Recently a Mr. Sidney Blumenthal, a Presidential aide and non-practicing journalist, filed a defamation lawsuit saying that some $30 million in damages had been done to his reputation and whatnot.
The value of these damages was calculated on the basis that a Mr. Matthew Drudge, a practicing journalist, had falsely claimed that Mr. Blumenthal "has a spousal abuse past that has been effectively covered up."
Mr. Drudge later retracted, and apologized for, the statement. But--never mind--the damage had already been done, and Mr. Blumenthal wants his $30 million. Mr. Blumenthal expects Mr. Drudge to make this payment with the deep-pockets help of America On-Line.
From an economic point of view, there is a quandary here: How does one come up with a number like $30 million? To illustrate the issue, let us suppose, purely hypothetically, that Mr. Drudge--in addition to the other allegations--had also falsely alleged that Mr. Blumenthal had had oral sex with the family dog. Would the damage to Mr. Blumenthal's reputation now be $50 million? And, if so, why?
Or suppose--again purely hypothetically--that Mr. Drudge had falsely alleged that Mr. Blumenthal had been seen on a bench in New York's Central Park reading The Seven Fat Years by Robert Bartley of the Wall Street Journal. Surely such a false allegation would have completely destroyed Mr. Blumenthal's reputation as a former New Yorker journalist of impeccable integrity. Would the damage to Mr. Blumenthal's reputation now be $75 million?
There must be some rationale, some basis, for these numbers. A friend of mine who was working at a well-known consulting firm in Cambridge, Massachusetts, told me of a project the firm undertook to calculate the value of damages done to a woman who had lost the use of her vagina due to medical malpractice. The firm was asked to venture an opinion on the value of the loss. The lawyers, after all, needed a number to wave around in court.
After some pondering on the issue, the firm did a survey of Boston-area prostitutes, and came up with $150 as the average fair market value of an episode of intercourse. Then, using actuarial statistics, the firm calculated the number of times, N, that the woman could have been expected to have experienced intercourse over the remainder of her life. They then multiplied N times $150, and concluded that the value of the loss was about $500,000.
Like the calculation or hate it, there was no question where the number came from. Which brings us back to Mr. Blumenthal. Let's say Mr. Blumenthal was still writing, or practicing journalism, at the New Yorker. And that he was paid $60,000 a year to offer his various takes on politics and the human condition. (I don't know how much the New Yorker really paid Mr. Blumenthal, but that is not necessary to clarify the issue.)
From the point of view of GNP statistics, we could say that Mr. Blumenthal's contribution to the annual flow of goods and services is $60,000. Never mind if you personally think Mr. Blumenthal's opinions are worthless. The market (in this example) determines his value, and the market says he is worth $60,000.
But, if that were true, how could one do $30 million in damages to Mr. Blumenthal's reputation? How could one possible remove $30 million from a yearly product of $60,000?
The first thing to notice is that this apparent paradox is a result of faulty thinking. It represents an invalid comparison--of apples to oranges. There is a time dimension with respect to the salary: $60,000 per year. By contrast, $30 million, is a lump sum payment. Or, as they like to say in economics, $60,000 is a flow, while $30 million is a stock. So, before we can come up with a lump sum like $30 million, we have to move from one dimension to another.
So, in this example, let us suppose that the New Yorker, after reading Mr. Drudge's statement with great shock, fired Mr. Blumenthal. And moreover, Mr. Drudge's universal renown being what it is, that no one would ever again give Mr. Blumenthal a job. Well now. In that event, we have some concrete material with which to work.
Let's now assume that Mr. Blumenthal will live forever. And we know he has been forever deprived of his annual $60,000 salary. Looking at the bond market, we see that long-term rates are about 6.5 percent. Capitalizing the $60,000 at 6.5 percent we get (60,000)/(.065) = $923, 076.92.
In other words, if Mr. Blumenthal were given $923,077 in cash, then the annual interest of 6.5 percent would pay him his $60,000 annual salary forever.
But the latter payment is too low. Mr. Blumenthal wants $30 million. That translates to an annual salary of $1,950,000, capitalized at 6.5 percent interest.
Has Mr. Drudge really reduced Mr. Blumenthal's value by an amount equal to $1,950,000 per year? I immediately looked for news of Mr. Blumenthal's firing by the White House from his current position as Presidential advisor--a lucrative position indeed. But, no, instead, I find a Reuter's item saying, "President Clinton and Vice President Al Gore approved of an aide's decision to file a $30 million lawsuit against on-line gossip columnist Matt Drudge, the White House said Thursday."
Hmm. Mr. Blumenthal is not only still solidly employed in his current job, but also has been given the go-ahead for other money-making opportunities. Did Mr. Drudge in fact enhance Mr. Blumenthal's economic value?
As part of his calculations, whatever they may be, Mr. Blumenthal has also factored in the value of his accusation that Mr. Drudge has abused his (Blumenthal's) wife. According to the Washington Post (a Drudge Report competitor), "Both Blumenthals have suffered ridicule and contempt as a result of the allegations. Jacqueline Blumenthal experienced 'severe emotional distress,' including headaches and nausea, and 'was unable to work at her job'."
That is, Mr. Blumenthal has charged Mr. Drudge with spousal abuse, and the value of this abuse is included in the hefty $30 million lump sum payment that Mr. Blumenthal wants Mr. Drudge to make. You might take the point of view, of course, that "you can't put a value on emotional distress." But that's exactly what Mr. Blumenthal has done--given it a value. Mr. Blumenthal should be able to clarify the calculation. What is the value of one headache, and how many headaches were there?
Mr. Blumenthal, of course, has undoubtedly caused Mr. Drudge some emotional distress by the filing of his lawsuit. Presumably Mr. Drudge could assign a value to this distress, and counter-sue Mr. Blumenthal. After all, Mr. Drudge apologized and retracted the story. This demonstates the absence of malice on Mr. Drudge's part. Mr. Blumenthal, on the other hand, isn't a bit sorry, and he apparently isn't taking anything back. Mr. Drudge may have caused Mr. Blumenthal a few headaches. But Mr. Blumenthal is seeking to destroy Mr. Drudge's life. Who is injured? Cui bono?
How much is the damage done to Mr. Blumenthal's reputation and the ensuing family emotional distress worth? I don't really know. But my own private calculation says that it's worth about $12.43. Mr. Drudge could cover his obligation to Mr. Blumenthal by sending him a free subscription to the Drudge Report.
August 30, 1997
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