So I was pretty upset about the ridiculous idiotic populist outrage over the AIG bonuses. The last week of media coverage has only made me more angry as I listened to pundit after pundit, even those few who argued for leaving the bonuses alone, panderingly assure the public that their outrage over the bonuses was perfectly justified. Should the government have used the depressed job market to reduce AIG employee compensation of all forms when they took over? Maybe, but that doesn’t justify the outrage at paying the bonuses. Of course it’s understandable that this scandal made people so angry, the word bonuses triggers certain associations and people form a mental picture of people being patted on the back for the immoral behavior that has caused them harm. It’s the role of the media to remind us that the issue is more complex than this, that these bonuses aren’t rewards for performance but basically just another form of salary and to point out that most of the people working for AIG’s financial products division were probably perfectly moral people behaving no differently than they would have in the same situation. The media’s craven failure to offer this opposing perspective is particularly aggravating.

Still, if this amounted to nothing more than a national venting no big deal. The extent to which this seems to be motivated by a desire to see others suffer as they are would still be disgusting but that’s a sad part of human nature. Horrifyingly, however, congress really seems to be going through with this plan to levy a 70-90% tax on bonus payments to AIG employees. This law will be subject to constitutional challenge as a bill of attainder (meaning the taxpayers might get to pay for the bonuses and the lawsuits) but even if it fails to meet the constitutional qualifications to be struck down in such a fashion it surely violates the spirit of the prohibition on bills of attainder.

I mean it doesn’t take a genius to figure out that the primary motivation here isn’t to save money or raise revenue for the government. If those were the motivations we would at a minimum be broadly taxing compensation at AIG. No, the public is angry at these people and wants to punish¹ them. But even if you think these people deserve to be punished the principal that we don’t punish individuals based merely on public anger is an important one. If this sort of thing passes muster there really is no way to say that taxing the principal of Bill Gate’s investments at 99% because we are pissed about the shody programming in windows is out of bounds or just because we don’t like the way he treated his wife. Ultimately when it comes to this question we have to set aside all consideration of it being taxpayer money or the unfairness of the situation. The government here isn’t acting as an investor in AIG but as the soverign. Nor does it make a difference that these bonuses haven’t been paid yet and that Bill Gates already has his money. Gates doesn’t keep a giant wad of cash in his house, he is content to let banks owe him the money just as AIG owes their employees their bonuses.

And for the love of god what could possibly motivate people to engage in this sort of dangerous punitive action when they don’t even know how most of the people who are receiving the bonuses behaved?

Many people working in the software industry seem to be coming to the conclusion that patents do more harm than good to their industry and therefore advocate abolishing software patents. The reasons they feel this way are pretty apparent. There are so many obvious¹ patents like the Eolas patent of Amazon’s one-click patent that any major piece of software is probably more likely to infringe on one than not. Something is pretty clearly wrong when people are spending more time worrying about accidentally infringing on someone’s patent than struggling with the problems the patented inventions solve. However, not all software patents are so unreasonable.

Consider google’s (well stanford’s) PageRank patent. Recognizing that one could create a useful measure of a page’s importance by summing up the importance of the pages linking to it and realizing that this could be efficiently computed using tricks from linear algebra was anything but trivial. Indeed, this kind of non-trivial application of mathematics to an ill-defined problem (return the best search) is a prototypical example of the sort of discovery that benefits from patent protection. Society can derive great benefits from these kinds of discoveries and money will lure people with the expertise to solve these problems away from pure mathematics or the sciences but without the ability to patent the discovery the financial incentives wouldn’t exist². While most software patents are more like the 1-click patent than the PageRank patent there is no shortage of real world problems that are crying out for a similarly brilliant solution.

In the face of examples like google’s PageRank patent it’s tempting to say that software patents are just dandy and the real problem is obvious patents. Unfortunately, it’s not that simple. Consider a hypothetical patent on the use of a LRU (least recently used) cache for texture data in a MMORPG client³. It’s certainly obvious in the sense that any decently skilled software developer would consider that solution if he was asked to solve the problem but until you actually try this design it’s not clear that an LRU cache would work. Maybe players don’t backtrack much so an LRU cache would simply waste resources on rooms the player won’t see again for awhile. At least in this example it seems clear that simply noticing that a fairly obvious approach solved the problem shouldn’t warrant a patent. The cost of actually testing out the ‘discovery’ is quite low and usually there are only a few obvious approaches to try.

However, such a rule would be totally unworkable in another industry where there might be a vast array of potential approaches that experts in the field would agree seemed promising but the cost of investigating them are quite high. For instance in the pharmaceutical industry everyone might realize that a certain large class of compounds are promising candidates to treat depression but actually evaluating each of these compounds for efficacy and safety is very costly. Incentivizing drug development requires that we let the pharmaceutical company patent their discovery that compound 5043A1 actually works to treat depression.

