 25, 2009

Congress, The One Branch Wrecking Machine

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The election of President Obama and the new Democratic majority in Congress was a sign that the people of the United States wanted sweeping change and a new course for the nation. The federal government has certainly seized on this mandate and has quickly passed the American Recovery and Reinvestment Act, while the House has passed a bill to retroactively tax bonuses received by employees of TARP recipient firms. Some have argued that this shows the government’s ability to now enact reform efficiently and effectively. However, Congress has been acting indiscriminately in wielding power. This may be the byproduct of a unified government, nonetheless, Congress has been irresponsible and President Obama must use the bully pulpit of the presidency to check Congress and explain to the public that policies enacted out of anger are largely ineffective.

While the quick enactment of the economic stimulus bill was met with mostly praise, we are now living through one of the unintended consequences that a hasty legislation process breeds. Without proper oversight, a provision was placed in the stimulus bill that protects the legality of the very retention bonuses paid to AIG employees that now have so many people outraged. An unfortunate he-said she-said blame game is now ensuing between Treasury and Congress. Had Treasury and especially Congress taken the time to review the legislation, we may not be experiencing this current tide of dissatisfaction.

Passage of the 90% tax is now only compounding the mistakes Congress made in the past. The House of Representatives, in its infinite wisdom, has decided to retroactively tax bonuses at 90%, pursuant to some parameters. This too contains a raft of unintended consequences. The tax sets a precedent for utilizing the tax code to penalize a targeted group of people. Congress is exercising this power in a retroactive fashion, effectively stating that if any already entered in to agreement between the private sector and government does not satisfy legislators, there will be severe penalties. Not to mention the disincentive this creates for anybody who is considering working for a TARP recipient to stay with the firm. It is understood that congressmen must balance their short-term interests with the public’s longer-term interests. However, our elected officials are elected to do what is in the best interests of the country and if this means differing with constituents then they must be prepared to do so.

The saving grace in all this might actually be President Obama. He has expressed reservations about the House bill and continues his mantra, “We cannot govern out of anger.” I believe that President Obama not only has the political will and firepower, but the intelligence to understand that rash decisions aimed at appeasing populist anger will ultimately fail. For example, Secretary Geithner has been criticized for the delay in releasing details on the new bank bailout plan and many congressmen have called for his head. Might it be possible though that the time taken to formulate an effective plan, while frustrating, resulted in a successful policy?

The President must communicate the importance of maintaining an even keel until financial markets are restored. Once there is stability, then prosecutions and indictments can take place. I do think, thanks to President Obama, cooler heads will prevail (much to the chagrin of Barney Frank). Policymakers must recognize the fact that satisfying short-term desires will almost inevitably lead to long-term complications.