Comments on: Player salaries and economic rents

By: stan

stan — Tue, 03 Aug 2010 22:33:06 +0000

I think he has misapplied the definition of economic rent.

By: A 6-Step Plan to Prepare Yourself for the Looming Sports Apocalypse of 2012

A 6-Step Plan to Prepare Yourself for the Looming Sports Apocalypse of 2012 — Tue, 03 Aug 2010 13:04:29 +0000

[...] * – NFL money logo credit: SmartFootball.com [...]

By: Nathan S

Nathan S — Sat, 31 Jul 2010 16:41:29 +0000

People have already really made good comments on the ridiculousness of Burke’s argument from an economic standpoint (4PS, Perry, JLK1, Joel, Flounder, especially), so I will keep mine very brief and from a practical standpoint: I don’t really understand the where the money from football IS supposed to go. 60% of the money goes to players, ok, now 40% goes to management? stadium security? maintenance? Say we cut it down to 80k salaries, freeing up a wild guess of 40% of the profit.

Assuming that they aren’t just going to slide all that extra cash on to the owners, the question becomes what do to with that money. Simply, in order for a business to become more profitable, it has to increase its ability to make a product, or increase the value of that product, excluding the inverse of this which is to limit product on the supply side or decrease the value of competing products. And what is the product of a football company? Producing a sport that people will watch. What do people watch? Maintenance? Security? Coaches? While stadiums and maintenance have a direct impact on ticket profitability, these days we could envision a stadium without any fans at all, just cameras. These stadiums would make a helluva lot of money anyway, because a lot of NFL revenue is in television, and increasingly, the internet. This means that the primary investment in football, after the methods exist for delivering the product (minimally, grass, painted lines, officials; television companies would bring their own cameras if it were popular enough, not sure about the logistics here), should be securing the raw materials (read, extremely talented athletes) needed to make the most desirable product possible.

By: VLB

VLB — Wed, 28 Jul 2010 21:05:29 +0000

But really, isn’t the value of a player the difference between how much the fans will pay to watch a replacement players as opposed to the ones who would not work for less? If it is a fan based calculation as opposed to a market analysis of appropriate salaries?

Obviously, the anti-trust issue looms there, which is one reason why the NFL could never drastically reduce salaries, because their anti-trust exemption balances on a tide of public good will which is dependent on whether the public thinks they are behaving fairly.

I do think that even given the brief lifespan of an NFL career that most players would think it was worth it to spend three or four years getting paid more than they would ever hope to get paid in other professions, then it would be to begin a career in those other walks of life. Those careers are presumably there to be begun after they make much bigger incomes in football.

Concerning whether athletes will continue to play sports, I don’t think there is much evidence that pay is the primary reason why players play. Huge salaries are a relatively recent development in the life of professional sports. I would not think the player pools are much different domestically than they were before.

I do think if the major three sports did not pay as much, the talent would be more equally dispersed among professional sports in general. You might see the long awaited American soccer revolution if the living you made in MLS was comparable to that of MLB, NFL, and the NBA.

By: Alex

Alex — Thu, 22 Jul 2010 01:58:31 +0000

Chris, I disagree with your methodology. Here is why: an offer’s merits should be considered against the next-best-alternative. So, in the case of an NFL player, if the next best alternative is working a $35,000/year job (let’s convert to a wage rate based on a 2,000 hr work year: $17.50/hr), then that player should be willing to play for $17.51/hr, all other things equal (obviously a risk-premium should be added for a football player, compared to a clerical employee).

With that said, the original thesis is ultimately the problem with attempting to value an asset (and a player is most certainly an asset). I think most reasonable finance professionals would choose one of two valuation methods: resale value (think residential real estate), or the value of future expected cash flows (think stocks). I suspect a football player’s salary closely reflects the future value of cash flows than can be attributed to their performance. Use baseball free agency as an example, since there are fewer market restrictions. It is LOGICAL that the best players (who happen to be the highest paid) play for the Yankees. By playing for the Yankees the maximum value for those players can be unlocked, and they’re compensated accordingly.

By: Once more

Once more — Wed, 21 Jul 2010 00:19:03 +0000

Burke doesn’t understand economics.

It’s not about how much the players are willing to play for.
It’s about how much people are willing to pay to watch them.
That is their true value. Not their rent value.

By: phantom

phantom — Sat, 17 Jul 2010 00:27:25 +0000

If you pay the players $80,000 per year you make it economically feasible to start a competing professional league. Then you have competition for star players and highly-rated rookies which leads to higher salaries for everybody. Eventually you’ll have the same salary structure as the NFL has now.

By: KJ

KJ — Thu, 15 Jul 2010 19:35:19 +0000

This is a stunning statistic: “As I’ve pointed out, 78% of NFL players file for bankruptcy.” But it’s not accurate. If you track back through the links, the source (SI.com) reports the number this way: “Although salaries have risen steadily during the last three decades, reports from a host of sources (athletes, players’ associations, agents and financial advisers) indicate that:

• By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.” The “or are under financial stress because of joblessness or divorce” is important because that could mean a lot of things that do not at all equal bankruptcy, and it is unclear how much of the 78% fits into this category and not the bankruptcy category. So, too, is the way the report went from “gone bankrupt,” which can mean something short of having to actually “file for bankruptcy,” which the way it’s put above.

By: flounder

flounder — Thu, 15 Jul 2010 03:05:16 +0000

I have to quibble with your tax explanation and whether it makes sense to make a bunch of money at once or less over a longer period.
Someone making $80,000/yr is going to pay 7.6% in payroll taxes (i.e. Social Security and Medicare). This federal tax is very regressive (it hits low income workers) because it stops at around $105,000/yr.
I make around $80,000/yr, and have paid anywhere from 16-24% over the past 4 years depending on deductions (I paid 24% the one year I was self employed because a self-employed person pays 15% in Social Security/Medicare on top of the rest of federal taxes).
Someone making $4 million a year is paying 0.2% in SS/Medicare taxes.
I bring this up because most tax comparisons of tax rates pretend that us regular folk don’t pay a sh*tload in SS/Medicare. For someone making $4 mil a year, their effective tax rates, assuming they hire a half-intelligent accountant, is going to be in the range of 20-25% (e.g. Warren Buffet claims to pay 18% and he is a billionaire).
Another thing to think about is how it is possible to live off capitol gains, which are taxed at 15%. There is a reason that everyone suggests that lottery winners take the lump sum, instead of the 20 year annuity (even though it pay more). If someone who makes $4 mill one year socks $2 million of that into the stock market and make 5% returns, which isn’t huge, they are making $100,000 a year.
And they still have time to sell insurance or whatever it is ex-footballers do for $80,000 a year.
There is another story in here about people who come into a lot of money and blow it on cars and parties and stupid things, but again…that is another story.

By: Not You

Not You — Wed, 14 Jul 2010 01:43:43 +0000

“Are football players overpaid?” is asking the wrong question.

If the question instead is: “Are ALL football players overpaid?”, the answer is, unquestionably, no. The average football player goes broke, and not always (not even usually) from excess… it’s because you’re a consumable. One severe injury, and most of them are done. Most of them just really want to play long enough to get on pension, so their health problems they WILL develop later in life will be guaranteed to be taken care of.

If, instead, the question asked is: “Are SOME football players overpaid?”, the answer is equally obvious, and the answer is absolutely. Mr. J. “Purple Drank” Russell, formerly of the Oakland Raiders, is good evidence. There are absolutely players who would play for less, and could live comfortably on far less. Some, like Pacman Jones, probably would have lived far BETTER if they had earned far less…

The trick then becomes, is there a happy medium? And, if so, where is it?