Economist Writing Every Day

Failure to elucidate (or the intended obscuring) of unseen policy costs and benefits is the kind of stuff that sends economists to an early retirement. The most common example is the unrealized gains from potential trade that haunt any and all forms of protectionism, but I often find more “micro” examples easier to convince an audience of because it allows them to delve into their own lived experience for supporting evidence.

I’m a big fan of this conversation with co-founder Reed Hastings about severance package generosity at Netflix. The interviewer is absolutely baffled that they offer a minimum of 4 months severance for all employees, with 100% pay and benefits, immediately after hiring, and it grows with length of tenure after that. How could a company afford such a costly line item, particularly one that yields no benefits at all? It’s exactly the kind of policy a central casting stereotype of an MBA would never consider or, perhaps more telling, would be the first on the chopping block when cutting costs to pump up quarterly earning numbers.

What Hastings lays out, besides just the warm-glow benefits of a more “compassionate” severance policy, is the subtle efficiency at the margin. The people making the decision to lay off an employee are sympathetic, pro-social, perfectly normal human beings. They don’t want to hurt someone else which means, perhaps even selfishly, they will take a series of costly intermediate steps to delay the prospective firing of a poorly matched or unproductive employee. The manager will incur costs that perhaps signal to the employee that they are inherently valued, that they, the manager and the company, want the employee to succeed, that any eventually possible firing is only an action of last resort. These actions, as anyone who’s ever had a job will know, rarely if ever succeed in reorienting the employee to a new and fruitful line of productivity. Rather, they simply delay their eventual firing, leaving them in the lurch to find new employment. The costs incurred to soften the impact of the inevitable firing are internalized as benefits by neither the employee nor the firm.

The more efficient policy, to the benefit of everyone involved, is to make the employment separation as early as possible, rolling over as much of those saved costs into a (nearly) pure cash severance that will soften their landing and subsidize their search for their next job. In anything less than the weakest job market four months is enough time to not just find a job, but to be selective in that search. Extended severance strengthens the bargaining power of the former employee in their job search because they don’t have to say yes to the first offer.

From the employer side, they can rest easy knowing that because their managers will not have to incur the emotional cost of wrecking their employees lives with cold calculating decisions to leave in employees in the lurch with 2 weeks pay and a “good luck” out the door, managers will, in turn, make employment decisions faster and more decisively. Generous severance pay is a perfect example of an excellent policy that only looks inefficient to those naive to the actual decisions being made on the ground. Conversely, a more draconian policy carries the pretense of a colder efficiency, when the reality is a flailing hodgepodge of spinning wheels and sundry transaction costs.

What other policies, micro or macro, might see their efficiency aspirations and denunciations wholly inverted if we were to consider not just their line item magnitudes on a spreadsheet, but the whole of their of interconnected costs and benefits?

All the big companies are suddenly finding themselves compelled to donate to Trump’s inauguration. That a bunch of large businesses with significant regulatory exposure would want to lobby the President isn’t terribly surprising. Such things are endemic, if not inherent, to any democracy. Perhaps heightened by the media, but I can’t help but think that the prospect of targeted tariffs, elimination of key visa programs, and the general animus projected towards seemingly anyone and everyone by the administration have changed the tone of this particular round of contributions. In short, it feels less like traditional lobbying and more like extortion.

“Nice business you have there. It’d be a shame if something undermined its market integrity. You know, for a few million dollars we could help you out. Pennies, really, when you think about the billions of dollars at stake.”

Which brings me to my absolutely genuine, I actually don’t the answer, question. Does a company have a fiduciary obligation to its shareholders to be a rent seeker? Is there a fiduciary obligation to give in to political extortion?

There is legal precedent that a company does not have an obligation to give in to ransom or criminal extortion. Common law duty of care (Meinhard v. Salmon, 164 N.E. 545 [N.Y. 1928]) does not extend to unlawful acts. 18 U.S.C. § 873 prohibits the receipt of funds in response to extortion. 18 U.S.C. § 1201 imposes criminal penalties for aiding or abetting kidnappers. 18 U.S.C. § 2339B may indirectly criminalize paying ransoms to terrorists. The Foreign Corrupt Practices Act (FCPA) dictates that paying bribes or ransoms may violate anti-corruption statutes.

But what if the extortion isn’t explicitly illegal? As some have suggested, certain activities are not in fact illegal if the President does it, a sentiment that has only gained legal standing. Which brings up the next point: could shareholders sue Amazon, Google, or Meta if they in fact chose not to donate to the inauguration? What if they released a joint statement that they had been approached by the administration but refused to donate? Could a civil case be launched against them on behalf of shareholders? I don’t think so, but we’re in a wild enough world where such a action could be profitable if only as a threat.

Maybe this is just another case where politicians are increasingly willing to “say the quiet part out loud”. Yes, it’s extortion, but it’s also always been extortion; the new administration is simply more willing to make political extortion more explicit. It’s just rent seeking as usual, only louder. Which, fine, it’s business as usual, but the volume does matter. Explicitness is a signal of voraciousness and intensity, that they are unlikely to be constrained by shame or the costs of overplaying a hand in the repeated game of lobbying and favorable policy outcomes that is replayed between industries and political parties across decades.

These things can and do come to a head eventually. These businesses are smart, they know how to discount repeated costs and figure out when it’s time to say no. A million here and milllion there, pretty soon you’re talking about real money. Everyone’s always asking when someone is going to stand up to a bully. The answer is straightforward, if easier said than done: when the benefits outweigh the costs. Eventually the administration is going to make promises that yield big donations. Either those donations will serve to stabilize policy, at least in the interest of the donors (which will hopefully extend to vast swaths of the US marketplace), or they will renege on those promises and then things get…interesting. The word will get out and then it will all cascade down in a hilarious carnival of vicious public statements and political threats. The collateral damage could be minimized as an administration finds its impact limited and hands tied. Or the collateral damage is maximized as influence is sought to be reestablished through chaotic political writhings of a cornered animal.

I guess we have to root for stability? I’m not excited about it, but maybe the best thing for the US is for politicla extortion to be significantly remunerative that the administrative decides the most profitable choice is to in fact release the hostage that is the US economy.

I guess I’m just hoping the lessons of Speed have been rightly lost to time.