Monday, May 04, 2009

The worst idea I've heard in ages. "Let's kick back money to the rich, scurrilous, labor-exploiting monopoly as a matter of 'fairness'."

I've heard a lot of bad ideas over the years, but this one goes right to the top of my short list.

Recall that the NCAA is a strong candidate for worst monopoly in America ... How its coaches and administrators receive multi-million dollar salaries and are increasingly often bid away from professional leagues ... And how they earn these riches from the labor of "amateur student athletes" who not only are unpaid, but are subject to all kinds of indentured servitude-type restrictions that apply to no other students: they can't take jobs, can't accept gifts, can't transfer to another school as other students can ... and on and on.

Well, over the weekend I was for the first time reading the Wall Street Journal's new sports pages, and spit my coffee reading an argument from one Allen Barra that professional sports leagues should actually reimburse NCAA college sports programs for the cost of developing players!
There are many reasons for the rise of the NFL and NBA over the past half-century, but one of the most important is seldom discussed: They don't pay for the development of their players ...
It's true. The NFL and NBA don't have minor leagues as Major League Baseball and the National Hockey League do. They draft their players right out of college, after they play on college teams. My gosh, the NFL and NBA are free riding on colleges! Exploiting the American higher education system. How awful!
between 70% and 75% of athletic departments lose money. Murray Sperber [an 'expert'] believes the number is higher than that. "Almost all athletic departments lose money if they do their books honestly."
Well, "70%" to "almost all" is totally irrelevant. Of the several hundred colleges with athletic departments, almost all NFL and NBA players come out of maybe 50, with the great bulk of them coming from maybe 25. If you think THOSE athletic departments lose money, well...

That must be why the University of Kentucky just gave John Calipari a $31.65 million dollar contract (plus considerable perks) to coach its basketball team -- because it loses money...

And why the University of Arkansas and University of Alabama just lured coaches Bobby Petrino (with $14 million) and Nick Saban (with $32 million!) into breaking their contracts with the NFL's Atlanta Falcons and Miami Dolphins, respectively, to coach their football teams -- because they are amateur programs ...

And why the University of Texas right now is adding $179 million of improvements to its 98,000 seat football stadium -- to lose more money on it ...

And the NCAA's $6 billion college basketball TV contract, which must cover the cost of a sport in which 10 guys basically run around in their underwear -- that must lose money.

Tell us another one, Allen!

But, hey, if these programs really all lose money, maybe the likes of Calipari, Petrino, Saban et. al. can kick back some of their salaries for the good of higher education? Or maybe their Athletic Directors (with their own million-dollar salaries) -- who make such money-losing hiring and stadium-building decisions -- should be fired like Wall Street bankers for throwing so much money away?
the total estimated cost for a full scholarship at a public school for four years (including tuition, room and board and books) is approximately $65,000. At a private school, it's around $140,000.

In other words, based on the approximately 361 athletes who will be drafted by professional leagues in 2009 it can be reasonably estimated that the total cost of putting those students through four years of college at the schools that produce most of the professional athletes is around $26 million.
This is a total crock, in more ways than one. In fact, let me count five of them:

[Or not. From here this turns into something of a long-winded rant. If the point has been made and you don't want to endure a rant, move on and have a pleasant day. If you want more ... you've been warned.]

1) The actual marginal cost to a college or university with thousands of students on campus, of bringing in one more, approaches zero, $0. It's the same for bringing in three or four students a year for a college basketball team. And also for any number of spots that don't go to other students so they can go to revenue generating "amatuer student athletes" instead, without increasing the student population at all.

The classroom buildings, dorms and libraries have already been built, the professors already hired. Bringing in a few new students, or subsituting one group of students for another, adds nothing to these expenses. And obviously, bringing in students who generate revenue or favorable publicity for the college, in the place of students who don't, benefits the college. That's why colleges do it.