Ultimately I think the real problem stems from the fact that we are lumping two very different kinds of invention into the patent system. There is the first type of invention, like the google PageRank system, that represents a flash of inspiration to try something that no one else thought of and then there is the second type of invention that consists of the discovery that some potential solution really works. Ideally the patent system would protect the first kind of discovery pretty broadly but only protect the second sort of discovery in industries where it requires considerable resources to ascertain which of many potential solutions succeeds.

UPDATE: Note that my analysis only applies provided these contracts were genuine compensation packages and not deliberately created for the purpose of siphoning money from the government as some (unreliable) reports are suggesting now.

UPDATE 2: The bit about fraud seems to have been more populist BS spread by Andrew Cuomo, the New York Attorney General. It seems highly likely this was just an attempt to ride the wave of populist anger to ‘get those guys.’

Anyone who has been paying attention to the media lately will have noticed the outrage over the bonuses being paid to AIG employees, particularly employees in AIG’s financial products division. The division responsible for the deals that necessitated the government bailout. Disgustingly even relatively clearheaded individuals have jumped on this populist bandwagon and just in case we needed another lesson in the failures of democracy congress is demanding heads. People complain about the lack of transparency about the government’s response to the financial crisis but if this is how the public responds maybe they don’t deserve it.

Let’s be totally clear. This outrage is over mere terminology. No one was making a fuss about the fact that AIG employees, even those in the financial products unit, continued to be paid their salaries. Getting mad because some employee compensation is called bonuses rather than salary is about the stupidest thing imaginable. No one even looked at what these people were payed before this bonus scandal. People are mad for no other reason than the fact that wall street pays out significant chunk of it’s employee compensation in the form of bonuses. Sure, there were demands that the very top level of the company (CEO, CFO etc..) no longer be paid their huge salaries but we aren’t talking about sweatheart deals cut by a friendly board in this case but relatively standard payments on wall street to top level talent¹.

Just in case rational thought escapes you on this issue let me put this question another way. Do you think that the government should stop payment on all uncashed paychecks to AIG employees in the financial products division? Even those employees who did their job well and are needed to help unravel this mess? If not why do you think it should take away bonuses for these employees? In both cases the employee was promised certain compensation in return for certain work/performance and calling it a bonus or paycheck doesn’t change that fact. Certainly it’s totally unacceptable for the US government to void valid employment contracts made by AIG after tricking those workers into continuing to labor under them since the bailout.

More reasonably one might think that the government should have allowed AIG to lapse into bankruptcy and simply fail to honor employee compensation agreements in general, no merely the bonuses. Of course this has nothing to do with the outrage being expressed by the public and their elected officials but it’s at least coherent enough to rebut. However, this would undermine the very motivation for rescuing AIG from bankruptcy as it would have created doubt about whether AIG would make good on it’s debts. Sure, the government could have decided to guarantee some AIG debts despite the bankruptcy but that leaves everyone wondering if the government will pay off their claim or if some unpopular behavior on the part of the creditor would convince congress to leave them on the hook. Any plan that let the government pick and choose which preexisting AIG obligations they would honor would have been a disaster.

Still, whatever you think about the wisdom of the bailout of AIG at this point it would be totally unacceptable for the government to renege on these bonuses. The government choose to simply infuse capital as if they were some private investor rather than to nationalize the company now it needs to live with that choice. Trying to use it’s legislative power to eliminate these bonuses now would induce fear in other AIG creditors, reduce the government’s flexibility to infuse banks with capital, and generally do great harm to future bailout attempts. Not to mention that the cost to the taxpayers from the resulting lawsuits and our interest in keeping top talent at AIG to unravel their finances. Even assuming none of the employees due bonuses leaves in anger or can find a better offer (the best people always have offers) so long as the government still owns part of AIG every single highly paid employee will wonder if they will really get the package promised them.

What’s so particularly absurd about all of this is that all this opposition that is being generated towards future bailouts or stimulus packages as well as the potential for harm if the government really voids these contracts is happening over about 1 400th of the amount we paid to bail out AIG. It’s like lending your friend $1000 to cover his mortgage this month and then making a big fuss over the fact that he still purchased coffee for the girl he asked out the month before.

The more I see the more convinced I am that democracy is a truly awful system.

