A Cautionary Note on AIG Bonus Clawback: Is the United States Turning into Argentina?

March 25, 2009

A friend who works in Wall Street was livid upon learning about the U.S. House of Representatives’ move to tax the controversial AIG bonuses at 90 percent. My friend—who is from Latin America and does not work at AIG—said that it looks like the United States is turning into Argentina. He was referring to last year when, in the midst of the commodity boom, the Argentine government attempted to raise the tax rate on the additional profits to around 90 percent and to increase its access to resources it nationalized the private pension plans.I asked my friend: Why didn’t cuts in the pay and benefits of the members of the United Auto Workers generate a similar sense of betrayal? His response: in the case of the auto workers the new terms were negotiated while the tax on AIG bonuses is imposed by the state. For people like him, it boils down to a breach of contract.For me, as an economist who has worked much of my career on inequality and poverty issues, taxing largely undeserved and tax-payer funded bonuses does not seem outrageous at all. Still, my friend has a point, a lesson, if you will, from the developing world.The political uproar in Washington is spooking the financial sector and, most likely, the business community more broadly. Is the United States heading to some form of “class warfare” that could undermine the prospects of an economic recovery because investors will be afraid to invest in such an atmosphere? Or will today’s indignant forget their grievances and start investing again as soon as the signs of a turnaround become apparent? My guess is the latter. However, I may be wrong.


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