'Unitary executive' theory runs amok

Sarah Palin appearing on KUSA in Denver on October 20, 2008. Replayed on MSNBC's "Morning Joe" on October 22, 2008. Apparently she skipped her high-school civics class on the day that they discussed the constitutional role of the Vice President.

Party on

For American International Group (AIG) executives, the party goes on even after the corporate meltdown that required a $123 billion (and counting) federal bailout since September. A House committee recently examined the events leading up to, and following, AIG's collapse:

One of the key items discussed was AIG’s spending of no less than $442,000 for a corporate retreat at the St. Regis Monarch Beach resort in Dana Point, California, south of Los Angeles. This original amount was spent on Sept. 22, a week after the Federal Reserve attributed an $85 billion emergency loan to AIG in order to keep the company afloat, avoiding bankruptcy due to insurance liabilities.

This event was hardly unique, as New York Attorney General Andrew Cuomo pointed out in a letter (.jpg) to AIG's Board of Directors dated October 15th:

In the last several months, as AIG was teetering toward bankruptcy, and operating with unreasonably small capital, AIG nevertheless made numerous extraordinary expenditures in the form of executive compensation payments, junkets, and perks for its executives.

For example, in March 2008, ignoring the massive losses AIG was experiencing, the Board awarded its Chief Executive Officer a cash bonus of over $5 million and a golden parachute worth $15 million. Similarly, in February 2008, a top-ranking executive who was largely responsible for AIG's collapse was terminated, but still permitted by the Board to keep $34 million in bonuses. This same individual apparently continued to receive $1 million a month from the company until recently.

Moreover, even after the taxpayer-funded bailout of AIG, the company paid hundreds of thousands of dollars for luxurious retreats for its executives, including an overseas hunting party and a golf outing. We believe these expenditures and payments, made in the absence of fair consideration, violated New York law... which deems such payments to be fraudulent conveyances.

AIG, the world's largest insurance company, has been deemed "too big to fail." The corporate leadership seemed genuinely surprised by all the fuss, though a spokesperson said: "We regret that this event [the retreat at the St. Regis] was not canceled."

The sense of entitlement and heedlessness that AIG's behavior reflects have deep roots in recent economic history. Consider this chart, from the Economic Policy Institute (EPI) in D.C.:

The graph shows the ratios between the incomes of the highest 0.1% of earners (top line), the next highest 1% (second line), and the rest of us (bottom 90%). As EPI notes, the most telling line is the top one:

...when it comes to the wage income of the highest of the high earners, the staggering gap has become a chasm: in 2004 the upper one-tenth of 1% earned 70.4 times as much as the average person in the bottom 90% of the income scale. Just 25 years earlier in 1979, the ratio that was only 21.0-to-1.

During the postwar period from 1947 to Reagan's election in 1980, the ratio was fairly constant — even flattening during the '60's. For the highest earners, though, the party really begins around 1980 despite a nasty recession under Reagan. The red line steepens again during the 90's, only to fall under Bush II with the bursting dot-com bubble.

The EPI concludes: "...in 1979 it took the highest-paid earners 12.4 days to make what most other earners did in a year, but by 2004 that feat was accomplished in a mere 3.7days."

For the top 1% of earners (bottom line in the chart), the news is less dramatic but still very good: in 2006, they earned 20 times as much as the bottom 90% compared to 9.4 times as much in 1979.

Since it focuses only on "earnings," EPI's chart only tells part of the story. A more complete picture would include asset values and other indications of wealth.

John McCain and other Republicans howl reflexively about "class warfare" whenever anyone points out the gross inequalities in the distribution of wealth and incomes in the U.S. Considering the spectacular failure of "trickle-down" economics, and the obvious need to create a more equitable alternative, maybe we need more of it.

It hardly needs to be mentioned that such unequal distributions of income and wealth are a direct function of conscious public policies, notably in the tax codes, that privilege the highest 1% over the rest of the population. It's a form of social Darwinism — not a law of nature, but a failed system of political and economic organization that needs to be restructured.

Meanwhile, AGI's share price has fallen from about $70 one year ago to $2.10 on October 17th.

[H/T to Paul Campos at LGM]

UPDATE: A relevant quote

Economist James K. Galbraith, writing in Harper's Magazine (November 2008) on the economic crisis of "casino capitalism:"

The rot comes from predators posing as conservatives and mouthing the rhetoric of “free markets.” They are not actually interested in free markets. Their goal is to use the government to build monopolies, to control resources, to block regulation, to crush unions, to divert as much as possible from taxpayers into private pockets. They have a reckless attitude toward war-making and they put the financial system in peril by failing to enforce standards of ethics and transparency. As a result, they imperil the country’s credit in the world.