The Sad Economics of the NFL

This is a quick hit, primarily because I'm still working (!) on getting a final report out for work. Yes, it's 9:20 pm on a Tuesday. No, I didn't get to watch the Obama speech tonight. Work seems to be all I do these days. Work, work, work, work. Hello, Boys! How're we doing?

I just couldn't let the occasion slip by after several days of wondering will he? Won't he? Will they? Won't they?

Sadly, the Indianapolis Colts decided to cut Marvin Harrison loose today, thereby breaking up The Most Prolific QB-WR Duo Ever. He played for the Colts for 13 seasons, and teamed with Peyton Manning to set all those QB-WR records. But the Colts save themselves $6M in salary cap space by not bringing him back to camp, and by releasing him now, he has a chance to sign with someone else before the April NFL draft.

That's about all the economics you need to know about the NFL, where (as I said before) nothing but the signing bonus is guaranteed money.

The Economic Case FOR Steroids in Baseball

Everyone who is a sports fan could not escape the news over the weekend that Alex Rodriguez, 3B for the NY Yankees, tested positive for two banned substances (both steroids) in 2003, when he was playing SS for the Texas Rangers. His name was one of 104 that appeared on a list of players who tested positive during that season, and the ramifications of all those positive tests was increased and public enforcement of drug tests in MLB the following year. The fact that A-Rod's name was leaked to the public by four anonymous sources and published by Sports Illustrated was not all that shocking; enough allegations had been made against A-Rod throughout the years that he had to defend himself by denying his steroid use in an interview with Katie Couric.

No, the surprising thing for me was that A-Rod almost immediately went on air in another interview, this time with ESPN's Peter Gammons, and admitted he cheated by taking steroids in 2001, 2002, and 2003. Well, he claimed to be off the juice in 2003, but then there's the case of his failed drug tests that year.

Even more surprising for me was the reason why A-Rod said he cheated:

"When I arrived in Texas in 2001, I felt an enormous amount of pressure. I felt
like I had all the weight of the world on top of me and I needed to perform, and
perform at a high level every day."

Why did A-Rod feel all the pressure to perform? When he left Seattle and signed the richest contract in the history of Major League Baseball, it was for 10 years and $252 Million to play SS for the Rangers. That's an awful lot of pressure, an awful lot of zeros to justify on a yearly basis. For the first time, a player came right out and admitted what everyone always understood as the underlying reason for taking performance-enhancing drugs (PED): ECONOMICS.

Keep in mind that A-Rod had all the tools necessary to play and be a star at the MLB level. He was not some no-power, good glove middle infielder in the years leading up to 2001. In 2000, A-Rod was one of the last stars left on a Mariners team that previously dealt LHP Randy Johnson and CF Ken Griffey Jr. to other teams. That season, he hit 41 HR, had a .316 BA, and became the only SS to have 100 runs, RBI, and walks in a single season. This is not some player past his prime or struggling in Double A or Triple A to make it to The Show; in 2000, A-Rod was in the prime of his career.

Much the same can be said of Barry Bonds, as well. Bonds, of course, has already been convicted of using PEDs in the eyes of the baseball public, despite his protestations otherwise. Bonds, even before he sought out the services of the Bay Area Laboratory Co-Operative (BALCO), was one of the all-time best outfielders in MLB.

Why on earth would these guys risk their reputations, their long-term health, and their shot at immortality (the MLB Hall of Fame) when all those things were in reach? I think economics has a great deal to do with it.

Baseball, when it comes to player contracts and guaranteed money, is somewhat between the extremes of the NBA and NFL. In the NBA, players have truly guaranteed contracts that will pay them for the life of the contract, even if the player is sitting on the bench. In the NFL, no contract is guaranteed past a given Sunday. I'm fairly well convinced that was why Shawne Merriman tried to tough it out and play on two bad knees in September, even after he was told by several doctors that he needed season-ending knee surgery to save his career. In MLB, player contracts are fairly well guaranteed, but either side can request salary arbitration to either increase or decrease the salary based on the past season's performance.

