Moneyball in the NBA

Chicago Booth economist Kevin Murphy is a certified MacArthur Foundation "genius grant" awardee and has a well-earned reputation as one of (if not the) smartest economists around.  Murphy is advising the NBA players association in their collective bargaining negotiations with the NBA owners.  Great interview with Murphy in this post on NBA.com, where he makes the following points:

1. I don't think it pays to try to pull the wool over the other side's eyes. When it comes to economic analysis, I try to be as honest as I can with the people on the other side.It doesn't do you any good to try to fool 'em. They're not dumb. You're not going to succeed and then they're not going to trust you.
2. The difference between being an NBA Finals team and being an also-ran is a couple of guys -- maybe one guy. It's only five guys and you can give the same guy the ball every time you come down if you want to.  
3. In a statistical sense, the level of payroll of a team explains somewhere like 5 percent to 10 percent in the variation in outcomes.
4. I would say the primary disagreement is not over the accounting numbers. It's what you include and how you interpret the numbers. For example, the accounting picture of the NBA isn't very different from what it was five years ago or 10 years ago in terms of ratio of revenues to costs and all the rest -- it's changed very little. Which immediately tells you, wait a minute, if the underlying financial picture is similar today to what it was five years ago or 10 years ago, and people are paying $400 million or whatever for franchises, and you're telling me that these things lose money every year, something's missing, right? These people aren't stupid, right? These guys are worth billions of dollars. So why did they pay all this money for franchises that, it looks like, lose money? Well, the answer is pretty clear. There are a couple of things that are really attractive. One is, historically, you've seen franchises appreciate in value and that appreciation has more than outstripped any cash-flow losses that you've had. And if you're in the right tax position, it's actually pretty good because you've got a tax loss annually on your operating and you've got a capital gain at the end that you accumulate untaxed until you sell it and then pay at a lower rate. So you get a deferred tax treatment on the gains and an immediate tax treatment on the losses, that's not a bad deal.
5. Ultimately what it comes down to is, you get what you can negotiate. It's not what you deserve, what's "right," that ends up carrying the day. But then they ought to be straight up. They ought to say, "We've got the ability to negotiate. We'll hold your feet to the fire and get what we can."The one thing I don't want to see happen: I don't want to see any lingering bad blood between the two sides. That's not good either. You run the risk that, if it gets too personal, that creates its own set of frictions going forward. I think people on both sides are cognizant of that.
   
    

How to do a trade deal

The 10/24 issue of Business Week has a great article on the behind the scenes negotiating on the Colombia, South Korea and Panama trade deals that were recently approved.  As much as we emphasize the role of tariffs and quotas as trade barriers, it turns out that a country truly committed to keeping out imports can do so through other ways, such as South Korea's constantly changing safety and fuel economy standards. 

The best story is about how U.S. sugar producers took pains to make sure imported sugar was not included in exports: 

In the end, the negotiators devised a compromise: At least 65 percent of the sugar in products containing cocoa powder must be from U.S. growers to be considered American-made. Otherwise tariffs will apply, which could make the product prohibitively expensive. But no such restrictions apply on sugar that’s used to make candy bars. In other words, a packet of instant hot chocolate that contains 64 percent U.S.-grown sugar is not considered American under the deal. But a chocolate bar made with 100 percent foreign sugar is.

Literally thousands of such details in each agreement.  Not much value being created, is there?

Happy days are here again?

Well maybe we should not put the champagne on ice quite yet, but there were two very good bits of news today.  One day after being unable to agree to meet for a pre-summit summit, the European Union has come up with a plan to (hopefully) deal with the sovereign debt crisis.   Greek bond holders are going to take a 50% hit, European banks will need to raise new capital, and there is now a bigger fund to try to stop the Greek crisis from spreading to other countries.  We will need at least 48 hours to digest all of the details of this deal, but at least they came up with something. 

The other good bit of news is the third quarter GDP report which showed a decent 2.5 percent growth rate.  Given all of the fears of a double dip recession, this is about the best we could hope for.  Consumer spending and business investment both picked up. 

The stock market celebrated with a 3 percent increase.  Let's hope it sticks

Trouble for mid-range b-schools?

So says the British newsweekly The Economist in an article accompanying their latest global top 100 MBA rankings.  Application volume is down at US schools, especially for schools with competitive admissions outside the top 15.  The Economist reports that tuition at these midrange schools averages $82k whereas starting salaries average $81k.  The top 15 charge more ($92k) but their graduates make enough extra ($111k) to produce a more favorable ROI.  The article suggests that non-elite schools have two options for survival: make the programs shorter (one-year MBAs are quite common in Europe) or move away from the general management MBA. 

At NC State's Jenkins MBA, the ROI picture is more attractive than at many other mid-range US schools.  In-state tuition is $33k and out-of-state tuition is $58k, but a large share of students receive graduate assistantships with full tuition and others receive partial tuition scholarships.  Starting salaries have averaged in the mid-$70s the last three years, a bit lower than at other mid-range schools (but most of our students stay in the Southeast, whereas many students at other schools end up working in states with higher housing costs and taxes).  The placement rate three months after graduation this year was 86%, above many of the schools in the Economist's ranking. 

