I’ll be the last one to suggest that government handouts (to individuals or businesses) are a good idea. That said, the remedy seems worse than the disease in this case.

Acting swiftly, the Democratic-led House approved a bill Thursday to slap punishing taxes on big employee bonuses at firms bailed out by taxpayers. In some cases the bonuses might be taxed 100 percent leaving the recipients with nothing… The bill would impose a 90 percent tax on bonuses given to employees with family incomes above $250,000 at American International Group and other companies that have received at least $5 billion in government bailout money. “We want our money back now for the taxpayers,” House Speaker Nancy Pelosi said. Rep. Charles Rangel, a New York Democrat, chairman of the tax-writing House Ways and Means Committee, said he expected local and state governments to take the remaining 10 percent of the bonuses, nullifying the payouts.

There’s this little thing called contract law (in essence, a guarantee, by the state, that parties must keep their word to one another). It supports way way more in our society than just the compensation plans for Wall Street denizens. Abrogate it arbitrarily in one place, or even call it into question, and a lot of the machinery of capitalism (not to mention civil society) seizes up or comes tumbling down (pick your favorite metaphor).

Time will tell just what those things are and how much we’ll miss them.

UPDATE I: A friend notes that, a) many many contracts were broken on the road towards insolvency and, b) since the government is now the majority shareholder in AIG, there’s a new sheriff in town; get used to it; they can do what they want with it.

To the first point, it’s not clear that breaking more contracts (or, in effect, forcing them to mean nothing) will make things better. It is also the case that when the government breaks contracts the effects (in terms of fear and uncertainty) tend to propagate far wider and deeper. And that’s really my concern with the second point as well.

If Donald Trump or Carl Icahn or T. Boone Pickens had taken over AIG, that would be one thing. They are men, not governments. Sure, they can lobby for changes to rules so as to give themselves an advantage — and they do — but they cannot just wake up one morning, read the newspapers and decide to change the rules to suit themselves.

A one-party Congress plus a radical president can. Not only is that double-dealing but there is no natural brake to it.

Add paralyzing uncertainty (always increased by regulatory change and increased exponentially with rapid, unprecedented regulatory change) onto double-dealing and its a perhaps-permanent recipe for the end of capitalism as we once knew it. One cannot un-bake this kind of cake.

UPDATE II: In which it is made plain that laziness and embarassment are at least as much in play here as any other motivations. Laziness on the part of Democrat Senators and Congressmen who didn’t read the behemoth stimulus bill, and embarrassment at having been found to have voted for the AIG bonuses… among other things.

Just a random muse, but what if there were Congressional bonuses and they depended on one’s knowledge of the legislation one was voting for/against? Is there such a thing as Congressional malpractice? If this erupts into violence will OBH or the Congress evince any shame at having played a major role in sparking it?