Political Entrepreneurs

The Economic Engine of Political Change

Reforming the NCAA on Player Compensation

January 7th, 2013 by Edward Lopez

Tonight — at last — Notre Dame and Alabama take the field to decide this year’s college football champion. An estimated 36 million viewers will tune in, and both schools will receive paychecks of $18 million. The winning team promises to have its assistant coaches descended upon with lucrative job offers. Alabama’s Nick Saban is already college football’s highest paid coach, at an annual salary of $5.5 million. And Notre Dame’s head coach, Brian Kelly, is already fending off rumors that he will skip to the NFL head coaching ranks — either way, his current $2.6 million salary is likely to increase. In short, there is a lot at stake besides trophy hardware tonight — there is cold hard cash at stake, too.

But not for the players. According to NCAA bylaws, student-athletes are barred from receiving any form of compensation, monetary or in-kind, aside from the benefits provided to them by their schools. Student-athletes are disallowed from receiving gifts or taking unauthorized employment while they are on scholarship. The rules get routinely bent — partially because they are complex — and scandals have erupted in recent years. In response, a large number of compliance officers at each school and within the NCAA has been enlisted to continually monitor and scrutinize athletes’ daily lives, all to enforce these tight restrictions on outside economic gain. While broadcast networks, corporate sponsors, coaches, athletic departments, and administrators all are free to gain economically, the people who take the field are not. As one cynical email correspondent summed it up, “the NCAA is the perfect business model — it’s a multi-billion dollar operation that doesn’t have to pay its labor.”

The United States being an open society with freedom of expression, it is no surprise that this topic has attracted the attention of the intellectual class. There are many proposals for reform, and the balance of the debate focuses attention on paying players some form of stipend. As the framework in Madmen would predict, the idea of compensating players has been met with two forms of resistance: first, the interests that economically gain from status quo rules; and second, widespread beliefs about whether and how student athletes should be compensated. Head coaches, for example, have been openly critical of outside suitors looking to compensate their players (last year, Nick Saban called zealous pro agents pimps and predators). So has the group of university presidents, which make up the NCAA. More broadly, almost half of Americans polled by Gallup say they are fans of college football, and it seems they all have strong opinions on whether players are being treated fairly and what to do about it.

One problem with the idea of paying student athletes is that it does not appear to be economically feasible under the current arrangements. That’s because so much of the revenue that college football generates is captured by various groups (head coaches, construction companies that build and maintain fancy facilities, etc.). Costs are very high, too, in part because of “arms races” to build stadiums, dorms, and other facilities to attract unpaid talent. Football is well known to be an extremely expensive sport, in part because so many bodies and so much equipment must be transported on every road trip. This distinguishes football from other sports like basketball (the only other sport that brings some schools profits), which has virtually no equipment and about one-fifth the traveling personnel per team. This explains why so many premier and average college basketball teams get to travel to exotic locales for preseason tournaments despite woeful fan attendance.

Now, it is important to recognize that student athletes are currently compensated in a variety of non-pecuniary ways, including scholarships that waive the major dollar expenses of attending college (namely tuition, fees, textbooks, and housing). However, these costs are not typically borne by universities because they can be shifted onto non-athlete students (who pay higher tuition and fees), boosters (who fund scholarships), and taxpayers in the cases of publicly-assisted universities. I would not claim that the shifting is dollar-for-dollar in proportion, but it certainly is not zero and it plausibly is a vast majority. Another form of compensation that top athletes receive is marketing exposure for their brand, on which they can draw once they go pro. Baylor University spent a good deal of money promoting Robert Griffin III, who won the 2011 Heisman Trophy, and upon graduating instantly landed major endorsements including Subway, EA Sports, and Adidas.

But marketing, too, is a two-way street. Universities benefit when their players attract a lot of public attention. This tension is playing out in a lawsuit by former student athletes against the NCAA for failing to compensate players when using their names, images, and likenesses in promotional materials. Historically, these sorts of lawsuits have been effective at getting the NCAA to reform its economic rules. Even so, the athletes affected by endorsement and marketing is a tiny fraction of elite players with mass brand appeal. The largest number of athletes still is prevented from gaining in any way from their talents and hard work.

While direct payment from schools to athletes may be uneconomical and unpopular, it’s quite feasible to allow players to profit from their talents and hard work outside of direct payment from their schools. Let them take any job offered to them? Let them sign endorsements while still in school? Let a booster buy them lunch? Status quo interests are currently hard at work to prevent any of this from happening. For now, anyway.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.189, ch.7)

The most successful entrepreneurs know what they do well, they know the market and the opportunities within it, and they choose those activities that create the most value. This is true in economic as well as political markets.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.178, ch.7)

[W]hen the right elements come together at the right time and place and overwhelm the status quo, it is because special people make it happen. We call them political entrepreneurs.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.176. ch.7)

While we started this book with Danny Biasone saving basketball, we end it with Norman Borlaug saving a billion lives. These stories are not that different. Both faced vested interests, which were reinforced by popular beliefs that things should be a certain way—that is, until a better idea came along.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.174, ch.6)

Because there was a general belief that homeownership was a good thing, politicians found the public with open arms.... Everybody was winning—except Alfred Marshall, whose supply and demand curves were difficult to see through the haze of excitement at the time, and except Friedrich Hayek, whose competition as a discovery procedure was befuddled... In short, once politicians started getting credit for homeownership rates, the housing market was doomed.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.166, ch.6)

Everyone responded rationally to the incentives before them. In short, the rules that guided homeownership changed over time, which in turn changed the incentives of these actors. And bad things happened.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.153, ch.6)

They understood the economics. The ideas had already won in ... the regulatory agency itself. All that remained to be overcome were some vested interests and a handful of madmen in authority.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.146, ch.6)

If the idea for auctions of spectrum use rights had been part of the public debate since at least 1959, why didn’t the relevant institutions change sooner? What interests stood in the way?

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.121, ch.5)

When an academic scribbler comes up with a new idea, it has to resonate well with widely shared beliefs, which in turn must overcome the vested interests at the table. Many forces come together to explain political change, even though it may seem like coincidence of time and place.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.120, ch.5)

It’s the rules of the political game that deserve our focus, not politicians’ personalities or party affiliations.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.119, ch.5)

In short, ideas are a type of higher-order capital in society. Like a society that is poor in capital and therefore produces little consumer value, a society that is poor in ideas and institutions will have bad incentives and therefore few of the desirable outcomes that people want.

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