Monday, April 4, 2011

Smart People Own Hammer, Spot Nail-Looking NCAA Arrangement

[Sorry for all the recent NCAA stuff, which will not be the focus of the site (I swear). But this is slow season for college sports, and since everyone else is writing about this stuff, I guess I will too]

The Becker-Posner blog is like porn for people with economics commentary fetishes. I'm not quite at that level, but I'm close enough to read the blog semi-regularly. Gary Becker is a Nobel Prize-winning economist; Richard Posner is a judge on the Seventh Circuit Court of Appeals. They are smarter than you or I.

Becker is wrong, however, when it comes to the NCAA, not because his conclusions are wrong (the NCAA is a cartel in some areas). Instead, he is wrong in lots of little ways--the kinds of errors that sneak in when someone is looking at a problem for the first time and don't realize that this ground has been covered several times over. 

I call it the "Why is there evil?" fallacy. When that question gets asked by an atheist to a religious person, you immediately know that the conversation is useless, not so much because the question isn't interesting, but because the question is so interesting that it has been hashed and rehashed for thousands of years. The sophisticated atheist and the sophisticated believer are dozens of intellectual "moves" ahead by this point. The philosophical and theological questions are subtler, more layered now. The fallacy doesn't make the atheist wrong (or correct); it is just a signal that the conversation will not be particularly valuable.

First, I encourage everyone to read Becker's piece in full.
The toughest competition for basketball and football players occurs at the Division I level. These sports have both large attendances at games-sometimes, more than 100,000 persons attend college football games- and widespread television coverage. As a result, many Division I schools with big time sports programs get many millions of dollars from their basketball and football programs. Absent the rules enforced by the NCAA, the competition for players would stiffen, especially for the big stars, as they would receive large scholarships and various gifts of cars, housing, and cash to themselves and their families. Payment to players, if competition for players were allowed to operate freely, would severely eat into the profits made by colleges from the big time sports
All is good until the last sentence. Competition for players wouldn't eat into profits, because, by and large, there are no profits. According to the author of the report which I just linked, "If you're not selling a bunch of tickets and you don't have a large alumni-booster base making contributions, and you're not in the right conference, you have very little chance of showing net positive revenue." There are lots of reasons for this, the most important of which is Title IX. That's not necessarily an argument against Title IX, especially if we think that gender equality in collegiate sports is more important than revenue production by athletic departments. Even the most popular women's sport, college basketball (the only women's collegiate sport with a national television deal) is a net drain on athletic departments.

The next biggest reason that there isn't much by way of profits is that, by and large, schools just don't raise that much revenue through sports programs. (Permalinks aren't available, but you can play around on the USA Today database for this). The Nevada sports department lost $800,000 last year, even though it receives almost $6 million from the government and another $2.3 million in student fees (that is, $40 a semester from every student that no one realizes because the tuition bill is so damn big anyway). Almost 60% of Eastern Michigan's athletic department revenue--over $15 million total--comes from "direct institutional support" (i.e., is subsidized). With that revenue, Eastern Michigan's athletic department had a $2 million "profit," but it's obviously a funny kind of profit. Take away the subsidy and EMU is $13 million in the red.

That isn't true of all schools, of course, especially those that make most of their money through ticket sales and contributions from donors. That would be all the Big Ten schools, for starters, along with most major conference schools (though there are exceptions). The top schools could probably squeeze somewhere else in the budget, such as coaching salaries and ancillary facilities. But this is a college sports universe in which only a few dozen teams are competitive each year, and in which only a dozen or so have any chance at a championship (and before the guffaws about how that's pretty much the situation today: Butler would not happen in this universe. VCU, with 78% of its athletic department revenue from student fees, would not happen in this universe. Boise State would not happen in this universe). Are college sports without Butler, VCU, and Boise State as competitive as college sports with those teams? Lots of professional sports leagues have decided that some level of competitive balance is necessary to preserve value in the league. It is not implausible that this is also true in the NCAA--perhaps more true, since preserving balance across hundreds of teams is harder than preserving it across 32. 

Then, there are the silly mistakes. Becker complains that the average graduation rate of black male DI basketball and football players is below 50%, while not noting that the graduation rate of all black males in college is 35%. In just about every demographic, if you take a student-athlete and a regular student from the population, the chances of the athlete graduating are better than the chances for the regular student. There's also the assumption that most athletes will see their compensation go up in a free system of compensation, which I've already argued is not likely.

There are similar problems with Posner's response to Becker, though I think his final analysis comes much closer to the mark:

College athletics would be less profitable for colleges if the student athlete market were competitive. If permitted, colleges would continue to agree to limit recruitment of athletes who could not satisfy degree requirements and to require athletes to attend classes and thus be bona fide students, because otherwise competition for the best athletes would tend to eliminate the “student athlete”; college teams would be largely composed of athletes who had no interest in or capacity to obtain a college education; awarding them a degree would be meaningless. The college would be engaged in a business unrelated to its academic mission and would thus have to pay taxes on its teams’ earnings. Worse, alumni donations to their alma mater, which are stimulated by the success of the college’s teams, would wilt if the teams were composed of non-students. If the University of Chicago bought the Chicago Bears, and renamed the team the University of Chicago Bears, would alumni of the University of Chicago write bigger checks to the University?  
For similar reasons, I don’t think eliminating the rule against paying student athletes would result in their being paid actual salaries. The concept of a student who is also a professional athlete would trouble alumni. I expect that instead the student athletes would receive exceptionally generous scholarships—scholarships that would yield more than the full cost of tuition and living expenses. But the sky would not be the limit, since, facing higher labor costs, college teams would be less lucrative 
A possible legal complication in repealing the rule against athlete salaries would be the salary disparity between male and female college athletes. The only really lucrative college sports are football, a male sport, and men’s basketball. Competitive salaries for college football and basketball players would vastly exceed those for other sports, including women’s sports. Paying lower salaries to women athletes could invite challenges under Title IX of the Education Amendments of 1972, which among other things forbids sex discrimination in education that receives federal subsidies. 
The strongest argument against eliminating the NCAA cartel is that it would make colleges and universities poorer, and this would be a social loss if one assumes (plausibly) that higher education creates external benefits. Of course the government could replace the lost revenues with subsidies financed by taxes. But while monopsony is inefficient, tax increases create distortions similar to those created by monopoly and monopsony.