Comments on economics, mystery fiction, drama, and art.

Monday, January 31, 2005

Another truly brilliant idea by baseball management

Jim Bowden, late of the Cincinnati Reds and currently with the Washington Nationals has proposed one of the truly dumb ideas about how to reorganize the competitive structure of major league baseball: Arrange teams into divisions according to the revenue they receive.

If we uses
Forbes' estimates of revenue for the 2003 season, and keep the league structure unchanged, this is what we'd get:

American League
The Rich............The Middle...........The Poor
Yankees.............Indians..................Royals
Red Sox..............Rangers................Blue Jays
Mariners............White Sox.............Twins
Orioles................Tigers....................Devil Rays
Angels.................Athletics

National League
The Rich............The Middle...........The Poor
Mets...................Astros....................Pirates
Cubs....................D-backs................Padres
Braves.................Rockies.................Brewers
Dodgers...............Reds.....................Marlins
Giants..................Phillies.................Nationals*
Cardinals
*But probably not based on 2005 revenues, as a new team in D.C.

In that alignment, in 2004, I'd guess your AL playoff teams would have been the Yankees, the Red Sox, the Athletics, and the Twins. In the NL, the Braves, the Cardinals, the Astros, and the...well, I really don't know who would have been likely to win the Poor Division. But the playoffs wouldn't have looked much different, would they?

This is not a completely insane idea--but it's close. It would do some useful things. It would force the owners of Major League Baseball teams to decide how to define revenue. And it would probably force them, as well, to disclose that revenue (or, alternatively, live with the leaks).

But as an idea designed to foster competition, it is truly awful.

First, to the extent that it worked, segregating low-revenue teams into their own divisions would mean that, on average, the quality of the teams making the playoffs would fall. Strictly speaking, this would be true if revenue is positively correlated with payrolls and payrolls are positively correlated with winning. Asking your fan base to accept a proposal that lowers--that must lower--the quality of championship play seems a bit much. What we have here is affirmative action for bad teams.

Second, it could lead to a team "dumping" late in one season so as to reduce their revenues and allow the team to "move down" to a division composed of worse teams. Any proposal that reduces a team's incentives to win within one season is not a good one. This problem could be mitigated by using something like a 5-year average of revenue, but the problem is still there.

Third, it could reduce the stability of scheduling and of the divisional structures. While this is not necessarily a major problem (English football leagues manage to deal with it, through a system of "demoting" the worst performing teams to what amounts to a minor league, and promoting the best teams from the minors), it's still an issue. The instability complicates scheduling and would probably increase travel costs. Look at the example above, particularly in the AL Rich Division--3 east coast teams and 2 west coast teams. Or the NL Rich Division.

Fourth, it rewards incompetent management in large market cities. The Phillies, for example, spent some time being a low-revenue team in a large market. The White Sox also would seem (to me) to fall into that category.

And, fifth, it could lead to pairs of "natural rivals" winding up in different divisions. For example, the Cubs and the Cardinals might wind up in different divisions (as they almost do in the example above). That change could damage the revenues of both teams. Furthermore, lumping low-revenue teams together, while it would guarantee one (or more) of them playoff spots might, perversely, reduce their overall revenue. After all, what you'd have is lower quality teams playing each other more often. Now, that's a formula for fan interest.

So if your purpose is to reward teams that can't manage themselves well, if your objective is to reduce the quality of play in the playoffs, then this is for you.



Tuesday, January 25, 2005

To Larry Summers: Correlation Does Not Mean Causation

A week or so ago Larry Summers (noted economist and President of harvard University) apparently argued that the over-representation of males in science and math at elite universities may be grounded in facts about the world. The first part of his argument is that performance among young males in math has a greater variance than it does among young women--that young males are both more likely to be unable to do simple arithmetic and to be math "whizzes" than is true for young women. This, apparently, is true.

What he did next was, I am sorry to say, bad science, and bad statistics. He inferred from this fact that the cause of this difference may well be genetic in nature.

Well, there's clearly a correlation here, between gender and test performance. But Summers knows, I mean he knows, that this does not demonstrate causation.

Consider, for example, an alternative story which yields the same outcome. Suppose that, among young men, outstanding performance in math (or anything else) is highly rewarded, but truly dreadful performance is not particularly condemned. But suppose, among young women, outstanding performance is not rewarded (and may even be stigmatized in some way), while bad performance is, in fact, regarded as unacceptable. One could easily develop some explanations based on the culture of the U.S. that would support this incentive structure.

Then, among young men with math (or whatever) aptitude, there's an incentive to develop the aptitude, whereas among young women, that incentive is much smaller. Conversely, among young men with little interest in math, dreadful perofmance does not lead to negative consequences, while among young women it does.

So wouldn't we expect to see the outcome that we see?

And isn't that outcome at least potentially amenable to social intervention?

What Summers does is something I'm sure he taught his econometrics students not to do. Don't mistake correlation for causation. Don't mistake a plausible-sounding story (not even the plausible-sounding stories that I tell) for reality. Do the hard, necessary research to figure out what's going on.

For making that mistake, he deserved what he got. Even if he didn't get the criticism specifically for that mistake.

