What do the Easter Bunny, the Tooth Fairy, Santa Claus and the "free market" have in common? None of them exist. All the furor and flip-flopping over AIG bonuses, which supposedly violate our sacred free market principles have a fairy-tale quality about them, which mirrors the mythic, counterfactual quality of our attitudes towards market "freedom" and executive pay in general. Discussing it requires a willing suspension of disbelief, especially when it comes to Congress wanting to take its Christmas presents back.
In this Tuesday's press conference, President Obama walked an odd line around the sanctity of market freedom and executive pay, admitting that while he is "as angry as anybody" about AIG executives, and while banks and Wall Street enriching themselves at taxpayer expense is "inexcusable," "the rest of us can't afford to demonize every investor or entrepreneur who seeks to make a profit." This is a bit of a fable. Even if Congress unwisely taxed bailout-financed bonuses, it would hardly amount to demonizing all profit, and in any case, executives enriching themselves on public resources is a fundamental feature of our system.
Somewhere between Reagan and Greenspan, we came to believe the myth that outrageous executive compensation (not to mention stagnant or falling middle class wages) was a meritocracy of self-made men whose pay was determined by their value in the free market. But in reality, it represented top-heavy consumption of the fruits of a system where public sector investment and public interest regulation enables the creation of wealth.
But we just hate admitting this truth. That's the reason the AIG bonus scandal excites such emotional outbursts, and why on its surface, it doesn't make much sense.
First, we lavish billions in bailout dollars on AIG and the enabling legislation even permits use of the money for executive pay. The justification is that propping up financial institutions "too big to fail" with taxpayer money will get the "free" markets functioning again (myth #1). Then citizens understandably get angry over the bonuses, and the House passes a tax to claw 90% of them back. Members profess shock, comma, shock at bonuses for execs who allegedly brought AIG to the brink of what for any other company would have been certain bankruptcy, and how this violates the meritocracy of the "free" market (myth #2). Then President Obama demurs about the House bill, explaining that we can't "govern out of anger," can't use the tax code to punish market behavior we don't like, lest we violate market "freedom" (myth #3).
The fact is, our markets aren't free, nor should they be. The only really free markets we've seen in my adult lifetime were the Miami area after Hurricane Andrew and New Orleans after Katrina. For a day or so, "entrepreneurs" could sell ice, plywood or any other critical item for as much as they could get. Then civilization enforcement stepped in via law enforcement and shut them down.
Civilization and a truly free market can't coexist. Even those bastions of free market capitalism, the NYSE and NASDAQ can't function without myriad rules, regulations and laws, and the go-go Alan Greenspan era of market freedom was predicated upon them (in fact, the demise of some those rules, such as the SEC uptick rule repealed in 2007, contributed mightily to the current crisis).
I once asked Greenspan in person to describe his notion of a free market. In his inimitable doublespeak, he offered an oxymoronic description of a system in which "actors are free to do what they like with a minimum amount of rules and regulations." Months later he famously testified to Congress expressing some disillusionment. Whatever he once thought was "minimum" regulation, he now thinks we need much more.
We now know the "free" market rhetoric of the Greenspan era turned out to be massively destructive. It owed much to Ronald Reagan's mocking catch phrase, "I'm from the government and I'm here to help," as if government involvement was inimical to a functioning market. Once our political discourse branded government as the interfering ogre, we started dismantling the investment and regulatory apparatus, and became prone to the myth that the success of the big winners was due only to their individual skills and talent within a free market. The "free" system supposedly permitted these talents to shine without government interference. Outrageous bonuses and executive compensations came to be viewed as the natural result of the free market at work.
But that was just revisionist history, mixed up with Cold War ideology and lots of special interest lobbying. Before the Boomer era of indulgence, the government was viewed not as an adversary but a key player in economic and social welfare, whether it was the GI bill, the interstate highway system or huge federal grants for scientific research and public education. We would never have become the world's economic leader, never would have established our reputation for dynamic innovation and technological advancement, without the anti-free market monopolies enabled by the U.S. Patent Office, and thousands of other public sector investments that shaped markets by fiat.
We don't have a free market and we don't want one. A better term for what we actually have would be a private market. The term "free" market has come to diminish or denigrate the role of government, but a private market embodies the notion of government encouraging risk-taking and innovation, capitalism within civilized norms and appropriate guidelines. It is in the private market's interest to understand, respect and support the critical role the government plays in our lives. The creation of wealth, including the bonuses of Wall Street executives, deserved or not, has always stood on the shoulders of public sector money and regulation, without which we would have anarchy and poverty.
Of course, understanding that doesn't mean we are likely stop complaining about government interference in the market. But at least where AIG is concerned, maybe we can be a little less disingenuous about our outrage.