Baldwin Wallace University Economics Blog ... thinking out loud ...: August 2011

Wednesday, August 31, 2011

NFL Rookie Salary Cap

By Tim Cole and Lewis Sage

The new NFL collective bargaining agreement effectively imposes a ceiling on the amount of money that teams can pay for early round draft picks, starting in the 2011 season. The obvious immediate impact is an increase in owners’ profits, the difference between the dollar cap and the (presumably higher) equilibrium contract. But there are likely to be some unanticipated side effects.

To understand why, remember that teams generally pay for rookies with two coins, only one of which is the player’s contract. The other is the value of the draft position itself. Using this past year’s draft as an example, when the Carolina Panthers signed Cam Newton for $22,000,000, they also invested the 1^st overall pick in the deal (Kadar, 2011). And that pick had what economists call opportunity cost – the value of the later picks for which the first overall choice could have been traded. So here’s what we’re arguing: when the amount of money a team needs to commit to an early draft pick’s contract goes down, the value of that draft pick, as a position in the draft order, goes up. Which means that teams will part with more and better draft picks in order to trade up on draft day.

We repeat, because teams will pay fewer contract dollars to sign a first-round choice, they will trade more (and perhaps better) later picks to move up.

And this will lead to the an unanticipated side effect. Because draft picks have value only if the player signs a contract, the increase in demand for later picks – if only for trading purposes – will likely translate to larger contracts for late-round players as compared to previous seasons. Couple this with the fact that the rookie cap frees up money, and the total effect could easily be to shift payroll from the elite to the journeyman.

Whether it increases ownership’s profits remains to be seen.

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Kadar, D. (2011, July 30). Rookie wage scale hits 2011 draftees hard. Retrieved August 30, 2011, from www.mockingthedraft.com: http://www.mockingthedraft.com/2011/7/30/2305689/rookie-wage-scale-hits-2011-draftees-hard

Dr. Lewis C. Sage likes intersections. Since 1991, he has taught Law and Economics, Mathematical Economics, and the Economics of Healthcare. A former Fulbright Fellow (Bulgaria 1995-6), he teaches an interdisciplinary Honors seminar, Enduring Questions, and is studying strategy in the NFL draft with faculty and students in Sports Management and Psychology. E-mail: lsage@bw.edu

Sunday, August 28, 2011

…be afraid of what they know not

By kay.e.strong

Ben is on to something. Is anyone listening?

In his annual Jackson Hole speech last Friday Ben Bernanke, monetary policy czar, elevated the threat level to orange by asserting that the government itself is perhaps the greatest threat to our nation’s economic recovery.

Fed Chairman Bernanke declared that “[t]he country would be well served by a better process for making fiscal decisions.” Undoubtedly, there isn’t an American alive whose memory has not been seared by the partisan debacle euphemistically called the” debate” over the debt ceiling. That “debate” elevated the level of angst in the world to new heights; pushed a frail financial market psychology over the edge and ratcheted up our second largest federal budget expenditure item, interest on the national debt, through a S&P downgraded. And for what, the sake of "hostage" tea?

But perhaps Ben’s not quite right. Perhaps, it’s not the process but rather the personnel involved in making fiscal decisions that need remediation. According to an Employment Policies Institute survey, thirty-five percent of degree holding members of Congress majored in government or law, while only 8.4 percent majored in economics and 13.8 in business or accounting. The remainder are scattered among the humanities, science and technology and other majors. For me this begs the question: how many of those making fiscal policy decisions are truly knowledgeable about the inner workings of the macro economy? If given an open note, open book exam, could they manage a passing grade on questions relevant to the current economy? Questions such as, how do we best jump-start the economy to alleviate the pain for households? What is the long-term effect of budget deficits on the economy? Is this a great recession or great debt contraction? Is there a difference? What is the future opportunity cost of a defense budget that eats three-quarters of the nation’s discretionary budget?

[By the way, if you’re a little fuzzy on the answers and googling isn’t doing it for you, then, please, allow me to reserve a front row seat in my macro economics course for you. It’s usually vacant anyway :)]

Now, as much as I appreciate the poli-sci majors among us, it is high time to recognize that maximizing the interest of the minority at the expense of the majority is no longer tenable. The only way to bring the threat level of government itself down is to operate as if every decision is WAIT-T. If we do, then we will improve the quality of economic policy making in the United States and this, in turn, will favorably improve our nation’s long-term prospects.

Kay Strong, Ph.D., Southern Illinois University, M.T., University of Houston, M.A., Ohio University; Associate Professor at Baldwin-Wallace College; Areas of expertise: international economics, contemporary social-economic issues, complexity and futures-based perspectives in economics. E-mail: kstrong@bw.edu

Sunday, August 14, 2011

…connecting the dots

By kay.e.strong

For a week now all eyes have been glued on the financial markets as profit-chasing investors, using complex risk models and high speed computerized buying/selling algorithms attempting to recalibrate their portfolios, propagate and amplify disruption in a perfect feedback loop. The kind you get when the mic signal gets picked up and amplifies continuously through the speaker. Ooouch!

