Bonus outrage bad for economy

Last fall, a European colleague asked me why Americans didn’t take to the barricades over economic injustice.

I tried to explain that we didn’t do things like that, the United States wasn’t France, and Americans could make their protest felt at the polls. That was then. These days, as public anger soars over AIG bonuses, fanned by cable television and Congress and indulged by President Obama, it seems we have arrived at a Gallic moment — or something more scary.

When an Iowa Republican, Sen. Charles E. Grassley, actually suggests that AIG executives follow “the Japanese example,” come before the American people, bow, and “commit suicide,” you know we’re reaching hysteria levels.

Scared politicians are throwing out short-term fixes to placate the public, instead of harnessing the anger to support long-term economic changes. AIG rage threatens to worsen the financial crisis at home and around the world.

Don’t get me wrong. I understand the public’s wrath. I’m angry, too. My employer has filed for bankruptcy and my 401(k) has withered. I have visions of Bernie Madoff in the stocks confronted by his elderly victims with rotten tomatoes in their hands.

But the emotions generated by AIG bonuses are so intense they clearly reflect something much deeper. This affair has freed Americans to air long-held economic grievances they have held in check for a decade.

Stagnant wages

Middle-class frustrations over years of stagnant wages and rising income inequality have finally exploded. Already, figures from 2005 showed that the top 1 percent of Americans received 21.8 percent of all reported income (the largest share in 80 years), and the top 10 percent collected half.

Long-standing unease at CEO compensation — which has soared to obscene heights — is also going public. Those frustrations were tempered in recent years by increases in home values, and a rise in credit card debt. But, now that the debt bubble has burst, middle-class Americans realize they may be permanently poorer.

So it’s not surprising that we see demonstrations in front of AIG offices, and the demonization of all of its staff — regardless of whether a given person deserves this. The New York Times reports that AIG executives have hired security guards to protect themselves in their houses. The company has become a symbol of America’s economic frustrations and worries.

Many Americans feel they have been cheated by Wall Street and corrupt politicians. Indeed, Obama was swept into office as a result of such feelings.

Demonstrators in Dublin, Eastern Europe, Greece, China, Russia, and of course Paris have already taken to the streets over the global recession. So why not in America?

Yet AIG rage can become a dangerous phenomenon if it is misdirected or misused.

So it is depressing to watch how anger over AIG is being whipped up by the talk shows and cable television. Lost in the cacophony are the details — which are hard to understand anyway — of exactly who did what. (The mainstream media are at least trying to sort this out, with varying success.)

Bank lending

The din virtually blots out the bigger picture: how the rescue of AIG relates to the urgent need to save the banking system and reinvigorate bank lending. Meantime, AIG rage has inspired demagoguery among scared politicians trying to deflect blame. This in turn has produced quick fixes that may undercut long-term economic reforms.

AIG rage, for example, led the House last week to vote for the levying of a 90 percent tax on bonuses paid by all firms receiving government aid. Yes, there needs to be a change in the bonus system, which rewards irresponsible risk-taking. But a blanket punitive tax may drive away talent needed to revive those firms. It may also scare away private investors needed to join government in buying up toxic assets from banks.

X Rubin is a columnist and editorial-board member for the Philadelphia Inquirer. Distributed by McClatchy-Tribune.