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Source link: http://archive.mises.org/15353/behind-the-lockout-part-i/

Behind the Lockout, Part I

January 18, 2011 by

Over the past 90 years, the National Football League has outgrown its roots as a collection of under-financed midwestern teams and is now the single most popular ongoing entertainment enterprise in the US. This year the NFL recorded some of its highest television ratings ever. Beyond the league’s 32 franchises there are a host of subsidiary enterprises, including an all-NFL cable network, sports-talk radio, fantasy football and gambling (much of it “illegal”), merchandising, and so on. If you ask the typical NFL sycophant, the league’s success will last forever — nothing will ever bring down Lord Football!

Except, of course, the people who actually run the NFL. Which is why we’re less than a month from a league-imposed “lockout” that could conceivably deprive millions of their entitlement to football come the fall of 2011. Wait, what?

How can a business be so popular — and profitable — yet prepare for such a self-destructive act. Unlike most labor showdowns, this isn’t the product of political rabble-rousing by the workers. The NFL Players Association, the union, was content with the collective bargaining agreement they signed with league owners in 2006. It was the owners who not only terminated that agreement early — they are now demanding radical changes to the present labor system.

One major rallying cry is the lack of a so-called “rookie wage scale.” The NFL likes price controls. Check that — the NFL loves price controls. The owners prefer to restrict the mobility of its workforce as much as possible. In and of itself, this is not morally objectionable or contrary to free-market principles. All employers have budgets for their businesses. And a sports league is almost by necessity a cartel in that it represents a partial “merger” of firms with respect to certain aspects of their common business.

The problem here is that the “rookie wage scale” smells an awful lot like red herring. Superficially, it sounds weird that the NFL would grind a multi-billion dollar industry to a halt over the lack of wage controls for a handful of entry-level employees. Yet the NFL has gone out of its way to sound the alarm bells. Last month Green Bay Packers President Mark Murphy wrote a panicky editorial in the Washington Post lamenting the plight of the poor owners:

Rookies should be paid fairly, but they should not be among the highest-paid NFL players before playing a single down. Teams don’t like it. Veterans and retired players don’t like it. Fans don’t like it. And the players’ union shouldn’t like it, either.

Earlier this year, Sports Illustrated published a list of the 50 highest-paid American athletes. Five 2009 NFL rookies were on the list, averaging nearly $21 million in total income for their rookie year. Every other athlete on the list was a proven veteran.

Our current system of paying rookies doesn’t make sense. In 2009, 256 drafted rookies signed contracts calling for $1.2 billion in compensation with $585 million guaranteed. This year the numbers increased to $1.27 billion, including $660 million guaranteed, for 255 draft choices.

No other business operates this way, and no other union gives its entry-level hires such privileges. The system is so bad that some teams no longer want picks in the top part of the first round of the NFL draft. The cost is too high, especially if a player taken that early turns out to be a bust.

The purpose of Murphy’s article was to focus press and public anger against the players. Indeed, the NFL’s entire public-relations strategy during the present labor negotiations has been almost Marxist: Generate middle-class resentment against players who earn exorbitant salaries to play a mere game.

What Murphy neglected to mention was that in the same year that those 256 rookies earned $585 million in guaranteed compensation, the NFL owners cleared a profit of over $1 billion. In fact, the NFL’s profitability isn’t tied to labor costs at all — but more on that later.

Even under the current agreement, there are limits on overall rookie compensation. The expiring CBA provides for complex formulae used to limit how much rookies receive. Murphy and his bosses want to go a step further and literally dictate what every player makes before they enter the league. This is what the NBA actually does: set maximum salaries based on the point where a player is selected in the rookie draft. As Murphy admitted, the goal is “eliminating individual negotiations” with players and their agents — whom Murphy also paints as part of the problem.

All this begs the question of how the league got itself to this point. Let’s take one of the players on that Sports Illustrated list Murphy referred to. Matthew Stafford, the Detroit Lions quarterback, signed a rookie contract in 2009 that guaranteed him just under $27 million in signing bonuses and base salary. Murphy says this is outrageous — Stafford hadn’t even proved himself on the field before getting such an enormous paycheck.