Baseball is not like some sports, when an athlete might have just one really good shot at winning a gold medal and securing lots of money in endorsement deals. How many track and field stars did we see in Beijing who came up just short of achieving their lifelong dreams? I would argue the economic case for cheating in track and field is far, far greater than it is in baseball or football.

Cycling is another case where the athletes have been doping for decades, but for different reasons. Sure, the leader of a cycling team can make several Millions of dollars while on contract with the team. The domestiques, however, make far less, although I think their salaries are still in the six-figure ranges. This article from WSJ sheds some light on cycling salaries, which typically are closely guarded (subscription req'd). No, the real reason why cyclists abused EPO for so many years, and why they still look for ways to cheat the system today, is because it is such a grueling sport. The attitude has been, "everyone else is doing it; if I want to survive in the peloton, I have to do it, too."

Let's get back to baseball. When all the talk about PEDs in sport revolved around Barry Bonds, I wondered whether it made economic sense for him to sacrifice his long-term health for a few more seasons of muscle. When Bonds left the Pittsburgh Pirates to sign as a free agent with San Francisco, his contract was a then-MLB record $43.75 Million over six years. That's a paltry $7.29 Million per year. When Bonds re-signed in 2002 (during or shortly after the time he is suspected of using PEDs), SF gave him a five-year, $90 Million contract. That's an average of $18 Million per year. In 2005, Bonds earned $22 Million, second only to A-Rod. In 2006, he earned $20 Million, and in 2007, he earned $15.8 Million. That's an awful lot of money that can be used to pay for any type of health issues Bonds might face (if any) as a result of using PEDs. The cost-benefit analysis is pretty straightforward here.

A lot of the MLB players who have been outed for using PEDs, either by Jose Canseco's books or by The Mitchell Report, have said they used PEDs only to help come back from an injury faster. Andy Pettitte was one of the players who took that path. Many of the players suspected of using have only denied the allegations, despite any evidence to the contrary. Roger Clemens and Rafael Palmeiro fall into that camp. Before A-Rod, however, no one admitted that one reason they used PEDs was due to financial or economic concerns.

On a macroeconomic level, the supply and demand of hugely talented baseball players is partly to blame for the high salaries for star players. There is little doubt that Tom Hicks, the owner of the Rangers, overpaid to secure the services of A-Rod in 2001. But the price he was willing to pay was driven up by the perception that A-Rod was the centerpiece of the World Series championship-winning club he wanted to build. Put in microeconomic terms, the marginal utility Hicks expected to receive by employing A-Rod must have far outweighed the opportunity cost of hiring other free agents.

There is little doubt, after listening to A-Rod's confession yesterday, that he felt the pressure of all those expectations to perform. He didn't put it in economic terms, per se, but he did say he felt the "weight of the world" on his shoulders.

Another way of looking at the same issue is to view a player's performance in the year leading up to free agency, often called the "contract year." Almost invariably, the player in a contract year performs far above his statistical averages, all in hopes of landing a bigger contract worth more money at the end of the season. In MLB especially, free agents who just landed a new contract with a new team tend to disappoint during the life of that contract. Kevin Brown and Mike Hampton jump to mind.

What's the alternative, then? Can we ever get back to a time when player salaries did not engender such on-field performance swings? I don't think so, and I don't think we necessarily want to see players earning the pauper wages they once did, way back when. About the only thing that can be done, and what MLB is finally doing, is setting up strict drug enforcement regimens to catch and punish the cheats. The MLB drug testing policy could be much stronger, yes. But at least they now realize how far-reaching PEDs were in baseball, and how damaging to the sport they are.

