Kenneth D. Gartrell

By: Kenneth D. Gartrell

There has been much recent news interest focused on why Obama is helping to cover the unpaid costs of Hillary Clinton’s campaign. The commentators would do well to remember that economic decisions are forward looking. No rational decision maker looks backward when making a decision. What is past is a “sunk cost.” The reason why the Obama Campaign has been so “generous” involves forward looking incentives.

Retiring Clinton campaign debt is a small cost for Obama in order to obtain the financial support of Hillary’s most loyal donors for the general election. If Hillary does not get behind Obama (especially among the inner circle of key donors/fundraisers) his access to her donors is likely to be limited. When looking forward, retiring $20 million in Clinton debt easily becomes a high net present value project for the Obama campaign. The inner circle of Obama primary supporters are maxed out in his campaign and the Clinton inner circle of supporters are also maxed out in her campaign. All Obama has done is promise to use the first $20 million to come into his campaign from Clinton supporters to pay off the debt. This, in effect, allows the closest and most loyal Clinton supporters to contribute a second time to the “Clinton Campaign.”

This makes the immediate decision costless for Obama because he was not going to get the first $20 million without Hillary’s cooperation. Obama gains on the upside with the broader sympathetic donor lists of the Clinton campaign that he has not tapped before. He not only gets a list of those willing to give, but he also can solicit support and votes with a very good idea of the demographics and motivations of the one-time Clinton donors.
The upside financial potential for Obama could be as high as $100 million in incremental new funds that would not be forthcoming if Clinton was not cooperative. It is true that most Clinton supporters will remain party loyalists and would give to Obama in any case. But, with Clinton’s cooperation added, contributions will be more forthcoming. The simple math — for every $1 of the “double contributions” of the Clinton inner circle that Obama returns to the Clinton campaign, the expected payback could reasonably be up to $6 per $1. Hence, to the maxed out inner circle of the Obama campaign, they are making a fully compensated $1 gift to Clinton which produces up to a net $5 contribution to Obama. We can think of it as a form of gift swapping and gift matching. The decision is always a positive net present value project as long as the first $20 million are clearly recycled second round Clinton contributions. For every $1 over the party loyalty expectation that Obama obtains is $1 more than he otherwise would get.

Commentators on all of the news shows, meanwhile, are casting about for explanations of why Obama agreed to retire the debt. The search almost always focuses on the past and on irrational sentimental and honorific considerations. The rational decision is a hard money decision. In those terms, the decision for Obama is a true no-brainer. Economists always observe that the simplest theory is the best theory and the least cost solution to any problem is the best solution as long as there are no negative unintended consequences.