Business Is Getting Political—and Personal

As anyone reading this blog is undoubtedly aware, Sarah Huckabee Sanders, the current White House Press Secretary, was asked last month by the owner of a restaurant to leave the establishment on the basis that she and her staff felt a moral imperative to refuse service to a member of the Trump administration. The incident, and the ensuing turmoil, highlights the extent to which business has become another political battleground—a concept that makes many anxious.

Whether or not businesses should take on political and social responsibilities is a fraught question—but not a new one. Writing for the New York Times in 1970, Milton Friedman famously argued that businesses should avoid the temptation go out of their way to be socially responsible and instead focus on maximizing profits within the legal and ethical framework erected by government and society. To act otherwise at the expense profitability, he reasoned, is to spend other people’s money—that of shareholders, employees, or customers—robbing them of their agency.

Though nearing fifty years of age, much of Milton Friedman’s windily and aptly titled essay, The Social Responsibility of Business Is to Increase Profits, feels like it could have been written today. Many of the hypotheticals he cites of corporate social responsibility—“providing employment, eliminating discrimination, avoiding pollution”—are charmingly relevant in the era of automation anxiety, BDS, and one-star campaigns. His solution, that businesses sidestep the whole mess, focus on what they do best, and play by the rules set forth by the public, is elegant and simple—and increasingly untenable.

One reason for this is that businesses and the governments Friedman imagined would reign them in have grown much closer, even as the latter have grown comparatively weaker. In sharp contrast to the get-government-out-of-business attitude that prevailed in the boardrooms of the 1970s, modern industry groups collectively spend hundreds of millions to get the ears of lawmakers, hoping to obtain favorable legislation or stave off laws that would hurt them. Corporate (and other) lobbyists are known to write and edit bills, sometimes word for word.

You could convincingly argue that this is done in pursuit of profit: Boeing, for example, spent $17 million lobbying federal politicians in 2016 and received $20 million in federal subsidies the same year. As of a 2014 report by Good Jobs First, an organization that tracks corporate subsidies, Boeing had received over $13 billion of subsidies and loans from various levels of government. Nevertheless, this is wildly divergent from Friedman’s idea of business as an adherent to, not architect of, policy.

As business has influenced policy, so too have politics made their mark on business. Far more so than in the past, today’s customers expect brands to take stands on social and political issues. A report by Edelman, a global communications firm, finds a whopping 60% of American Millennials (and 30% of consumers worldwide) are “belief-driven” buyers.

This, the report states, is the new normal for businesses—like it or not. Brands that refrain from speaking out on social and political issues now increasingly risk consumer indifference, which, I am assured by the finest minds in marketing, is not good. In an age of growing polarization, every purchase is becoming a political act. Of course, when you take a stand on a controversial issue, you also risk alienating people who think you’re wrong: 57% of consumers now say they will buy or boycott a brand based on its position on an issue.

This isn’t limited to merely how corporations talk. Firms are under increasing social pressure to hire diversity officers, change where they do business, and reduce their environmental impact, among other things. According to a 2017 KPMG survey on corporate social responsibility, 90% of the world’s largest companies now publish reports on their non-business responsibilities. This reporting rate, the survey says, is being driven by pressure from investors and government regulators alike.

It turns out that a well marketed stance on social responsibility can be a powerful recruiting tool. A 2003 study by the Stanford Graduate School of Business found 90% of graduating MBAs in the United States and Europe prioritize working for organizations committed to social responsibility. Often, these social objectives can be met in ways that employees enjoy: for example, cutting a company’s carbon footprint by letting employees work from home.

In light of all this, the choice between social and political responsibility and profitability seems something of a false dichotomy. The stakes are too high now for corporations to sit on the sidelines of policy, politics, and society, and businesses increasingly find themselves taking on such responsibilities in pursuit of profitability. Whether that’s good or bad is up for debate. But as businesses have grown more powerful and felt the need to transcend their formerly transactional relationships with consumers, it seems to be the new way of things.

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The Value of Inferior Products

There’s no shortage of lessons for us to learn from the unfolding Mylan scandal. It’s practically a study in the consequences of an uncompetitive market and bureaucratic cynicism. Among all the take-aways from this episode, there’s one thing that stands out as particularly interesting: the value inferior products offer consumers.