Wait, Wait, Don't Tell Me

Actually, I have one more economics-themed post that I wanted to include on the last one about inverted yield curves, but just didn't seem to fit there. This might actually have less to do with economics than it does politics. You decide. But I promise: discussions of which obscure old movies I've been watching from NetFlix are coming soon to this space. Get up for it!

At this point, I wanted to bring up quotes from the op-ed piece President Barack Obama penned for the Washington Post on Thursday. The full article is here (free registration may be required). Obama, naturally, was defending his administration's "Stimulus Package", which people have critiqued as nothing more than a pork-laden spending bill. Obama sounded a clarion call for action, trying to get some amount of bipartisan support from the GOP side of Congress, but here is what he said:

By now, it's clear to everyone that we have inherited an economic crisis as deep and dire as any since the days of the Great Depression. Millions of jobs that Americans relied on just a year ago are gone; millions more of the nest eggs families worked so hard to build have vanished. People everywhere are worried about what tomorrow will bring.

What Americans expect from Washington is action that matches the urgency they feel in their daily lives -- action that's swift, bold and wise enough for us to climb out of this crisis.

Because each day we wait to begin the work of turning our economy around, more people lose their jobs, their savings and their homes. And if nothing is done, this recession might linger for years. Our economy will lose 5 million more jobs. Unemployment will approach double digits. Our nation will sink deeper into a crisis that, at some point, we may not be able to reverse.

Now, I don't want to get too historical on you, but I fear Obama could slide down the slippery slope of sounding too much like Jimmy Carter did in the late '70s.

At this point, I would love to link to a YouTube clip showing the scene from an early episode of The Simpsons, when the townsfolk of Springfield were expecting the unveiling of a statue dedicated to Abraham Lincoln. Instead, when the drape was lifted, the statue was of Jimmy Carter (with the tagline "Malaise Forever" -- classic!), which of course created a town riot. Sadly, that clip doesn't exist on YouTube, but I can provide the actual Carter "Crisis of Confidence" speech from 15 July 1979, archived by the University of Virginia. Side note: who knew that when Bill Clinton used the line "I feel your pain," he was practically quoting Carter?



Economic recessions have everything to do with crises of confidence, of course. If consumers have no faith their jobs are secure, their buying patterns change radically. That is one reason why Hyundai's offer to buy back a new car purchased this year if the buyer loses his or her job is so revolutionary. As almost every other car manufacturer saw huge hits on new car sales, Hyundai's sales actually increased 14%. Consumer confidence levels are so critical to the economy, a dedicated organization exists to track them.

Consumer confidence was one factor why the economic crisis described in Tom Clancy's 1994 novel Debt of Honor was so realistic. Clancy understood that for a foreign entity to wreak havoc on the U.S. economy, all they had to do is sow distrust and fear of our economic institutions (like the financial firms on Wall Street) among the American people. The resulting crisis of confidence brought the American economy low, setting up the rest of the novel. Sorry, I don't want to play spoiler for anyone who has not read it yet.

FDR understood how important consumer confidence was during his first Inaugural address, in 1933, when he famously declared, "...the only thing we have to fear is fear itself." The U.S. was already in the midst of the Great Depression, and only by dispelling the negative cloud of uncertainty and fear could FDR lead the country towards economic recovery.

Getting back to Obama and Carter, President Obama will get his stimulus package approved eventually. There was word on the news today that Congress either already approved or appears ready to compromise on a reduced spending bill, one that totals a mere $780B price tag to future generations.

I just think that if Obama wants to help the U.S. recover from this recession in a timely manner, he will skip the doom and gloom speechifying. For heaven's sake, don't mention the possibility of 5 million jobs going away! He needs to leave the fearmongering to the MSM. They do a great job of that.

On Inverted Yield Curves and Recessions - Yay!

OK, this will be one more economics-related post, and then we can shift back to discussing more important topics, like old movies I've watched lately. Hey, they don't call economics the dismal science for nothing!

