The big news has been the $165 million bonuses AIG gave its executives after receiving $170 billion in taxpayer bailouts. It’s disgusting, outrageous, and shows how short-sighted these bailouts have been.

The government has claimed AIG and other financial and car companies are just too big too fail, so we have to give them money. But this rewards companies that expand, even if unsustainable. If a company gets big enough, no matter their mistakes, the government and taxpayers will save them. AIG just makes mistake after mistake because free money doesn’t teach anyone a lesson on how to run a better business.

Mike Masnick proposed my favorite idea that bailed out companies should be broken up so they are small enough to fail.  The new, smaller companies have less baggage and can focus on a fresh start.  James Moore points out, even with $170 billion, AIG is closer to death than a fresh start.  Moore writes:

AIG’s predicament will be studied for years to come in marketing and communications classes. When the company decided to pay out millions of dollars in retention bonuses after seeking billions in bailouts from taxpayers, there was probably nothing the greatest crisis communications expert in history might have ever done to manage the situation. AIG’s first step was to insist that it had contractual obligations to pay and this is factually correct. The company had signed deals to keep critical employees in the competitive financial products division. However, the people getting these bonuses are precisely the same individuals who created the nonsensical derivatives that turned America’s economy into a stick of butter in a microwave.

Financial mistakes are one thing. A company can reclaim the public’s trust even after bankruptcy or other major missteps. But AIG has harmed the public’s good faith so much, it’s impossible to see a realistic scenario where AIG becomes a force for good business in the United States and the world.  So with $170 billion of taxpayer’s money, what is AIG to do next?

There isn’t much. One argument could be the government is bailing out AIG just so companies can get their insurance payouts and not default themselves. After everyone’s paid, AIG can collapse under its own incompetence. But can AIG remain? I don’t think a name change will be enough to build back trust. The company name and image is so tainted and untrustworthy, Moore says “AIG is dead.” We, the taxpayers, own a dead company – a company with no viable future.

Trust for a company or person is one of their most valuable commodities. Without trust, products, services, and marketing are ignored because no one can believe them. AIG could make every reform possible, and there would be questions about what are they hiding.

I’m a believer (and practicer) of the magic of community-building and know Americans have a high capacity for forgiveness (we haven’t lynched anyone…yet). But at some point, we have to cut our losses and realize these too big to fail companies eventually have to be successful on their own. How do we accomplish that? Rewarding incompetency or outright manipulation don’t seem like winning strategies. Companies, from banking to insurance to cars have to rebuild trust in their brands, otherwise we’re just bailing out lost causes.

Last week I wrote about using bailout money to fund start-ups rather than supporting already failing companies. Leave it to Techdirt’s Michael Masnick to show how short my post fell.

Obama’s bailout plan, as he says, is focused strictly on creating jobs as quickly as possible.  But truly successful start-ups create jobs slowly. And if they’re truly revolutionary, they even destroy the need for other jobs.  Masnick explains this:

So, think about it from a government bureaucrat’s perspective right now. Go back a few decades, and assume someone came to you with a plan to create the internet — and even accurately described how it would allow a great free exchange of information. The reaction, if you were trying to deal with an economic crisis, would be to focus on all of the jobs it upset. People can share music online? Think of all the job losses in the music industry! People can read news for free? Think of all those newspapers shutting down! But they wouldn’t consider all of the economic activity created by the internet — the billions of dollars and millions of new jobs created thanks to it.

The internet makes so many things easier, it makes those jobs obsolete, but doing so, it opens up millions of new jobs over the long-term.  It takes more jobs to make cars than it did to make and sell a horse and buggy.  Bailing out incumbent companies prevents the risk-taking and innovation that will create the next industry. It’s short-term thinking that is, part, of the same problem Wall Street got into. When all you think about it the quarterly job report, sustainable economic growth is always another quarter behind.

Thomas Friedman this weekend wrote a column asking for more stimulus money to go to start-ups rather than bailout failing car companies and banks (again).  Originally I was just go to praise and agree with Friedman until some bloggers came out criticizing his position.  So now I actually have to be persuasive.

Friedman’s argument is we need to stop giving public money to companies that screwed themselves up.  GM and Ford and begging for another $20 billion.  Friedman says let them fail and rightfully so. GM and Ford spent billions lobbying Congress to avoid fuel regulation and letting Toyoda out-innovate them.  After laying of 50,000 employees, these companies want more public money (on top of the $15 billion they already got) for no other reason that avoid economic catastrophe in Michigan.  But why are we rewarding companies that were run so badly?

Silicon Alley Insider says most start-ups are bad and investing them will lead to misallocation of resources.  My question – how much worse than GM and Ford can than these start-ups be?  These massive firms are laying off tens of thousands with little plan on how to fix themselves.  Start-ups, even likely to fail, provide widespread job creation, at least short term,  and creativity and experimentation leading to long term benefits in technology, innovation, and new business models.  Friedman points out, Intel and Google both grew out of recessions – harder economic times make start-ups more grateful for the opportunity and aggressive to succeed.  There’s less a flood of new companies, allowing the cream to truly rise to the top.