But who is responsible for this? Um, the NFL owners, that’s who. The union didn’t put a gun to Detroit’s head and make them pay Stafford $27 million. To the contrary, the NFL insisted on a labor system that produced this outcome. Now they’re trying to blame everyone but themselves.

As noted above, NFL owners want to avoid player “free agency” at all costs. Murphy’s actually on the money when he says “no other business operates this way” when it comes to new hires. No other business would get together with its competitors and allocate the most promising talent to the worst performing firms. You know how the Lions came to sign Stafford to a $27 million contract? Because the team lost every single game the previous season.

The NFL Draft goes in inverse order of team performance so that the worst teams always pick first. Once a club “drafts” a player, no other club may negotiate a contract with that player. If the player refuses to sign with the club that drafted him, he must wait a year and is subject to being “drafted” a second time.

What this does is create a monopoly on both sides of the equation. The Lions draft Stafford. Stafford is stuck in that he can’t sign with any other NFL team, but the Lions are also stuck in that they can’t go back and take the next-best-available player. So that’s one reason you end up with seemingly large rookie contracts.

Another factor — which you don’t see in most other businesses — is that these so-called entry-level workers are in fact known commodities long before they sign their first NFL contract. There’s an entire sub-industry built around the NFL Draft. Starting with heavily marketed college games and extending to pre-draft activities like the NFL Scouting Combine, and culminating in the television Draft itself, rookie players are subject to a level of hype that has no real non-sports equivalent. All of this is reflected in the value of the top rookie contracts.

If the NFL wanted to reduce incoming player costs without resorting to the blunt instrument of wage scales — a system more common to a government teacher’s union than a robust free-market enterprise — the league could simply switch to a less hype-driven system. Sure, there’s nothing the NFL can do about college football. But instead of a televised Draft, why not simply hold a closed-door silent auction where each team could submit bids for the players it wants? This would fulfill the NFL’s stated goal of eliminating agents and protracted “holdouts” from the process, while ensuring a more rational allocation of incoming players.

But the NFL would never do such a thing for two reasons. One, the league won’t give up the hype. Just this year the league expanded the Draft to three days and aired the first round on Thursday night in primetime for the express purpose of increasing hype.

The second reason is that any deviation from the present system is declared a threat to “competitive balance.” In fact, when the union proposed to accept a rookie wage scale in exchange for allowing players to become unrestricted free agents after three seasons, the owners rejected in out of hand — because allowing free agency that quickly would destroy their vaunted “competitive balance.”

So what of this? Is “competitive balance” essential to the NFL’s success? Most people are conditioned to uncritically accept this as truth. I don’t. In one sense, competitive balance is a mirage: as a commenter to one of my prior posts noted, there are 256 regular season games in the NFL each season, which means no matter what you do the combined record of all teams is 256-256 (barring ties). Everything naturally pulls you towards the median.

There’s an easy way to demonstrate this. I examined the starting orders for the past ten NFL drafts (2001–2010). I noted the teams with the first ten selections in each Draft (excluding trades); this reflects the ten worst-performing teams from previous season. This essentially produces a table of the bottom-third of the NFL from each of the past ten years.

In theory, perfect “competitive balance” would mean each team appears in the top ten about three times. Of course, that’s not what I found. It turned out that the results produced a near-perfect bell curve: Eight of the 32 NFL teams had a top-ten position three times, 12 had it more than three times, and 12 had it less than three.

The aforementioned Lions were the worst overall performer, holding a top-ten Draft position in 8 of 10 years. This provides further insight into Matthew Stanford’s sizable contract. He was going to a team with a history of poor management and poor on-field performance. The Lions were desperate for a star quarterback to rebuild the team around.

From his perspective, Stafford was taking an enormous risk playing for a team that would almost certainly continue to be bad (the Lions are 8-24 since drafting him) at a difficult position that tends to produce just as many failures as successes. Add to that the average NFL career is about four seasons, and suddenly you realize that Mark Murphy’s protests notwithstanding, players like Stafford are far from typical “entry-level hires.”