I've been thinking lately that all is right in the world of economics, or at the very least, I think that's a true statement. It would be interesting to get a reading from an actual economist on this. See, there is a very accurate predictor for the U.S. economy entering a recession: the inverted yield curve. According to whoever* wrote the entry on Wikipedia, an inverted yield curve accurately predicted worsening economic situations two to six quarters into the future five out of six times since 1970.

* Whoever or whomever? Whomever probably sounds right to more ears, but since the preposition in question does not indicate a person to whom or on whom an action was performed, I think whoever is correct. We're talking about the person who wrote the page, or the person who performed the action. Whoever.

A normal yield curve, in which the long-term rates are higher (and usually significantly more so) than short-term rates, appears below:



You can see that long-term yields (on the 30-year and 10-year Treasuries, for example) are significantly higher than those for the short-term Treasuries.



An inverted yield curve is exactly what it sounds like. Short-term bond rates spike to higher levels than long-term rates; Wikipedia indicates this is partly due to expectations that inflation will be low during a time of recession in the economy. The graphic below shows what happened mostly in 2006 and 2007 between the 2-year Treasury and 10-year Treasury rates:



You can see that the 2-year notes had significantly higher yields than did the 10-year notes, in some cases approaching 200% of the yield on the longer-term bonds.

Why is an inverted yield curve so bad, you ask? In normal situations, people require a higher expected payout (in the case of bonds, a higher interest rate) for tying up their money for longer periods of time. Keep in mind that with bonds, price and yield always move inversely to each other: when prices on bonds go up, the yield automatically goes down, and vice versa. What drives the price of a bond up? The same as anything else: demand. In the case of an inverted yield curve, no one wants to purchase the short-term bonds, driving the price down and the yield up.

A lot of what happens in the relationship between long-term and short-term yields also has to do with investors' expectations, as mentioned before, and with what types of Treasuries are being offered for sale (usually at Treasury auctions). Between 2001 and 2006, the Treasury Department didn't auction 30-year notes at all. The longest term bond a person could buy from the Federal government was just 10 years, and that was partly what led to the inverted yield curve.

Another factor that led to the inverted yield curve was the Federal Reserve aggressively raising interest rates* in 2004-06 when worries of inflation gripped the new Fed Reserve Chairman, Ben Bernanke. I have to laugh at this article from February 2006, when Bernanke said "the inverted yield curve would not bring recession this time." Think he would like a mulligan on that one? How quickly did they reverse course and lower rates, trying to avoid the pending recession? (WSJ article, registration may be required) Here's a graphic from that article showing the target overnight rates since 2000:


* I really shouldn't fall into this same trap that all the news media does when discussing the Federal overnight lending rate, or target Fed rate. The Federal Reserve does not directly set what interest rate Federal Reserve banks use to lend to each other. Rather, the Fed does change how much cash a Federal Reserve bank needs to keep on hand at any one time, which then has an influence on what interest rate they use when lending to other banks. That's why it's called a target interest rate, not a definitively set or effective interest rate.

One reason why economists pay attention to the yield curve and any oddities thereof is because recessions typically cannot be forecast with any certainty. The official definition of a recession is a minimum of two consecutive quarters of negative GDP growth. Because everything is backwards-looking, by definition, the economy has to already be in a recession for at least six months before you know it. An inversion of the yield curve is one of a very few economic indicators that can predict trends in the future, rather than waiting and looking back at the data.

So, back to my original point, where I said that everything was right in the world of economics these days. At first, it appeared that the inverted yield curve of 2006 was not going to forecast a recession in the U.S. economy. 2007 was still a fairly happy year for consumers and investors alike. The crap didn't really hit the fan until 2008, when Wall Street melted down after home values fell off the cliff and banks had to start writing off their bad loans. Was that still within the typical two- to six-quarter window mentioned above? I think the recession probably hit within that window, despite the yield curve returning to normal, so all must be right in the world.

Sad to say.