2) Barra somehow neglects to mention that the NFL and NBA already amply pay college programs for their assistance in developing players, by engaging in anti-competive labor practices that block "student athletes" -- and for that matter anyone else -- from earning a living by playing pro ball before ages specified in the pro leagues' respective union contracts.

The result is that "amateur student athletes" who generate revenue by playing their game -- in some cases millions of dollars worth -- are barred from doing so in the pro leagues and being fairly compensated for it. They are instead forced to generate the revenue for college teams while getting no compensation for it ... except the risk of a career ending injury.

Half of all American don't go to college at all, and any who don't want to shouldn't. But if you want to be a pro football or basketball player you must, even if you have no scholastic aptitude at all, because that's the only way to get into the "development system".

This indeed saves the NFL and NBA team owners the cost of running minor leagues. But this arrangement (and the closely related NFL and NBA player drafts) would be a blatantly illegal anti-trust violation but for the cooperation of the leagues' players unions in writing it into their contracts.

Union contracts trump anti-trust law. And the unions do it because their senior members, who run the unions, get more for themselves by stiffing younger players, including potential college age competitors for their jobs.

Say you are an extremely talented athelete, with no aptitude for education at all, and that you want to play pro sports and are good enough to do it. If your sport is baseball, hockey or soccer, no problem. But if your sport is football, your name might be Maurice Clarett, and you'll find yourself locked out of everywhere. Perhaps then you'll sue -- isn't it unfair that others can agree to deprive you of the right to work? And the court will tell you: Unfair, yes, but too bad, you are still locked out...
"That's what unions do, they protect people in the union from people not in the union," said Judge Sonia Sotomayor ... That, she said, was the essence of labor law. "It might not be nice," she said. "But it's not illegal." -- NY Times.
The law says: "Go make money for some college until your period of servitude is over". No, that's not nice. But the idea that colleges are losing money from this arrangement, and so "deserve" yet further kickbacks from the pros, is risible.

You can mark the NFL's and NBA's debt to the college athletic departments for developing talent on their behalf "paid in full and then some" -- not ethically perhaps, but paid nonetheless.

3) Even if the pro leagues benefit from colleges' investments in players just as Barra imagines, so what? Isn't it exactly the job of colleges to develop the ability of talented young people so the can contribute productively to future employers?

When scholarship students in other departments (Business, English, Physics, whatever) go on to make valuable contributions to private businesses, do we say, "Those businesses are profiteering from the college's losses incurred in developing those students. So the businesses should be required to kick back some of their profits to that English Department"?

4) Even as Barra calculates it, that "$26 million", when spread over the budgets of the 50 or so athletic departments that produce almost all NFL and NBA players, amounts to little more than a rounding error. Nick Saban's contract alone is $32 million. He's just one guy.

So as noxious as Barra's proposal is in principle, in practice the whole thing amounts to nothing as a remedy for anything.

And now I'll close this rant with the rantiest part, about the issue that gets most under my skin. It has the least to do with the NCAA but the most to do with the cost of college education to everyone, which is why it gets the most under my skin. So I suggest that if you've already read enough, you stop now. You've been warned ...

5) Huge numbers like "$140,000" and "$65,000" thrown around as "the cost to a college or university of a full scholarship" are a bunch of marketing hooey, bogosties thrown about to cover the colleges' aggressive, revenue-maximizing price discrimination.

It works like this: If you set one price for a product for all buyers, there will be a lot of buyers who purchase it at that price who would have been willing to pay more, but didn't need to. You didn't get all from them that you could have.

If you're the seller, you want to get those people to pay more. You identify them, and discriminate among your different customers by finding ways to set for each customer a different price, the most he will pay. Price discrimination!

Retailers do this by selling "premium" versions of products at little extra cost to themselves. For instance, putting a hard cover on a book adds only pennies of cost to the publisher, but adds dollars to the price received from buyers who really want it when the hardcover edition comes out. Later the softcover edition comes out at a lower price for readers who don't want it quite so much.

