Obama is Wrong on Bonuses

Member Group : Glen Meakem

According to a Rasmussen survey, 88 percent of American adults support the idea that executives of companies receiving federal money should not receive bonuses. Thus, it was easy politics for President Barack Obama to scold Wall Street for paying $18.4 billion in year-end bonuses. Such payments were "shameful" and reflect a "culture of narrow self-interest and short-term gain," he said.

But a closer look at those bonuses shows that the president needs to balance his political rhetoric with a basic understanding of economics if he is to successfully lead America and the world out of the recession.

Let’s look at the numbers.

First, according to New York state Comptroller Thomas DiNapoli, the bonuses were paid not just to CEOs but to more than 164,000 securities industry employees in New York City, or virtually every employee still working in the industry. More than 19,000 of them had already lost their jobs by December due to the financial crisis. The surviving employees received a total of 44 percent less in their year-end bonuses than in 2007.

Year-end bonuses are an integral part of total compensation for virtually all workers in the New York-based securities industry, making up a large percentage of total compensation. The 44 percent decline translated into $14.5 billion less than the $32.9 billion paid in 2007.

Further, these bonus numbers are for the entire industry, including firms that have not received money from the government. The reality for those working in New York City’s securities industry, like most everyone else, is that 2008 was a difficult year and 2009 will be worse.

But this is only part of the story. New York is a very high-tax locale. And according to an editorial in the New York Daily News, "Wall Street … traditionally pays the fat salaries and bonuses that drive New York’s economy — and its municipal budget."

In fact, the decline in bonuses translates into a sharp decline in tax revenues for New York City and the state — an immediate decline of almost $1.3 billion in personal income tax collections (9 percent of the decline in bonuses).

This enormous shortfall in tax revenue was the direct cause of Mayor Michael Bloomberg’s recent call to lay off 14,000 teachers, more than 1,400 nonteaching school employees and 1,000 police.

President Obama says "there will be a time for (Wall Street firms) to make profits and there will be a time for them to make bonuses. Now is not that time."

Added Vice President Biden: "I’d like to throw these guys in the brig. … They are thinking of the same old thing that got us here: greed. They are thinking: ‘Take care of me.’"

If Obama and Biden had their way, the bonus cuts would have been $32.9 billion and 164,000 Wall Street employees would be suffering more, the New York City economy and real estate market would be further in the tank and Mayor Bloomberg would be laying off more than 30,000 teachers and support staff, plus 2,000 police.

Additionally, if the industry were not able or not permitted to earn any profits, then all of our retirement, education and other investment plans — down an average of 50 percent since October of 2007 — would be further hit.

Is this what our new leaders really want when they talk about ending bonuses and profits? Or did they overlook the economic realities? The president’s call to limit CEO pay to $500,000 per year for companies being assisted by the government folds under similar scrutiny.

Barack Obama clearly is a gifted politician, organizer and communicator. But for him to be a successful president, he needs to stop lecturing American business on greed like an ivory tower college professor and start leading with economic policies and messages that will work in the real world.

If he fails to make this change, then we will all endure a longer and more painful recession than necessary.

Glen Meakem was the founder and chief executive officer of FreeMarkets Inc. in Pittsburgh. He is now a co-founder and managing director of Meakem Becker Venture Capital and host of the Glen Meakem radio program.