Monday, January 24, 2005

Union's share of the workforce.

Something I wrote as a letter-to-the editor of The New Republic last week, after they wrote an editorial suggesting that the decline in the unionized portion of the labor force is a result of changes in National Labor Relations Board decisions:

Your lead editorial ("Labor Pains") in the January 17, 2005 issue, correctly points out the decline in union membership as a percentage of the labor force between 1979 and 2003 (down from 24.5% to 12.9%, and even more marked in private sector employment--union representation of private sector workers declined from 22% in 1979, to 8.2% in 2003).

What you fail to point out is that from its peak in 1953 (at 32.5%; 35.7% in the private sector), union membership had already begun to fall. Indeed, between 1975 and 1979, it fell as rapidly as it has declined since--about one percentage point per year. Representation of private sector workers fell by 13.2 percentage points between 1953 and 1978--and by 13.8 percentage points between 1979 and 2004--two roughly 25-year periods. (I have drawn this union membership data from
this web site.)

Clearly, a change in the attitudes of presidents, of their appointees to the National Labor Relations Board and of the courts is a part--a large part--of the story of this decline, it is not the whole story.

Tuesday, January 18, 2005

Bankruptcy Follies

President Bush has now begun using the line that the Social Security Trust Fund will be "bankrupt" in 2018 (or thereabouts) when incoming tax revenues will fall below benefit payments.

Let's see. I'll retire in 2013. At that point my income will fall below my expenditures. Wouldn't that, accoding to Bush's logic, mean I'm bankrupt? So according to Bush's logic, are all retirees bankrupt?

Tuesday, January 11, 2005

The Social Security Trust Fund Is Worthless: National Review Online

John Hood at National Review Online writes:

"Ramesh: you are being, if anything, too charitable to Brad DeLong on the point of the nature of the IOUs in Social Security. He is right to point out that, on some level, any financial security is an IOU. It represents a claim on future income. Thus it represents, inevitably, an asset for the payee and a liability for the payer. If the payee and the payer are the same person, it represents precisely nothing. The fact that the federal government always pays its debts, and thus federal bonds are a popular security, is entirely irrelevant. A private person with excellent credit who everyday filled a box with IOUs for a Christmas-present fund would, when December rolls around, be no better off that if he hadn’t bothered to do so."

Let's see what this seems to be saying:

1. The Social Security Administration has purchased U.S. Treasury bonds and
apparently has about $1.335 TRILLION currently in asets.

2. These assets, consisting largely of Treasury bonds have no value, because the U.S. Government "owes" this $1.335 trillion to itself.

3. So the U.S. Treasury has no obligation to redeem these bonds from the Social Security Trust Fund when they come due.

4. Or, in other words, it's OK for the U.S. Treasury to default selectively on its obligations.

Now, don't you the Central Banks of China and Japan, to say nothing of the private holders of U.S. Treasury obligations are gonna be happy if that becomes official U.S. government policy, instead of the, well, misconceptions of the folks over at National Review?


UPDATE: PGL at Angry Bear is also on the case.

Thursday, January 06, 2005

Is Randy Johnson "Worth" $48 Million For the Next Three Years?

Randy Johnson and the New York Yankees have reportedly agreed to a contract extension which will pay Johnson $16 million per year for 2006 and 2007, in addition to the $16 million ($6 m. deferred at 2% interest) he's due to receive in 2005. Johnson turnd 42 shortly before the end of the 2005 season, so we can call these three years his age 41, 42, and 43 seasons.

The answer to the question of what he's "worth" will depend partly on what level of performance might be expected of him, and that's hard to determine. His recent performances have been extraordinary, however.

I've looked at the performances of five other extraordinary pitchers, all of whom aged very well--Steve Carlton, Roger Clemens, Nolan Ryan, Tom Seaver, and Warren Spahn. Here's their average level of performance, first for ages 38 - 40, then for ages 41 - 43, along with RJ:

................................Big 5................Randy Johnson
.......................Age............Age..........Age..........Age
.....................38-40.........41-43.......38-40......41-43 (Proj.)
Starts..............94...............79............88...........75
IP/Start.........7.22............6.60.........7.04........6.44
K/9...............7.14............6.88.......10.88......10.49
WHIP.........10.27.........11.38..........9.31........9.49
HR/9............0.70...........0.88..........0.87........1.10

The projection for Johnson assumes that his performance declines at the same rate as the average for the other 5. Frankly, his age 38 - 40 performance has probably been better than theirs, so even with the same decline, he projects to be an outstanding pitcher for the next three years, but over fewer starts and fewer innings per start than the last three years. (It's worth noting that is 88 starts are 35-18-35--2003 was an injury year for him. In effect, the projection includes the probability of injury in it.)

Is that performance worth $16 million a year? According to J. C. Bradbury's "salary estimator" (on his blog,
Sabernomics), a pitcher with Johnson's expected performance characteristics could expect a salary of about $7.6 million. So, based solely on that, Johnson is seriously overpaid at $16 million. But RJ may well be a bigger draw, both in terms of attendance and in terms of media revenue. So the $16 million might not be too big a stretch.