Michael Lewis has an incredible column today on the AIG bonus scandal. The author of “Moneyball” points out that the insanity over the $165 million in bonuses to AIG executives is just that: insanity. The government has already agreed to pay out $173 billion. The bonuses make up approximately less than .1% –that is they constitute barely one one thousandth of the total. There is (regrettably) a solid consensus in the political class that the bailout of AIG is necessary for a recovery. But instead of complaining about the bucket, we’ve gone mad about a few droplets:

But when AIG itself pays out $165 million in bonuses — money it is contractually obliged to pay — the entire political system goes insane. President Barack Obama says he’s going to find a way to abrogate the contracts and take the money back. A U.S. senator says that AIG employees should kill themselves.

Every recriminatory bone in the political body is aroused; the one thing you can do right now in Washington without getting an argument is to rail against the ethics of AIG’s bonus payment.

Apart from Andrew Ross Sorkin at the New York Times, it occurs to no one to say that a) the vast majority of the employees at AIG had as little as you or I to do with its quasi- criminal risk taking and catastrophic losses; b) that the most- valuable of those employees can easily find work at AIG’s competitors; and c) that if the government insists on punishing those valuable employees they will understandably leave, and leave behind a company even less viable than it is, and less likely to give the taxpayer back his money.

And also — oh, yes — that if the government can arbitrarily break contracts made by firms in which it has taken a stake no one in his right mind will ever again make a contract with one of those firms. And so all of the banks in which the government has investment will be damaged.

Indeed. Lewis even points out that most people have a difficult time separating millions from billions.

To the political process all big numbers look alike; above a certain number the money becomes purely symbolic. The general public has no ability to feel the relative weight of 173 billion and 165 million. You can generate as much political action and public anger over millions as you can over billions. Maybe more: the larger the number the more abstract it becomes and, therefore, the easier to ignore. (The trillions we owe foreigners, for example.)

Lewis is absolutely right: we’re innumerate. Read the whole thing, please. And check out Lewis’ excellent piece on the financial madness in Iceland from Vanity Fair.