Should the people in charge of sports leagues also be running our economies?
By: Anonymous Advisor
Tags: NFL, Socialism, NBA, Sports, MLB

They say that Sports are a microcosm of society. As for who this “they” is, it’s anyone’s guess; however, the statement does ring true that no matter which professional league you follow it does reflect some part of the outside world. It’s probably why we’re drawn to them in the first place; right from the Roman gladiatorial events which were literally life and death in a time when life itself was much cheaper; right through to the modern NFL which reflects our current tolerance for violence.

Now, this isn’t another “Is the NFL too violent?” think pieces. It may or may not be, but that dead horse has been beaten thoroughly.

First and foremost, let’s agree that the big three leagues (NFL, NBA and MLB) are in the best shape they’ve ever been or better. The valuations on these sports franchises have shot through the roof no matter which league you look at, and we literally have owners that have become billionaires simply through their investment in these teams (read: Buss family-Lakers). Even becoming an owner has now turned into an arduous process, where the opportunities are few and far between. Just ask Chris Hansen (the billionaire, not the guy who has pedophiles take a seat and wait for the cops) how bringing an NBA team to Seattle is going, and they already had a team less than 15 years ago.

So, has it been a worthwhile investment to own a sports team? Unequivocally, Yes.

The other NBA team in Los Angeles, the Clippers, which were and still are the JV squad to the Lakers (sorry Kawhi) were purchased in 1982, by local real estate developer named Donald Sterling for $12,500,000. The team was sold in 2014 to Billionaire Steve Ballmer for $2,100,000,000 because the former owner, Sterling, was openly racist and rightly forced out by the NBA. In any case, you don’t have to be a math whiz to see that the second figure has more zeroes. And also, local real estate developers don’t get to play in this sandbox anymore, as this is now the exclusive domain of guys like Ballmer with that many zeroes in their bank accounts. The return on investment for Sterling ended up being more than a bit above inflation (approx. 17.5% compound annual growth rate) and in fact outpaced the S&P 500 by about 33% over the length of his ownership. What is crazy for the uninitiated NBA fan is that Sterling, even before his racism was exposed, was inarguably the worst/cheapest owner in professional sports. Let’s just say owning a team has been good business, even in smaller markets like Milwaukee and also weaker leagues like the NHL. The pattern repeats even if it’s to a lesser degree.

But why?

I had always thought of the people who buy sports franchises in the same way as those who buy brand-new high-end luxury cars; people with money to burn who don’t care about the associated loss. So, when did this turn into a savvier move than throwing your millions at a Hedge Fund manager?

In a way it’s counter-intuitive that these teams would have these skyrocketing values in an era where the attention span of the average consumer is shrinking, Millennials are cutting their cords and there seems to be less disposable income in the average household to spend $800 to take the family to a game. Yet, in the NBA it’s harder to get a ticket than ever, Covid aside; and even in Major League Baseball where attendance/viewership is down the revenues are nevertheless up.

Again, it could just be that owning a team is an ego trip and that billionaires have the egos and the financial wherewithal to play in this space; a space that is very limited, evidenced by the wait list/vetting process to get in on the action. Maybe it’s simple old supply and demand since we have more billionaires today than ever before.

But rich people didn’t get that way by owning things that hemorrhage money.

The people who bought these teams in the 70’s and 80’s weren’t exactly buying a sure thing. Many of the leagues back then, were either trudging along (NFL), struggling (NHL) or effectively on the cusp of failure due to dwindling attendance and a shaky landscape in terms of television rights (NBA).

However, over the course of time the leaders of these various leagues implemented or were forced to concede certain measures which ended up strengthening their respective leagues. The most glaring example was with Major League Baseball (MLB) where players fought for and won the right to change teams in 1975, colloquially known as “Free Agency”. The NBA also had free agency foisted upon it the following year when it settled a lawsuit with star player Oscar Robertson. This concept of a player being able to choose the team with which to sign a contract now exists in various forms in all of the big four leagues today, and is fundamental to their current economic rules.

The most important of these rules, which was fought for by the owners in reaction to the players’ right to move freely, is the salary cap. This exists in all but Baseball where there is a “luxury tax” system whereby high-spending “rich” teams are forced to pay an escalating tax that becomes progressively more onerous based on the number of years they spend above a pre-determined threshold. The NBA, for example, has a hybrid system that employs a soft salary cap with a graduated luxury tax system that penalizes teams that remain above that threshold progressively worse based on time and money spent. The main purpose of both the salary cap and the luxury tax is to limit player salaries and even the so-called playing field.

What’s strange is that both of these systems reek of socialism. If you removed the sports context, some readers might’ve thought we were talking about “Mother Russia’, or at least Sweden. Yet, these systems are employed by Billionaires, as noted, to great success which has been a win for all involved (just look at player salaries/guarantees).

The cap system limits what players can earn (in the NBA there is also a fixed maximum for the absolute best of the best), and effectively redistributes the sport related income to the lower- and middle-class players of that league. It’s the same thing in Baseball, where the luxury tax is complimented by a revenue sharing system whereby the teams that make the most money because they are well run or more likely in a desirable media market simply send money to other teams. The New York Yankees effectively pay money that they’ve earned so that Tampa Bay can have a team.

Does the league really need Tampa Bay to have a team (the Rays), if the people there don’t go to games or watch on TV enough so that the team can turn a profit? The short answer is obviously yes. The Yankees need teams to play and the league needs competition otherwise no one will be interested and even the money-printing Dodgers will go extinct. Incidentally, those Dodgers beat the Rays in a Covid-subdued World Series this year, so a “taker” team can succeed every once in a while.

The relationship is symbiotic, which is a lot like society writ large. A wealthy family may want a nanny for their kids, a gardener to tend to the beautiful landscaping and people to hire for various other endeavors, so on some level they agree to give away some of the money they rightfully earned so that that the whole thing works via income taxes. Those people working for them, both directly and indirectly, like the folks at the supermarket or other service industries need to make a living via a minimum wage and have access to public schools, etc. These people are the Tampa Bay Rays, and just like the Rays, they may be takers most of the time, but every once in a while, they break through.

Taking it back to sports, not only are their limits to what the best can earn, but if you can believe it there are also league minimums that must be paid to a player on a roster. There are league specific reasons for doing this, but it really boils down to concessions fought for by unions and accepted by the various leagues. The same principle applies, in that you need players of all talent levels to create competition and maintain interest in the league.

The societal corollary is minimum wage, but we don’t have a league. Maybe, we don’t truly care (economically) if anyone is paying attention to the guy flipping burgers and whether he’s doing it for $15.00/hour or 15 cents. In fact, most of us really care about the person who started that burger joint in the first place because they’re a “job creator” who took the real risk with their hard-earned money to start that business. If they need to pay someone pennies to make it profitable, then so be it. But then who buys the burgers. It’s not a novel concept. Noted opponent of all things socialist, Henry Ford, came up with the concept of paying people enough to afford the products they produce.

The ultimate irony, as we all grapple with income inequality and what solutions might exist, is that some of the greatest capitalists of our time have effectively presented us all with their somewhat socialist solution.