In fact, I’m rather at a lost to understand why so much media energy is being expended on the tail-end of the economic story. Beginning students in economics learn two important lessons: first, the US economy is consumption-driven, unlike the export-driven economy of China, and second, households own all the income in the economy. In the simple circular flow of economic activity model, households jump start the reciprocating cycle between households and producers by demanding products. Firms produce and sell those products to households and earn income. That income is used to purchase resources from households. Income earned by the sale of resources enables households to make new demands in the next round. Any discussion about “profit” occurs much, much later in the textbook.

So, if the economy is experiencing a weakness, then, according to the circular flow model, the fault lies at the feet of households. Why, then, are households not doing their part to jump-start the reciprocating cycle?

Perhaps, these sentence strings collected over the past week from NYT are telling.

…preliminary data for one of the leading barometers of consumer confidence fell in August to its lowest levels since May 1980

Why falling consumer confidence?

Twenty-five million Americans could not find full-time jobs last month. Millions of families cannot afford to live in their homes.

More layoffs are also likely in many states, on top of the 577,000 jobs eliminated by state and local governments since 2008.

For individual investors, whose ability to retire depends on stock investments in 401(k)’s and other retirement plans, recent swoons are yet another hit.

As xxx, R.I., sorts out its finances after filing for bankruptcy, it is trying to put bondholders in line for payment ahead of pensioners.

States have been cutting frantically for the last four years because of declining tax revenues, but the 2012 budget year will have the deepest cuts to education, health care and other services since the recession began.

It used to be that only cheap foreign manual labor was easily available; now cheap foreign genius is easily available.

At little Grinnell College in rural Iowa, with 1,600 students, “nearly one of every 10 applicants being considered for the class of 2015 is from China.” The article noted that dozens of other American colleges and universities are seeing a similar surge as well. And the article added this fact: Half the “applicants from China this year have perfect scores of 800 on the math portion of the SAT.”

…instead of treating street culture as something that has no place in a [US] classroom, [rap] is being used as a vehicle to deliver instruction.

Why falling consumer confidence?

In sum, no jobs, no homes, no pensions, no education, no jobs…—another perfect feedback loop! A bit reminiscent of Because a Little Bug went Ka-choo!

Monday, August 8, 2011

Rationality and Freedom

By Lewis Sage

So now we can blame each other for irrational intransigence, for playing chicken with school busses… with predictable results. So what’s “rational”?

The narrow definition of rationality – even in this form, a trait in apparently short supply in the halls of power – imagines that as shoppers we make purchases from the lists we brought to the store. More broadly defined, the free exercise of the rational faculty requires that we be able to choose among the lists we might have written. It requires us to get beyond pure agency (running an errand) and to engage imagination and – dare I say it? – empathy (what does the family need). Full rationality may even mean wanting a totally different list, one that we did not start with, one that answers needs beyond our immediate appetites. If we cannot even imagine that a different list could be transcendentally better than the list we came with, we are in no manner free and our rationality is sorely limited.

Harry Frankfurt examines this notion of full and free rationality in his 1971 article, Freedom of the Will and the Concept of a Person, in which he distinguishes between the broader “person” - what I might call a fully rational being – and something less, which Frankfurt terms a “wanton”, responding efficiently and predictably to stimulus. He then presents his notion of personal freedom:

“A person who is free to do what he wants to do may yet not be in a position to have the will he wants. Suppose, however, that he enjoys both freedom of action and freedom of the will. Then he is not only free to do what he wants to do; he is also free to want what he wants to want. It seems to me that he has, in that case, all the freedom it is possible to desire or conceive. There are other good things in life, and he may not possess some of them. But there is nothing in the way of freedom that he lacks.” (17)

As I read Frankfurt, anyone who is constrained, by self or other, from the exercise of “second-order volition”, the wish to want what one does not now want, would fail the test for rational, free, personhood. By this construction, intransigence must reflect either a wanton’s inability to conceive of another list, or a person’s doctrinal imprisonment.

…every decision, WAIT-T

By kay.e.strong

Nothing screams WAIT-T better than today’s headlines and bylines--these from today’s NYT.

Shock waves from the downgrade of the United States credit rating hit global markets over the weekend and traders on Wall St. prepared their strategy.

The European Central Bank said it would intervene in bond markets; Group of 7 finance officials said they would take "all necessary measures" to support stability.

The declines were not as sharp as at the end of last week, but the Nikkei 225 index in Japan, the Kospi in South Korea and the Australian market all fell.