Ultimately, the comparatively high salaries for top rookies reflects the price of the NFL’s decision to subsidize poorly managed franchises in perpetuity. It has nothing to do with unscrupulous agents or a union unwilling to impose more bureaucracy on its members. It’s about the league failing to remove ownership groups with a demonstrated record of incompetence. All the talk of a rookie wage scale and overpaid players is just an attempt to create a scapegoat.

If you look at the distribution of top-ten orders that I mentioned above, you’ll actually find that many of the teams on the low end of the distribution — the teams one or no top-ten draft positions in the previous decade — actually made a higher-than-average number of overall draft selections. Teams like New England (1 top-ten appearance) and Philadelphia (0) routinely acquire multiple additional picks from other teams through trades. That reflects smart management practices. If “competitive balance” was really the NFL’s top concern, it would ban such “unscrupulous” attempts to game the system.

For that matter, if allocating top player talent through an inverse-order Draft is really so effective, then why not apply the same principles to coaches, general managers, and other executive talent? Why should a hot, up-and-coming coach be allowed to auction his services off to the highest bidder? After all, a coach often has more direct impact on a team’s competitiveness than a single player taken in a Draft, even a quarterback in most cases. Shouldn’t the Detroit Lions of the world be given the same exclusive right to monopolize the services of a potentially great coach as it would a player?

Of course, the players, coaches, and general managers are the real entrepreneurs of professional football. The owners — and their handpicked commissioner — are mostly just bureaucrats. They contribute little to the creation of the actual product or customer value. Yet they hold the political reins of the entire operation. That will be the subject of another post later this week.


Dick Fox January 18, 2011 at 4:26 pm

They forget that they are an entertainment industry that must give the audience something for the money. Baseball forgot this and went through all kinds of stupid “labor” problems. The bottom line on baseball is that it went from America’s favorite past-time to a sometimes summer diversion. If we are smart we will just stop watching pro sports. There are a lot of other activities that do not insult the audience.

David C January 18, 2011 at 5:32 pm

I’ve often wondered about salaries and talent in the sports industry, it seems like much of it is propped up by copyright cartels and government built infrastructure (stadiums, etc …) , makes me wonder how much of it is artificial.

J. Murray January 18, 2011 at 6:59 pm

The whole setup is ridiculous. A union for employees that have a minimum wage of $325,000 (even if it’s four years, that’s still $845k after taxes or nearly 20 years worth of your typical salary in the real world), owners that constantly complain about lacking the resources for stadiums, demand local taxpayers cover the bill, and pitch a fit about their shrinking margins when people complain when they sell a half a can of Bud Lite for $9 when they can easily afford to float bonds and buy one themselves, constant threats to derail the entire business. The whole thing is bizarre.

Even the overall operation is a confused mess. On one hand, they attempt to behave like a McDonalds and put in place things like salary caps and profit sharing to avoid putting its own franchise units out of business that rely on one another to stay in business (if one team puts the others out of business, there’s no one left to play). On the other hand, when a team is poorly managed, they just throw up their hands and say, “Hey, we can’t control the management, they own it.” McDonalds would just strip the franchise from them in the franchise situation or teams would refuse to be scheduled against them in the private entity situation.

The whole situation is maddening (pardon the pun) when I realize the only reason the NFL still even exists is because of all the healthy tax subsidies being siphoned out of my pockets and your pockets. The Arena Football League is infinitely more interesting than the NFL, yet my local team, the Sharks, are stuck renting out a shoddy arena while the lockout king (there’s another bizarre practice, locking out the more lucrative television broadcasts just because the team failed to sell out the game) Jaguars got full reign of a full-on stadium bought and paid for by Joe Taxpayer.

Bah, I’ll just go back to playing video games. At least that hasn’t been completely overrun by government…yet. Canada and the UK are trying their hardest to subsidize that, too.

S.M. Oliva January 18, 2011 at 7:34 pm

Good points all around, and I’ll address some of them in my next post. Just one factual clarification: The minimum salary you cite is actually for rookies. Like many union-based firms, the NFL minimum salary scale rises according to seniority. So for example, the minimum salary for a player with at least four credited seasons is $630,000 in 2010.