The Jenkins MBA has long emphasized the management of technology and innovation; we have never offered a general management option.  Perhaps that is why we are more than holding our own. 

Two leading economists weigh in on housing

The drop in home equity values continues to be a major drag on consumer spending.  Also, as more and more homes go into foreclosure, there appears to be no end in sight.  Last week two leading economists from opposite ends of the political spectrum published op-ed columns suggesting some outside the box thinking. 

Marty Feldstein headed the Council of Economic Advisors under Reagan.  In an NYT op-ed, he offers up a plan where the government would write down mortgage principal when it exceeds 110 percent of the home's value.  The government and the holder of the mortgage would split the costs of the writedown.  The homeowner would face the loss of other assets (cars, bank accounts) if there was a subsequent default.  This would be a wash for the government because it already is on the hook for the loans via Fannie and Freddie.  The mortgage holder trades off a loss in return for greater odds of repayment.  All of this would be voluntary. 

Alan Blinder served on the CEA and the Federal Reserve Board under President Clinton.  In his WSJ op-ed he also argues that a program for mortgage writedowns needs to be developed.  He also thinks that steps should be taken to make it easier for homeowners to refinance and that incentives be given to turn vacated houses into rental units.  The politics would be messy because so many oppose bailing out individuals who took on too much debt.  Feldstein, as strong a believer in free markets as one is likely to see, thinks that something needs to be done. 

But failure to act means that further declines in home prices will continue, preventing the rise in consumer spending needed for recovery. As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession.

Is employer uncertainty causing high unemployment?

The economy is stuck at 9% unemployment and corporations are sitting on unprecedented amounts of cash.  So, why aren't companies hiring more?  The business press is full of anecdotes where corporate officials basically say something like "there is too much uncertainty, we are reluctant to hire."

I always have had trouble with this sort of argument because there is lots of uncertainty all of the time.  Steve Jobs did not know how the iPod would turn out, but Apple introduced it anyway.  Successful businesses find a way to connect with their customers and that translates into jobs. 

A recent study by Chicago Booth economist Steve Davis (along with two colleagues at Stanford) attempts to quantify the amount of uncertainty about economic policy since 1985.  According to Bloomsberg Business Week, they constructed an index based on newspaper articles mentioning uncertainty, tax code provisions scheduled to expire, and disagreement among forecasters about inflation and government spending.  The index shows cyclical peaks around wartime, elections, and the crash of Lehman Brothers -- all instances where one would logically expect lots of uncertainty.  But here's the kicker -- the index hit its all time high last summer during the debt ceiling dispute. 

This alone does not prove that uncertainty is causing a slowdown in hiring; more econometric work will need to be done to establish that link.  Also other economists will no doubt introduce their own uncertainty indices soon.  My take: I am taking the uncertainty argument a lot more serious now that I have seen some data.

Nobel prizes in economics

Kudos to Thomas Sargent of NYU and Chris Sims of Princeton for receiving the Nobel Award in Economics, announced on Monday.  (Click for NYT and WSJ stories.) Both were Harvard PhDs but made their reputations at the University of Minnesota.  Sargent did important theoretical and empirical work on what came to be known as the "rational expectations" theory of how the economy would respond to monetary and fiscal policy.  Sims is well known for developing a technique called vector autoregression that can be used to identify shocks to the economy and the response to those shocks.  Sargent and Sims will split a richly deserved $1.5m award.  Sims said he intended to keep his in cash for awhile. 

MBA combo platters

WSJ reports how more MBA students are combining their business courses with graduate program in another discipline.  Many schools, including NC State, allow students taking a Master of Science degree to use MBA courses as electives and vice versa.  This allows students to earn two degrees which would normally require two years apiece within a span of three years.  The article cites a number of interesting examples, including an MBA-MFA at NYU and an MBA-M.S. in environmental studies at Michigan.  NC State offers MBA dual degree opportunities in biotechnology, biomanufacturing, law (with Campbell Law School), accounting, industrial engineering, global innovation management, and veterinary medicine (doctoral). 

Externalities

Great post by my NC State colleague Richard Warr on energy economics.   Key point: although federal subsidies for wind, solar and other nontraditional forms of energy are well known, the popular press and the average person tends to forget how much carbon-based fuels are supported by federal policies.  Warr emphasizes the fact that carbon-based fuels impose significant amounts of pollution on the rest of society, costs that are not reflected in the price at the pump.  Other subsidies include government-build and maintained roads and highways (sorry, gasoline taxes do not fully pay the bill here) and military actions in the Middle East.  And guess what?  We cover externalities tomorrow night in MBA 505.  

Want a deal on a Greek bond?

The consensus in the economics and finance community is that Greece will at some point have to default on some of its bonds, the only questions being when and how much.  Not so fast, says an NYT story earlier this week.  It turns out that hedge funds are buying large amounts of Greek bonds that days ago were trading at 36 cents per euro of face value.  The anticipated bailout deal will lengthen maturities that will be worth almost twice as much.  About 30 percent of the bonds that are involved in the deal were acquired since July 21, presumably by people who were well aware of the riskiness of the investment.