Cut, Cap and Profit!

Posted on October 4, 2011 by

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The following is a guest post from Imhotep Royster. Imhotep graduated from Harvard in 2008 with a degree in Economics. He is currently a graduate student at American University, studying Political Communication in order to learn how to make income inequality a meaningful political issue. Between college and grad school, he worked briefly first for the National Basketball Association and then as a proprietary trader. Follow him on twitter at @iaroyster

The dream for NBA owners in this CBA fight has long been the reality for America’s workers

Through their respective CBA proposals, both the NFL and NBA seek to remake their league economics in the image of the general American economy at large.

“This is about profitability. We’re going to make it profitable.”
— Commissioner David Stern, in a podcast with ESPN.com on Friday, August 12, while detailing a claim that the players’ union has said in private meetings with the league that teams should only break even financially in a new collective bargaining agreement.

This quote leaves open the question about how league owners are going to achieve their goal of profitability. At root, their answer can similarly be summed up in one word: redistribution. While it is true of both the NBA and NFL, the NBA specifically seeks to facilitate the upwards redistribution of income by literally taking money out of the players pockets in order to pad their own.

Through the CBA, the NBA is trying to emulate general American business. If the owner’s proposal was given a title, “Cut, Cap and Profit” would be a perfect fit. To run and grow a modern day American business means that an organization disconnects the link between worker pay and worker productivity, allowing management to capture all gains. The NBA, in their effort to roll back and cap total player salaries at $2B, is seeking to do exactly that. Decoupling player wages and total league revenues parallels the existing gap in worker pay and worker productivity in the economy at large.1

Since we are discussing professional athletes, disconnecting worker pay and worker productivity is applied differently. Here, the owner’s goal is to disconnect player pay from increases in demand, “demand” being defined as fan interest in the game. Fan interest in the game of basketball is the only thing that gives value to player talent.

With more fan interest, the Marginal Revenue Product of players increases, not because players improve as basketball players, but because additional fans increase marginal revenue, resulting in an increase in demand for the players labor.2 Ordinarily, when demand rises, so do wages. However, in an attempt to emulate a “legitimate American business,” owners seek to disconnect this link, causing increased demand not to result in increased wages, but only increased profits, captured entirely by owners.

Consider these facts comparing wage growth in the American economy at large and the owner’s efforts to remake the NBA economy in this image. Since 1980, the economy has grown substantially, but only the fraction at the top has benefited. Average income went from $30,941 in 1980 to $31,244 in 2008. In nearly 30 years, the average income of American workers has grown just $303.3 Though wages have stagnated, the productivity of the American worker continued to grow,4 resulting in record profits for America’s corporations and CEO’s. In line with flattened wages amidst exploding productivity, the ratio of CEO to average worker pay has gone from roughly 44:1 in 1980 to 411:1 in 2005,5 before the crash of 2008. The idea that every owner deserves at least $10M in profit per season,6 regardless of the stupidity of their decision making, rivals the ratio of CEO pay to average worker pay.

While the income of the average American has remained effectively repressed, NBA players have participated in the growth of the game of basketball. In 1985, the average NBA salary was $330,000. By 1995, the average NBA salary was $1.8M and by 2007, average salary reached $5.2M.7 In this context, the NBA’s efforts to hold total player salaries at $2B, an average of $5M per player with no room for growth for at least the next eight years,8 is nothing other than the NBA attempting to adopt the established practices of America’s corporations.

Consider these findings from a recent study out of Northeastern University, which examines the beneficiaries of recent growth in the economy.9 Over the six quarter period between the second quarter of 2009 and the fourth quarter of 2010, “corporate profits captured 88% of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1% of the growth in real national income.”1011 As the NBA continues to grow over the next decade, the league proposes that owners receive 100% of future revenue growth, while players receive 0%, unless certain growth targets are realized. And, the exclusion of players from the future growth of the league comes after they have had their salaries reduced by 8% in year one of the owners proposed CBA.

Let us acknowledge that even if the owners are able to push through a CBA that satisfies their every desire, NBA athletes will likely maintain their standing among “the best-paid union members in the world.”12 However, after 30 years of rising wages in the NBA, it seems that it is finally time for NBA athletes to join the rest of working America, as employees in a profession where their salaries will remain flat regardless of the economic value generated by their labor.

When David Stern and Adam Silver discussed the final NBPA proposal just prior to the lockout on July 1, their voices dripped in disgust as they noted that average player salaries would grow to $7M at the end of the NBPA’s six year proposal. As Stern noted on Bill Simmons podcast on August 12: “At some point, when the proposal is, in light of today’s economics, we want to go in six years from a five-million dollar average to a seven million dollar average salary, it really makes no sense. None. It doesn’t even begin to respond to the issues.” The NBPA’s proposal, though a $500M giveback, kept player salaries as a percentage of league revenues and assumed the continued growth of the NBA. As Stern says himself, “in light of today’s economics,” maintaining any sort of relationship between pay and productivity,13 or between player wages and total league revenues, is absurd from the NBA’s point of view. In today’s economy, worker wages do not rise under any circumstances.1415

How did we get to this point, just 12 years after basketball owners secured more control over player costs than in any other sport and enjoyed what was considered “a landmark victory” coming out of the 1999 NBA lockout?16 How is it that yet again, a “fundamental economic restructuring” is necessary coming off a historic season, where total league revenue exceeded $4 Billion for the first time, where the NBA delivered record television audiences for its network partners, experienced record merchandise sales and maintained attendance figures exceeded 90% of capacity?

Although NBA ownership claims that 22 out of 30 teams are losing money in a system that includes one tenth of the revenue sharing of Major League Baseball, this lockout is based not on any relevant economic realities, but on political realities. In today’s America, every political and economic dispute is resolved in favor of the moneyed few. From the much ballyhooed deficit reduction deal that was composed 100% of cuts to services and government agencies while asking nothing of our wealthiest citizens and corporations, to the anti-union and anti-worker legislation that has passed in states like Wisconsin, Ohio and Michigan, and at a time when income inequality in America is at its highest levels in history,17, 18 the United States is a country where in business and in politics, the very rich invariably get their way. This idea has finally reached the NBA, where the extremely wealthy individuals that populate NBA ownership have decided to use their muscle to change their financial relationship with players, in the image of the general American economy. It seems truer now than ever, as author William Rhoden notes in “Forty Million Dollar Slaves,” that “for all the wealth [that players] generate for the league in their comet-quick careers, [players] share will always be circumscribed — through bullying or forcible lockouts if necessary — by the dictates of the owners rather than by the widely praised American free-market system.”

Foot Notes

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Posted in: Basketball Stories, Imhotep Royster