What is Seen and What is Not Seen. Section 162(m)
The idea is that every public policy measure or law or regulation or change to an existing law or whatever will have consequences that are both seen and intended as well as unseen and unintended. Thus, at the core of Hazlitt's lesson based on Bastiat's insight is the idea that changes in economic policy must not only consider the short term effects or desired effects on one group or the targeted group but also the long term effects...both intended and unintended on everyone and everything.
This is, of course, not supposed to serve as a built-in excuse to never do anything but rather to serve as a mental reflex when considering any policy change so that the full implications of the policy in question are truly understood and considered.
It's like selling the idea of steroids on the promise of increased muscle mass...and stopping there. For some reason, this lesson makes perfect common sense in our own lives when discussing a plan of action. People seem to follow through instinctively and say something like:
"No, no. We're not doing that. That's gonna open a Pandora's Box because if we do that then "this and that" will happen."
Somehow, public policy on social issues and economics never seems to go through this thought process....as if that line of thinking doesn't apply.
And it does apply because INCENTIVES MATTER ....always have, always will.
The changing of incentives is the dynamic that lies at the heart of many "seen and unseen" issues.
But on to "Section 162(m)": Don Bourdeaux points to an article from Forbes amount a little known rule in the tax code dating to 1993 called "Section 162(m)" that is directly related to the bonus issue at AIG that has many people outraged and many politicians posturing with faux outrage.
What hasn't been discussed is the way misguided regulation fostered these pay arrangements in the first place. IRS Code 162(m) places strict limits on the deductibility of certain executive salaries, a proscription that has spurred short-term thinking and excessive risk-taking. We've learned the hard way that Wall Street firms are particularly ill suited for the type of culture that this rule encourages. ... President Clinton followed through on campaign proposals to limit executive compensation, signing into law the Revenue Reconciliation Act of 1993. Compensation rules within the act became codified in IRC 162(m), which governs the salary-based compensation of the top five executives within publicly traded companies. The rule influences compensation by limiting the deductibility of salary expense to $1 million for each of these executives. Deductibility above that ceiling was permissible as long as the excess came in the form of performance-based compensation, whether cash bonuses or equity-based compensation like options (various technical rules needed to be followed as well). ... None of this is to suggest that IRC 162(m) alone was responsible--numerous market forces were at work, but clearly the bonus culture of Wall Street played a role in blinding executives to the risks their firms were taking.
Incentives change. Incentives matter. People respond to incentives. You won't find that econometric models.