Equal enforcement of contracts?

Dean Baker is strident:

If the connection with AIG isn't immediately apparent, then you have to look a bit deeper. Folks may recall that AIG paid out $170m in bonuses to its employees in March 2009 with its top executives receiving bonuses in the hundreds of thousands of dollars.

These were people who not only shared responsibility for driving the company into bankruptcy; they also had been at the center of the financial web that propelled the housing bubble into ever more dangerous territory. In other words, the bonus beneficiaries were among the leading villains in the economic disaster that is still inflicting pain across the country.

The prospect of executives of a bailed out company drawing huge bonuses at a time when the economy was shedding 600,000 jobs a month provoked outrage across the country. President Obama spoke on the issue and said that unfortunately no one in his administration was smart enough to find a way that could keep the bonuses from being paid. The problem according to Larry Summers, then the head of President Obama's National Economic Council, was that the bonuses were contractual obligations and they had to be honored.

This provides a striking contrast to what might happen to current and former city employees in Chicago and may happen to current and former employers of the state of Illinois and Detroit. In these cases, it seems that the contracts workers had with their employers may not be honored. Employees who worked decades for these governments, with part of their pay taking the form of pensions in retirement, are now being told that these governments will not follow through on their end of the contract.

The differing treatment of contracts in these situations is striking for several reasons. First, the AIG executives stood to gain much more money with their bonuses on a per person basis. In contrast to the six-figure bonuses going to top executives, pensions for Detroit's workers average just $18,500 a year. Pensions for Chicago's workers average over $33,000 a year, but almost none of these workers will get Social Security, so this will be their whole retirement income.

I am not as upset at the difference in size of the individual compensation, the difference in liability for global economic problems, or the asymmetry in harm -- these points are decent but they are secondary to the key argument.  The real issue is whether the need to honor contracts is being applied equally.  And, it is true that bailing out pensioners has a serious element of moral hazard.  But it would be intriguing to see the argument for bank bailouts NOT having at least some element of moral hazard.   

The real question is what is the status of contracts as being fundamental; the ability to amend a long term agreement when the terms work out in somebody else's favor would really change the dynamics of our ability to run a modern economy.  Remember, it is a small walk from this to deciding not to pay for materials that have been purchased because your business plan did not work . . .