I support the movement afoot to grant the District of Columbia congressional representation but the bill Lieberman, joined by Hatch, Clinton, Kerry amoung others, introduced is patently unconstitutional. While I believe in an evolution of constitutional interpretation over time one can no more interpret the constitution to allow a representative from DC than one can interpret it to allow a 25 year old president. Given the obvious constitutional concerns the supporters of this legislation advance several arguments to justify it’s constitutionality. However, these arguments are so poor I sincerly hope such prominent individuals don’t sincerely find them compelling. It’s unfortunate but giving DC congressional representation is going to take an amendment.

If you had read only the proponents of this legislation one might think the only constitutional obstacle to this legislation was this language in Article 1 Section 2 (emphasis mine)

The House of Representatives shall be composed of members chosen every second year by the people of the several states, and the electors in each state shall have the qualifications requisite for electors of the most numerous branch of the state legislature.

While one can reasonably argue that DC residents are “people of the several states” and if you strain a bit one could interpret the second clause as merely a restriction on how states may choose their representatives, not an implied restriction on who may have representatives. However, the subsequent passage devastates any hope of such an interpretation.

No person shall be a Representative who shall not have attained to the age of twenty five years, and been seven years a citizen of the United States, and who shall not, when elected, be an inhabitant of that state in which he shall be chosen. Representatives and direct taxes shall be apportioned among the several states which may be included within this union, according to their respective numbers, which shall be determined by adding to the whole number of free persons, including those bound to service for a term of years, and excluding Indians not taxed, three fifths of all other Persons.

Short of biting the bullet and saying that DC is a state, which would imply they were due a pair of senators as well, there is simply no way for the representative from DC to “be an inhabitant of that state in which he shall be chosen” since they won’t have been chosen in any state. Nor can one give any sensible interpretation of the requirement that representatives be apportioned among the several states that would permit DC to have a representative. Moreover, any theory allowing congress to use legislation to grant DC a representative would pose a fundamental threat to our electoral system. Either you interpret the formula for apportioning representatives demands DC be given one or forbids it but not both. Thus if congress has the power to either grant or deny representation to DC it must, on any logically consistent interpretation, somehow have the power to grant DC representation unconstrained by this formula. If congress can choose whether to grant DC 0 or 1 representatives then it would seem nothing prevents it from granting DC 200 representatives.

The justifications the proponents offer spend a lot of time arguing that the Framers surely didn’t intend to deny DC residents representation but that merely demonstrates a deep confusion about the role of intent in legal interpratation. The relevant question is whether the framers (original public understanding/whatever) intended the rule to apportion representatives only among the states, not whether they intended a particular consequence of that rule. If Blagojevich had signed an anti-corruption law the fact that he didn’t intended the law to be used against him wouldn’t pose any obstacle to prosecuting him under it. The only time we should look beyond this narrow kind of intentionality is when the legal rule is vague and requires additional preciscification which most assuredly isn’t the situation here. Observing that the alternate rule granting representation to the states and DC according to their population would have better served the framer’s ultimate aims is no more justifies the constitutionality of this legislation than pointing out that war veterans are often wise beyond their years would allow us to elect a 25 year old war veteran to the presidency in violation of the age requirement.

The proponents also try to use court precedents which establish congress’s power to treat DC as a state for the purposes of judicial jurisdiction or to apply other laws to the district to argue that congress has the power to grant the district a representative. This argument is so confused that it’s hard to make sense of it. The courts have ruled that the broad grant of authority the constitution explicitly grants congress over DC gives congress additional powers to pass legislation affecting DC that it’s enumerated powers might not allow with respect to the states. Thus even when the constitutional justification that congress uses to pass a law affecting the states fails congress can still fall back on this alternative authority. However, none of this gives congress the power to ignore specific constitutional restrictions when it comes to DC. Congress still can’t restrict free speech in the district and it can’t ignore the requirement that it apportion representatives among the several states.

Finally, what appears to be the best argument the proponents have is that when DC was first ceded to the federal government congress granted the citizens of that area the right to continue voting in their former congresional districts. At first blush this would seem to conflict with the argument here but on closer examination it’s apparent that no such conflict exists. The constitution merely guarantees that representatives be apportioned amoung the states according to a certain formula, if Maryland or Virgina decided to let citizens of Kentucky vote in their elections I see no obvious constitutional violation. Congress could likely, with the consent of some state, grant the district residents the right to vote for representatives in that state (but it’s unclear if they would count for the purposes of apportioning representatives) but unless you think that congress could dilute Wyoming’s votes by allowing any US citizen to vote in Wyoming elections the state could always revoke this privilege. Moreover, this would have the perverse consequence that DC residents couldn’t select another DC resident to represent them by the residency clause.

This is as clear as constitutional issues ever get. The politicians need to stop posturing and start trying to pass an amendment.