The world's second-best price discriminators are airlines. They have extensive computer data bases informing them that for the same ticket the business traveler flying on short notice who really needs that seat will pay $X,XXX, while the business traveler booking a week in advance will pay $XXX, and the bargain-seeking retiree tourist who has a choice of 40 different flights will pay $29.

But the world's first-best, most thorough and aggressive price discriminators are US college admissions departments. When applying to one you fill out your FASFA form to reveal in detail your family's toal income, savings, the value of your home, and so on, everything you've got. Then the college admission officers look at it and you, decides how much they want you, weigh that against how much they can expect your family to be willing to pay, and quote you the price they are willing to give you. (If only all businesses could do that!)

 But the one problem with price disrimination is that consumers hate it. "Yes, we are charging you twice as much as that other person for the exact same thing, but you have more money to give us", generally does not go down well!

So sellers who practice price discrimination always whip up some marketing ploy to disquise it. The business flyer is not charged more because he'll pay it -- he gets the "regular" fare. Instead, the retiree tourist gets "the special, book in advance, senior citizen discount!"

And that's where "the $140,000 cost of a college sholarship" comes in. A college sets an arbitrarily high "regular" tuition, the most anyone will pay, say $35,000 per year. Then it reviews your FASFA form and decides how much you will be willing to pay, say $20,000. Then it takes the difference, calls it "financial aid", and acts as if it is giving you that amount! You are costing it $15,000 a year! Which cost it bears due to the kindness of its heart. Of course you gratefully say "thank you" for its generosity.

But you only feel so grateful because of the image that colleges so successfully cultivate for themselves as being "non-profits" disinterestedly bewstowing education upon the community as a cultural good. In any other circumstance the exact same thing would leave you not so pleased.

Imagine going out to buy a $15,000 car, say a Honda Civic. To your surprise the Honda dealer tells you, "The Civic now costs $40,000. However, if you bring in your tax return and personal financial statement (a FAFSA form will do) I'll see what kind of special discount we can offer you."

You do, he looks at the forms and says, "Good news! We can sell you a Civic for only $28,000." "But that guy just drove off in one for only $17,000??!!" "Well, you have more income and savings, so we know you can pay more." "Ha, I'm out of here." "Hey, ingrate, we are giving you $12,000 in financial aid!" "Keep it. I'm going across the street to the Ford dealer to buy a Focus". "Good luck, they cost $40,000 too"...

There's nothing wrong with price discrimination per se, in a competitive market it can be economically beneficial. Airlines are ferociously competitive, the last-minute business flyer can go online and get six competing price bids for his ticket in a few minutes, driving the ticket price to the most efficient level. But price discrimination combined with monopolistic price setting is the bloodsuckingest way to extract exessive payments from consumers.

The first Bush Administration brought an anti-trust suit against the Ivy League universities and a number of others (57 altogether) for blatantly doing just that -- jointly deciding the tuition and financial aid offers they would all make to the same students. They defended themselves not by denying that they did it, but by protesting in op-eds and on talk shows everywhere: "But we are non-profit! We are schools. How could we exploit anyone? Who's more benign than a non-profit school? We are only eliminating competition on the basis of money to free students to choose among us on the basis of quality!"

Newspaper editorials across America bought that argument, but the courts didn't -- the universities lost. Remember: Non-profits have profits just like anyone else, the only difference is that their profits aren't taxed.

Alas, the universities appealed, of course, and the Clinton Administration took office while the appeal was pending. It promptly settled the case on terms that were all the universities could have hoped for. But they wanted even more, and successfully lobbied the new Democratic Congress for a new law establishing their right "coordinate" (say "collude") in making financial aid decisions that maybe left them even better off than before.

OK, this is wandering rather far from the NCAA -- although for parents who are saving to send their chidlren to college, it all may be something to think about.

The bottom line for both them and NCAA athletes is this: a full scholarship actually costs a college nothing like "$140,000" or "65,000" -- not for an "amateur student athlete" or anyone else. That's just the amount they college will charge you to go there, if they think you'll pay it.

Don't let anyone fool you about that, they way they fooled Barra.