J. Murray January 18, 2011 at 7:37 pm

Ah, so basically that fact only makes my confusion over a union even more well founded.

J.E.C. January 18, 2011 at 9:44 pm

While I wholeheartedly agree that the government subsidies for professional sports are ridiculous, I think you misunderstand the origin of unions. The first unions were for skilled tradesmen,who pooled their market power in order to command higher rates for their work. In a way, the NFLPA is much closer to the original trade unions than the AFL-CIO is.

brad January 18, 2011 at 7:13 pm

personally i am not an NFL fan but this applies to the NHL too. i as leaf fan forever (hold your laughter) am tired of seeing teams like the leafs, rangers, red wings, etc. having to subsidize the weaker teams in the league. the NHL has a salary cap that is as useless as anything because teams like pittsburgh and atlanta dont even come close to being able to spend that much. the cap is projected to go up to $60 million this year with most teams being able to spend half that amount. like anything in the real world, teams that make money cannot improve themselves because they cant buy the best talent. everyone may $%^& on the yankees but is it their fault they generate so much revenue? of course, spending the most doesnt guarantee success (see aforementioned maple leafs and yankees) but it helps.

S.M. Oliva January 18, 2011 at 7:35 pm

The NHL’s problems are almost entirely the result of over-expansion in the 1990s. The league used franchises as a means of “printing money” via expansion fees. It’s the Weimar Republic of sports.

Dave Albin January 18, 2011 at 8:14 pm

The NHL seemed to be a special level of insanity a few years ago, with all of the malinvestment through rapid expansion. Maybe NASCAR, too? These were popular regional sports that may have grown beyond their venues – smacks of some sort of malinvestment.

J.E.C. January 18, 2011 at 9:48 pm

Well to understand the NFL’s quest for parity you have to understand what is being sold. The league as a whole is selling competitive football; individual teams aren’t selling their individual success. Considering that the NFL is much more popular than baseball, I would have to say their plan appears to be working. Generally in baseball we know who is going to be in the running every year. The NFL had 50% turnover in its playoff teams this year and many years has higher turnover.

S.M. Oliva January 18, 2011 at 9:55 pm

I respectfully suggest you’re confusing correlation with causation. I maintain the NFL’s success is largely unrelated to “parity” and is better explained by other factors.

J. Murray January 19, 2011 at 6:21 am

I would venture to say it’s because of the relatively short season for a professional league. 16 games isn’t enough to properly gaugue who is the best and who isn’t. Rarely in baseball or basketball, where the teams are mostly a lock from day 1, do teams ever go 16-0. Many of them start slow and even go 8-8 before getting 100 win seasons. Because of the short season, the statistical variations have a stronger impact on the final record than in a 161 game season. If the NFL season started on the first Sunday in June and ended the last Sunday in December, we’d likely start to see a more consistent post-season lineup.

matskralc January 19, 2011 at 10:07 am

Yep. Variance is the friend of the underdog, and the smaller your dataset, the more variance you will tend to have. It’sthe same reason, weaker teams try to limit possessions during individual games. Underdogs work the shot clock down in basketball or run the ball in football in order to kill time and limit possessions. I’d say about 95% of so-called “parity” in the NFL is due to nothing more than the limited number of games.

J. Murray January 19, 2011 at 5:47 pm

Just a quick and dirty analysis I did for support. I used ESPN’s history of the MLB and took a snapshot of each division when the teams played just 16 games and then again at the end of the season. I used the 2002 through 2010 seasons for this analysis.

In a 16 game season, 24 of the 30 teams would have made it to the playoffs at least once, or 80% of the league, during this 9 year stretch. In the complete season, 19 teams, or 63%, made it to the playoffs once during this stretch.

Only 1/3 of the teams leading at the 16 game mark make it to the playoffs in any given season.

If the season ended at 16 games, the Yankees would have only won a division once in the past 9 seasons. They won it six times at the end of the season during the same stretch.

Teams that made the playoffs once in the fictional 16 game season went to the playoffs an average of 2.25 times during the 9 seasons under the fictional 16 game season. Teams that made the playoffs in the normal season repeated 3.13 times on average.

