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

Sunday, October 17, 2010

Bailing the NFL out?

This week’s (cover date October 18, 2010) Sports Illustrated has three articles dealing directly with the economics of sports. I’m going to look at these three articles one at a time over the next few days.

In the first article (pp. 41-43), “Million-Dollar Maybes,” Jim Trotter takes on the issue of the high salaries/bonuses being paid by NFL teams to high draft choices. The essence of the argument advanced in the article is that teams that have high draft positions in the NFL draft have incurred large obligations under the league’s salary cap structure that have made it difficult for them to develop as teams. The three teams specifically mentioned are the Detroit Lions (drafting in the top 10 eight times since 2002; averaging under 4 wins per season, including an 0-16 year in 2008); the Oakland Raiders (in the top 8 six times in the past 7 years; no more than 5 wins in any season); and the St. Louis Rams, with 3 players potentially earnings $112 million if the final years of their contracts kick in—in addition to the early-career guarantees (3 wins in 2008-2009).

Trotter writes: “A hard rookie wage scale similar to the NBA’s slotting system would relieve some of the financial pressure on teams at the top of the draft.” What he does not address is why teams continue to offer such generous terms to high picks; my reading of the collective bargaining agreement is that teams choose to make these offers and that the players have little leverage, except to refuse to sign (and potentially, to play in Canada), which, given their options outside the NFL, doesn’t seem like a credible bargaining strategy to me.

Let me repeat that. The contracts signed by the players whose salaries are discussed in the article had little-to-no bargaining leverage and the teams voluntarily offered them extremely generous contracts, even knowing how well that was working out. Trotter does not discuss—he does not even mention—this disconnect. The tone of the article is that teams cannot avoid these contracts, somehow, and that only by bargaining explicit limits on salaries and bonuses for first-year players can teams avoid making extremely expensive (and, apparently, bad) decisions.

I may be missing something, but this does not make a lot of sense to me. Obviously, the NFL would like limits on compensation of first-year players; in the absence of higher salaries for players with more experience, such a limit would flow directly to the bottom line of the teams (and the league). Why the Players’ Association would bargain away the possibility of first-year players earning (what amounts to) windfalls, unless they know that they can make up those earnings for veterans has an obvious answer—they are extremely unlikely to, and (as Trotter notes) have made that clear.

There is only one reference to the real failure—that teams have perhaps incorrectly evaluated the potential of new draftees (p. 43)—and again, no mention of the fact that teams are voluntarily paying these salaries and bonuses.

Writing a “hard” rookie salary system in to the collective bargaining agreement is simply an attempt to win back, through bargaining, money that teams have lost through bad decision-making.

Tuesday, October 12, 2010

The Mortgage Crisis for Dummies

This entire series is more than worth reading.

What Mike Konzcal is doing in covering the mortgage crisis is exceptional and deserves both wider coverage and HUGE public approval.

Monday, October 11, 2010

The unemployment problem

Brad DeLong notes that the unemployment rate has now been at or above 9% for 17 months, from May 2009 through (so far) September 2010. And he's not alone in being concerned about the persistence of extremely high unemployment (Ezra Klein; Paul Krugman; Adam Posner (no link); and many others).

Looking back at the monthly data, we see that only in the twin recessions of 1979 to 1983 and the current recession did the unemployment rate rise above 9% for any significant period, 19 months in the earlier case (March 1982 to September 1983) and 17 (so far) in this one. Even more disturbing, the unemployment rate has been above its post-World-War-II average (of 5.7%) now for 27 months.*

Why do we think this is a problem? As DeLong and Krugman, again among many others, have pointed out, what starts out as cyclical unemployment resulting from a recession can become structural. The longer unemployment (or intermittent employment punctuated by additional spells of unemployment) persists, the more likely people are to see their skills decay and the harder it becomes for them to become re-employed.

While we don't know the precise dimensions of this, or how long it takes, it is something to be concerned about.

But (to be optimistic), we also know that a sufficient increase in aggregate demand leading to a sufficient increase in the demand for labor can drive unemployment down quickly and a lot. Our experience from the Great Depression at least indicates that this is true. The overall unemployment rate** was above 15% in every year but 2 from 1931 to 1940 (except for 1937 and 1940; in both those years, the unemployment rate was about 14%), falling to 1.9% by 1943.

So, given sufficient resolve, it seems to me, and a sufficiently large set of programs designed to produce employment opportunities, it seems to me that we still have the ability (and the opportunity) to reduce unemployment significantly and to dodge the quicksand of structural unemployment. The question is whether we have the will.

*The economic malaise of the late 1970s and early 1980s will not soon be approached, though. Back then, the unemployment rate remained above 5.7% from September 1974 through March 1988--163 consecutive months!

**I'm not going to get into the controversey here about how to count people working under such programs as the WPA, PWA, CCC, and other New Deal temporary employment programs. (But, to the extent that one wishes to argue that the unemployment rates shown in the Statistical Abstract, for example overstate the extent of unemployment, one would have to acknowledge that the employment programs of the federal government were responsible.)