Have you heard? AIG is using some of its government funds to pay contractual bonuses out. What an unspeakable outrage right? I too am pretty upset with the idea that government money is going to pay the bonuses of employees in a private [edit: public] company, but isn’t it laughable that the same government who insists we rescue AIG because of its “vital importance” to the economy is now enraged by the way they run their business? The problem is irreconcilable conflicts of interest between the employees who can freely work for the company with the best incentives, the corporation that wants to maintain a competitive advantage, the government who wants to control the operational affairs of private enterprise, and the tax payers who don’t want to pay a single penny to save uncompetitive corporations, no matter how “vital.”

Because of these diametrically opposite interests, the government’s plan is beginning to experience stress. Corporations like AIG are frustrated with the bureaucratic impositions on their ability to manage their business (e.g., Chrysler wanting to acquire Fiat). Government involvement requires companies to virtually zero out their risk, meaning less innovation, investment, and a less competitive environment. If you need an example, see Amtrak. The obvious differences between how the government and corporations run their business demonstrates the friction that is occurring between the two. Sure, AIG and GM and the rest may survive extinction, but they will not be any more competitive. Are we better off having used trillions in borrowed money to save them, or should we have let the market do our bidding instead? I bet you know my answer already.

Now, we hear how outraged the President is over AIG’s move to pay these bonuses. Well, if you give whiskey to an alcoholic, what exactly do you expect? The result is completely predictable.

There are public questions over whether Treasury Secretary Geithner knew about AIG’s plans, and if he didn’t, then why not. Is it becoming clear that Geithner is overwhelmed? That’s a subject for a future post. What’s important now is to point out that rescuing failed businesses isn’t healthy for the economy; it isn’t noble, responsible, or even reasonable. This will only become more clear as things play out.