The Twins, Yankees, Cardinals, and Angels won their division in 5 or more of the past 9 seasons. No team in the fictional 16 game season won the division 5 times or more.

It’s only 9 data samples, but it’s already demonstrating that a short season generates a more “competitive” result when compared to a long season. I’d like to do a more comprehensive comparison, but it would be incredibly difficult given the nature of expansion teams and city changes.

Don Mynack January 23, 2011 at 11:40 am

That is a ridiculous comparison, given the injury level of both sports, and the level of physical exertion inherent in both sports. Given that the majority of the time, baseball players are just standing around, or sitting and watching in a dugout, while football players are running and getting hit, knocked to the ground, etc. A more accurate comparison would also take time into account, rather than actual games played, since the injury rate is so much higher in the NFL. Can you imagine NFL players trying to play 6-7 games a week? It’s ludicrous.However, if baseball went to a 16 game season, I might actually watch it, since it wouldn’t be so damned boring.

matskralc January 18, 2011 at 10:58 pm

You might want to do some research (click my name for a link). The lowest payroll in the NHL is the New York Islanders and they are spending at about 70% of the cap. The average team spends at about 90% of the cap, and the median team at about 94%.

Nick E January 19, 2011 at 5:29 pm

Yeah, Pittsburgh is really pinching pennies on the contracts for Crosby, Malkin, Staal, Fleury, Kunitz, Letang, Martin, and Michalek. And the resources of some teams are clearly putting others at a disadvantage: that’s why the Leafs and Rangers keep winning Cups year after year and teams like Pittsburgh, Anaheim, Carolina, and Tampa have seen so little recent success. I thought you Canadians had a better grasp of the facts than that.

The NHL’s problems are due mostly to (a) foolish overexpansion; (b) abysmal marketing of the sport to US-based audiences, particularly following the 2005 lockout; and (c) no apparent clue as to how to address (a) or (b).

Seattle January 18, 2011 at 8:44 pm

I think this is the most insightful article on the madness of the NFL I’ve ever read! Every sports fan confused by what’s going on should read this. And I say this as someone whose never actually watched a single game! Fantastic work as always, good sir.

Jim P. January 19, 2011 at 2:22 pm

I know very little of the ins-and-outs of NFL (and most other sports), but I do sometimes enjoy the weirdness of internal politics and little theoretical bureaucracies. It’s like Alice in Wonderland to me. Sports politics seems sort of a skewed reality where utter nonsense is of the highest possible importance, and the great matters of the real world are largely irrelevant. It’s as if all the real entertainment is behind the scenes.

Nick E January 19, 2011 at 5:37 pm

Great piece. I personally have no problem with NFL players like Stafford signing these mammoth contracts, or even with players who hold out for contract extensions. The simple fact is that playing football at the highest levels for several years is hazardous to your health, and the chances are high that injuries will limit you to a few years’ career in the NFL. Given that, I have no objection to a player taking every cent the market is willing to pay, and/or withholding their services if they believe their interests are best served by a trade to another team. If I were a pro football player, I would do the same thing.

Anthony Brancato January 20, 2011 at 9:27 am

Cultural attitudes – and changes in those attitudes over time – figure greatly in all of this.

Half a century or more ago in baseball, for instance, it was considered important for a team to finish in “the first division” – this meant fourth place or higher in the either of the eight-team leagues that existed prior to 1961, when the American League expanded to 10 teams, the National League following suit a year later, causing “first division” to be redefined as a fifth-place finish or better. And finishing in “the cellar” – last place in either league – was an ignominy to be evaded at all costs. The fan base heartily embraced both these concepts, and similar ones in the other major sports generally.

But in recent decades, an all-or-nothing mentality has replaced this – epitomized perhaps most eloquently by the “You Don’t Win Silver – You Lose Gold” ads Nike plastered all over Atlanta during the 1996 Summer Olympics. Indeed, today if a team repeatedly comes close to winning the championship without actually doing so, that team is reviled as “chokers,” and even greater opprobium is rained down upon them than if they were finishing in last place year after year – although a team in the latter situation will now be completely ignored, its games unattended and unwatched, prompting the current obsession of league bureaucracies with “competitive balance.”

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