Politicians have yet to get a handle on the true nature of the economy. Despite all the seat time logged in Principles of Economics, the economy is not a gigantic machine. It can not be tinkered with and tweaked-at-will. The economy is a living, responsive organism. It lives and breathes as does every other organism. Every organism is composed of parts. Politicians, investors, businesses, consumers, workers and households are all parts (agents). The parts are interdependent, intimately connected in the economic web of life. Every organism responds to feedback from its environment. Changes introduced by one part of the system or the larger environment, induce changes in the behaviors of other parts, sometimes in novel and quite unanticipated ways.

William Brian Arthur, an early pioneer and authority on economics and complexity theory, differentiates the textbook view of the economy from the complex.

“In the standard view of the economy, which has an intellectual lineage that goes back to the enlightenment, the economy is mechanistic. It is complicated but can be viewed as a series of objects and linkages between them. Subject and object—agents and the economy they perform in—can be neatly separated. The view I am giving here is different. It says that the economy itself emerges from our subjective beliefs. These subjective beliefs, taken in aggregate, structure the micro economy. They give rise to the character of financial markets. They direct flows of capital and govern strategic behavior and negotiations. They are the DNA of the economy. These subjective beliefs are a-priori or deductively indeterminate in advance. They co-evolve, arise, decay, change, mutually reinforce, and mutually negate. Subject and object can not be neatly separated. And so the economy shows behavior that we can best describe as organic, rather than mechanistic. It is not a well-ordered, gigantic machine. It is organic. At all levels it contains pockets of indeterminacy. It emerges from subjectivity and falls back into subjectivity.” (The End of Certainty in Economics, P6)

To reiterate: the economy is "not a well-ordered, gigantic machine. It is organic."

As an organism it's health is wholly dependent on healthful interaction among its parts. The truth be told: some parts have been acting in extremely unhealthy ways, deluded in their belief about not being part of the organic whole. But the system is not fooled. The headlines all but scream WAIT-T—we’re all in this together!

Friday, August 5, 2011

…forget Washington

By kay.e.strong

I don’t know about you...but me…I’ve heard just about all the left-brain analysis about left-brain decision makers with their left-hand dipped deep into the pork barrel of leftover monies in Washington that I can take! As the conversation about jobs creation ratchets up perhaps the best news is really in our own backyard.

A study concludes that smaller, locally owned business (10-99 employees) are actually a better source for igniting the economy, improving innovation and productivity on a local level and providing higher long-term economic growth than large (more than 500 employers) firms or those headquartered in other states.

The Penn State U study Does Local Firm Ownership Matter conducted by Fleming and Goetz drew on a data set of 2,953 business owners located in both urban and rural counties to assess whether per capital density of locally owned businesses affected local growth. Their results provide “strong evidence that local ownership matters for economic growth but only in the small size category. Results are robust across rural and urban counties.”

When small, locally owned firms rely on other local businesses for service-support such as legal, accounting, maintenance and supplies the local jobs creating ecosystem is strengthened. Over time all ecosystems are sustained through diversification. In the jobs creating ecosystem new startups are the source of that diversification as new business fill new niches.

According to Goetz, “Many communities try to bring in outside firms and large factories, but the lesson is that while there may be short-term employment gains with recruiting larger businesses, they don’t trigger long-term economic growth like startups do.”

Goetz admonishes that “We can’t look outside of the community for our economic salvation. The best strategy is to help people start new businesses and firms locally and help them grow and be successful.”

At the end of the day--if it’s gonna’ happen, we're better off nurturing our own local job creation ecosystem than looking to self-absorbed Washingtonians haggling over the next program on the chopping block, while spending on luxury goods by high-end consumers soars despite the overall drop in retail sales!

Wednesday, August 3, 2011

Life, Art, and the Confidence Fairy

By Lewis Sage

Sometimes art imitates life. Sometimes life imitates baseball. And sometimes, national politics reflect the insights of the late David Foster Wallace. [See Wallace on the fragility of hub-and-spoke networks in What I’ve Been Reading (June, 2011).]

“STILL TINE: Gentlemen, what the president is articulating is that what we face here is a microcosmic exemplar of the infamous Democratic Triple Bind… Now, speaking in the very most general terms, if the president’s vision dictates the tough choice of cutting certain programs and services, … the American electorate will whinge.

“SEC. TREAS.: And we already have an all-too-good idea of what will happen if we attempt any sort of conventional revenue enhancement…

“SEC. DEF.: Tea-party…

“SEC. TREAS.: And yet the financial communities demand a balanced budget…”
(Infinite Jest, 440-441)

The only unfamiliar note is “whinge,” but I bet you can guess what that means. The rest is eerily familiar. The fictional administration evades disaster by auctioning the naming rights for calendar years, beginning, of course, with the Year of the Whopper. Not much more unrealistic than belief in the confidence fairy.