Stimulus money shouldn’t hand out money to just anybody.  It should function just like a venture capital firm (with the ability to offer tax credits on top of grants and subsidies).  Money rewards smart business plans that serve the public good – by creating jobs and long term benefits, and even failures can be learned from.  And just like any venture firm, we’re banking on one or two companies actually taking off and paying back the taxpayers with equity.  When do we expect GM, Ford, and all the banks to pay us back?

Risk alone should never be a reason not to do something.  Even failure has benefits; failure is also why we diversify so no loss alone is catastrophic. This means still helping larger companies that provide a tangible plan for how to succeed.  Fixing 10-20 years of bad management can be just as hard as starting a business from scratch – just think about how many start-ups could be built with $20 billion.  This is what risk-benefit analysis is all about.  We are not comparing our risk to benefit.  Rewarding smart and innovative businesses sounds like a good risk to make.

It’s a sad time to try to put a silver lining on job losses, especially when many of my friends are accepting unemployment for the first time.  But there is a silver lining for our economy few look at.  New, better jobs.

Slate posted a list of all the industries that have been hurt or put out of business because of improving technology. This includes typewriters to turntables to toll collectors (replaced by E-ZPass) and film cameras.  They don’t even mention horse and buggy.  Agriculture is the best example. Once the dominant economic force in this country, now agriculture is less than one percent of its GDP.

The economy keeps growing because new industries create new jobs, and often these new jobs are better. They require more skill and pay more money, lifting the living conditions of the nation as a whole.  This is why loosing toll workers and bank tellers to automatic systems isn’t a bad thing. It’s an opportunity.

Technology helps free human labor for the jobs technology can’t do.  As technology improves, it can replace human labor more and more.  Humans used to have to ride their horse or bike themselves, but soon let automobiles do the hard work. We used to do hard math on paper until calculators and computers did the work for us. This doesn’t make us lazy or stupid or worthless. It lets us move on to the next job.

Technology can’t problem solve or think on its feet like humans can (not yet at least).  More people can now work as problem solvers, as nurses, technicians, or repairmen for all our gadgets. These jobs require training, so there’s also trainers to hire. Because of the qualifications, these jobs pay more than being the toll worker or bank teller.  That is a good thing.

Thomas Friedman showed in his book The World is Flat why outsourcing isn’t the bad word, but a benefit to the United States and the world. China, India, and other countries take the jobs we don’t want. They take simple accounting, doctoral, or easy-to-do customer service jobs that Americans want higher wages for but don’t enjoy doing. To an Indian coming out of school, these outsourced jobs are the ticket out of poverty. They are fought over by thousands of applicants for a fraction of the pay Americans get.  When they get the job, they are excited and motivated because the job is so prestigious.  They make more money than they would have without the outsourced job, work more productively, saving companies money.  These workers then use their new middle-class wages to buy more goods (some American even) and educate their children allowing the next-generation to have more.  This is how a country builds wealth.

Watching entire industries crash is frustrating, but inevitable.  The U.S. automotive industry wants a bailout for their lack of innovation and market success, but what about newspapers and the recording industry. Do they get bailouts too? The United States needs to encourage the next-generation of technology to flourish so it can replace these jobs with more, better jobs increasing our economy and wealth.  There is a silver lining to even this economic collapse. It gives the nation and world a chance to learn from mistakes (however unlikely) and build a stronger nation with better jobs tomorrow. Now accepting applications.

The bailout’s for the banking industry are a failure.  I say this because we don’t have a set of goals to accomplish.  The government just hands over billions of dollars to the same people to messed up the financial industry and says, have fun, don’t fuck up.  As investors in these banks, the public has no oversight, transparency, or accountability all of which the government promises.  This is, of course, nothing new with our government, and is why I partially blame the news media.

I was optimistic when David Cay Johnston wrote about how journalists need to change their approach to the financial crisis, saying “let’s not make the same mistakes as were made with the run-up to the Iraq War, and the PATRIOT ACT that so eroded our credibility, in terms of how we cover this financial crisis.”  But nothing changed.  The news media was incapable of covering such a complex and nuanced story.  Same for our politicians.  For eight years, politicians and news media have been teaching the public to accept one liner answers and he said/she said narratives.  No filter, no analysis, no answers.  Should we go to war, not go to war. Should we protect ourselves from terrorists or not protect ourselves from terrorists.  The financial crisis couldn’t be broken down to simple platitudes making it impossible for 24-hour news channels (and many newspapers) to fully inform the public.

Without a news media, there is no accountability in democracy.  Sure people can vote every couple of years in the polls, but that doesn’t change the system.  Public shaming is a powerful tool. That’s why accountability in the bailout matters.  AIG has already spent billions on vacations and retreats for the same executives who wasted billions before.

I’m late to the bailout bashing, but felt there are still lessons to learn and things to do, especially since there’s more bailing out to be done (credit card companies, the second round of mortgage failures). First, let’s understand the goals of any bailout.  If it’s simply to save jobs, then save jobs (most of the banks and car companies are already having massive layoffs even after bailout payments).  But let’s have some publicly stated goals so we, the public and news media, can judge progress.  And have the news media follow up on politicians passing these bills.  Create websites to follow who’s getting money (banks and politicians) so the public can see the full story.

I’m not expecting change as the same people who screwed up before are still in power, at the banks, in government, and at news organizations.  But I still have hope for change.