Friday, August 26, 2011

NBA Is Rick Perry's Worst Nightmare

Economist Tyler Cowen warned us recently that labor productivity in the US has stagnated in the past few years, presaging an inevitable slowdown in our standards of living. When we can produce the same amount of stuff with fewer resources, we grow wealthier, and everyone can afford more stuff. When the productivity of a typical worker stays flat, we don't grow.

The NBA is fond of boasting its year-on-year growth, but this is growth in nominal revenues: the league is pulling in more dollars every year. For the most part, the league is not expanding its product: arenas are no larger, the number of teams is no greater, and games are no more frequent.

The NBA produces exactly the same product, in amount and character, every year. Since the league expanded to 30 teams in 1995, it produces 1,230 regular season games every year, plus four rounds of best-of-seven playoffs. (The change in 2003 from a best-of-five format to a best-of-seven format for the playoffs' first round has added, perhaps, three or four extra games to the playoff slate per spring. First-round series rarely go beyond five games.) Serious fans would likely object to a lengthening of the season, arguing that it makes historical comparisons, and the existence of "career records" by players, inapposite.

What would it mean, anyway, for productivity in the NBA to grow? How could one player give us more basketball goodness? Perhaps it might mean switching to 4-on-4 or 3-on-3 basketball, permitting more games with the existing stock of players. But then, of course, the game would not be the same: with more cavernous space on the floor, we would see less passing, less help defense, and more Allen Iversons. Another possibility for increased productivity in the NBA might be to carry fewer men on the roster: perhaps each team could employ only 10 players, say. Injuries could quickly sap a team's depth, though, reducing the quality of play, so again, the product would not be the same. It is true that defensive schemes and training methods have grown more sophisticated with time, so perhaps the quality of play is better than 20 or 30 years ago. But most casual fans are unable to appreciate the difference between a man zone versus a box-and-one.

Arguably, the increased popularity of the league in China and other developing countries could be seen as growth: with a nonrivalrous product, bringing televised images of the NBA to more eyeballs is easy and also better for global happiness. Slowly, the NBA's money and co-promotional efforts have begun to stimulate high-level professional basketball leagues in China and other countries. But the NBA's core business is the same as it always was.

Under the 2005-2011 collective bargaining agreement [see Article VII, Section 5(c)], contracted player salaries may grow by up to 10.5% per year. And the NBA's salary cap and average player salaries keep on growing. Corporate sponsorships, TV rights fees, ticket prices, jersey prices, and every other dollar amount associated with the NBA keep going up. Yet, again, there are no more teams and no more games. Productivity per worker is unchanged.

What we have in the NBA, and in other major sports leagues, is pure inflation, rivaling the ruinous inflation seen recently in residential real estate, health care, or university education in the US. Some universities have expanded their distance learning or evening programs, but for the most part, universities are not educating more students; they are actually hiring more faculty to reduce student-teacher ratios. Productivity has dropped and the price of a degree has spiked.

Contrast this to the performance of, say, Chipotle Mexican Grill, a favorite of this blogger. Chipotle is wrapping more burritos today than in 2010, or 2005, but has barely touched its per-burrito prices. Chipotle's physical expansion has, in some cases, taken over the retail footprint of other stores that failed or didn't want to pay the rent anymore.

NBA inflation is the fault of every fan who agrees to pay ticket prices that escalate with each new season. With inflation in the real world hovering around 2% annually, the real price of attendance has jumped greatly over the past ten years. However, fans seem to be wising up in this terrible economy, as ticket prices dropped 2.5% for the 2010-11 season after falling 2.8% in 2009-10.

Under the previous CBA regime of 2005-2011, the maximum annual salary raise, as discussed above, was 10.5%. If superstars make 10.5% annual raises and scrubs earn a constant nominal salary each year, then, if the aggregate league-wide salary sum comes in over the targeted percentage of "basketball-related income" due to falling ticket prices, every player will see his salary adjusted down by an equal proportion-- which could mean that the scrub receives a nominal drop in pay. Middle-class players should be thinking very carefully about how much maximum annual salary increase they want to build in to the next labor agreement.

Meanwhile, the league, and particularly the players, must look for ways to legitimately expand the NBA's product to justify its relentless push for salaries growing faster than CPI inflation. Whether summer streetball tournaments, a robust minor league, youth training academies, lecture series by Ray Allen, or perhaps Italian lessons from Kobe Bryant, NBA players must look for ways to grow their productivity.

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