That sounds a bit counterintuitive. We typically think of inferiorities as something to be eliminated. But in many cases the presence of inferior goods–economically defined as goods for which demand increases when a consumer’s income drops–is actually beneficial, relative to their absence.

Before I talk about how this applies to the EpiPen, I have a confession to make:

I don’t have the latest iPhone.

I don’t even have the oldest iPhone. I have a Samsung Galaxy Light.

It overheats easily, has abysmal battery life, and sends snapchats that look like flipbooks. It hangs up during calls and will never catch a single Pokémon. I once tried to purge my text archive and it took over 12 hours.

Why do I own a device that’s so pathetic by modern standards? It’s a question of personal priorities and resources. I don’t care enough about the add-ons to spend $400 on a phone: a decision surely influenced by the fact that I don’t make that much money.

And yet, even though my phone is undeniably of poorer quality than the phones of my peers, I am much better for it. If I were to disappear tomorrow, say, because someone outlawed suboptimal cell phones, I’d be upset. I would probably end up buying an iPhone, but if I didn’t have the money, I might end up without a cell phone altogether.

So what’s the scrappy alternative (the Galaxy Light, if you will) to the EpiPen? Well, we don’t know–it’s not allowed to exist.

The FDA has the power of deciding what products consumers can and can’t access. In the case of EpiPen substitutes, as well as others, it’s imposed onerous hurdles to market entry that have severely limited anyone’s ability to compete with Mylan. The Wall Street Journal writes:

But no company has been able to do so to the FDA’s satisfaction. Last year Sanofi withdrew an EpiPen rival called Auvi-Q that was introduced in 2013, after merely 26 cases in which the device malfunctioned and delivered an inaccurate dose. Though the recall was voluntary and the FDA process is not transparent, such extraordinary actions are never done without agency involvement. This suggests a regulatory motive other than patient safety.

Then in February the FDA rejected Teva’s generic EpiPen application. In June the FDA required a San Diego-based company called Adamis to expand patient trials and reliability studies for still another auto-injector rival.

Let’s be charitable and ignore that Mylan spent over $2 million lobbying in Washington in 2015. FDA risk aversion, noble or otherwise, is still hurting consumers by leaving them with fewer options and higher prices.

While the FDA has a preference (and every political incentive) for extreme vetting, it may be that some consumers of epinephrine prefer a less expensive, if less tested, model of injector.

Assuming that consumers have the same priorities as their legislators is a mistake of arrogance, and a costly one. A study by Tufts University in 2014 put the cost of getting a drug through to market at $2.56 billion–$1.4 in out-of-pocket expenses and $1.16 in time costs (the forgone ROI of that $1.4 billion over the time the approval process took).

There are reasons people buy lower-quality products. Sometimes it’s a question of personal priorities, sometimes one of finance. The reluctance to acknowledge that this is as true in healthcare as any other marketplace is wrongheaded, though understandable given human emotion and that people’s health is at stake.

But the rules governing price and availability aren’t swayed by emotion. If we want EpiPens to be less expensive, we need to let more people try to make them, even if that involves some measure of risk. Excessive caution carries risk as well: by implementing such harsh standards, the FDA has ensured that the only product remaining is not only highly effective, but also highly expensive.

Rather than accept that there exists a continuum of quality in healthcare products, as with everything, epinephrine users are forced by regulation to use the best or nothing. Because of the diffuse nature of healthcare expenses, this kind of action raises prices across the board and inhibits the development of more efficient products.

Cell phones, even smartphones, are ubiquitous today and generally affordable. When they first came out, they were strictly the province of the wealthy. The same goes for cars, HD televisions, and most other technology.

Someone like me can afford those things today because lots of different producers were able to compete against each other and figure out how to give people more for less. If, when the iPhone came out, all following smartphones were to be held to the same standards, it’s almost certain that there would have been less people making smartphones, fewer models to choose from, and that the ones that did exist would be markedly more expensive and less innovative, due to reduced competition.

Yes, it makes sense to worry about the quality of medical devices that people are using, and yes, the FDA (or something like it) can be useful in that regard. But it also makes sense to concern ourselves with the availability of those same devices. Climbing healthcare costs are dangerous, too.