Monday, November 24, 2014

Jeremy Lin and the Political Economy of Superstars

CAMBRIDGE – The biggest news around Cambridge in recent weeks has been Jeremy Lin, the Harvard economics graduate who has shocked the National Basketball Association by rising overnight from “nowhere” to become a genuine star, leading a losing New York Knicks team to an unlikely string of victories.

Lin’s success is delicious, partly because it contradicts so many cultural prejudices about Asian-American athletes. Flabbergasted experts who overlooked Lin have been saying things like “he just didn’t look the part.” Lin’s obvious integrity and graciousness has won him fans outside the sport as well. The whole world has taken note, with Lin being featured on the cover of Sports Illustrated for two consecutive issues. The NBA, which has been trying to build brand recognition and interest in China, is thrilled.

I confess to being a huge Lin fan. Indeed, my teenage son has been idolizing Lin’s skills and work ethic ever since Lin starred on the Harvard team. But, as an economist observing the public’s seething anger over the “one percenters,” or individuals with exceptionally high incomes, I also see a different, overlooked facet of the story.

What amazes me is the public’s blasé acceptance of the salaries of sports stars, compared to its low regard for superstars in business and finance. Half of all NBA players’ annual salaries exceed $2 million, more than five times the threshold for the top 1% of household incomes in the United States. Because long-time superstars like Kobe Bryant earn upwards of $25 million a year, the average annual NBA salary is more than $5 million. Indeed, Lin’s salary, at $800,000, is the NBA’s “minimum wage” for a second-season player. Presumably, Lin will soon be earning much more, and fans will applaud.

Yet many of these same fans would almost surely argue that CEOs of Fortune 500 companies, whose median compensation is around $10 million, are ridiculously overpaid. If a star basketball player reacts a split-second faster than his competitors, no one has a problem with his earning more for every game than five factory workers do in a year. But if, say, a financial trader or a corporate executive is paid a fortune for being a shade faster than competitors, the public suspects that he or she is undeserving or, worse, a thief.

Economists have long studied the economics of superstars in fields where a company can lever enormously the decisions of a small number of individuals, making them valuable in a way that someone who can, say, chop down trees like the legendary Paul Bunyan, is not. But the political economy of what levels of income differences countries will tolerate remains uncharted territory.

Of course, there is a certain logic to the public’s disdain for superstar compensation outside of professional sports and entertainment. This is especially the case in some areas of finance that are essentially zero-sum games, in which one person’s gain is another’s loss. There are other areas, such as technology, in which someone like Apple’s late founder, Steve Jobs, arguably delivers real innovation and quality, rather than just employing lawyers and lobbyists to maintain a monopoly position.

As a basketball fan, I would not describe the sport as a zero-sum game, even though one team wins and one team loses. The best players have huge creative flair. But so do some “street ball” players who excel in slam-dunk theatrics; perhaps because they are not tall enough to compete, they make almost nothing.

Do fans tolerate outsize sports incomes because players are role models? Many certainly are, but not all high-paid sports celebrities are exemplary citizens. Michael Vick, a star quarterback in the US National Football League, served time in prison for running a vicious dog-fighting operation, and arrests of players on charges ranging from illegal possession of drugs and weapons to domestic battery have been a regular occurrence.

And, back on the field or court, serious infractions occur all the time. Think of Zinedine Zidane’s infamous head butt in the 2006 football World Cup. In the NBA itself, a star player, Ron Artest, was suspended for the remainder of the 2004 season after going into the stands and brawling with heckling fans during a game. (Artest has now changed his name to Metta World Peace, perhaps in response.)

Moreover, sports teams surely lobby governments as aggressively as any big business. Professional sport is a legislated monopoly in most countries, with top teams extracting free stadiums and other privileges from host cities. Indeed, Lin’s story, it should be remembered, grew out of a huge labor dispute between the NBA’s billionaire owners and its millionaire players over division of the league’s nearly $4 billion in annual revenues – more than many countries’ national income.

As the late University of Chicago economist Sherwin Rosen postulated, globalization and changing communication technologies have increasingly made the economics of superstars important in a variety of fields. That is certainly true in sports and entertainment, but it is also the case in business and finance.

I wish Lin a long and successful career as a superstar, though he will have already had a huge cultural impact even if his success proves meteoric. One can hope that, as Asian-Americans continue to break barriers in other arenas – they remain under-represented among corporate CEOs, for example – these rising superstars will be greeted with similar acclaim.

If the public is not happy about high superstar incomes, the obvious remedy is to improve the tax system, including for powerful sports-team owners, many of whom benefit from huge tax breaks in their day jobs. Who knows? With a more level playing field, superstars outside sports and entertainment might find themselves a bit better appreciated.

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    1. Commentednat taylor

      What a smug, misguided article. Condescending people for the supposed nonsequitur of supporting the high pay of sportsmen on the one hand and brandishing the pitchfork at CEOs and bankers on the other. There is no inconsistency. Behavourial studies show that people hold desert-based preferences and attuned to how rewards are earned.

      Without venturing into bankers pay, the evidence on CEOs contribution to firm performance -beyond abstract models- is highly ambiguous. Path dependencies, the collective talents of the workforce, firm proprietary resources and myriad other factors muddy the relationship between inputs and outcomes: see Groysberg's Chasing Stars.

      In fact, many justifications of CEO pay don't even bother to defend it in these terms. They rely on other arguments i.e. tournament effects though they beg the question of whether labour markets in business and finance are genuinely competitive. I know why I'm not a professional basketball player: I suck. Otherwise, a scout would have snatched me out of my cradle. There is a pretty efficient machine for detecting talent in sport -in part because it is compulsory at school; in part because it is a hobby the rest of the time, ensuring that it can draw on the widest possible field. The same is not true of other walks of life.

      Therefore, is it really any wonder that people draw the kinds of distinction that Rogoff implicitly mocks.

    2. CommentedDavid Kelland

      Professor Rogoff also seems to have missed the point that professional sports are very meritocratic. Most Americans played basketball in their youths and remember that they had no chance of making it to the NBA. A disproportionate number of CEOs and hedge fund managers come from privileged backgrounds. Their salaries are not well publicized except at the highest levels and those salaries are agreed upon by their friends on the boards. The rags-to-riches stories of many professional sports players are inspiring to Americans who want to believe that one's success is not dependent on the family to which one was born.

    3. CommentedZahed Yousuf

      Professor Rogoff there are couple of issues here:

      firstly as Mr Davis mentions that the majoirty of the population is quite unimpressed with the huge amounts sportstars are making

      Secondly the reason for this discontenmnet is largley because there are increasing levels of inequalities in the world which is fuelling resentment.

      Thirdly the reason why the majority are discontent with the trader who reacts that little bit sharper is the financial sector has done little to provide economic value to our society - they simpy used borrowod money to make themselves richer - of course there is going to be discontent with this section of society particulalry when you consider the financial system has played such a huge role in fuelling the financial crisis - sportstars did not fuel this financial crisis which has led to a loss of jobs, protests etc.

    4. CommentedAndrew Davis

      I wouldn't say the public blindly accepts the huge salaries, more that the public can see the relationship between payment and performance. Kobe proves his worth on court all the time, and the team has championships as a result. The public can understand that.
      When CEO's are pulling down millions while their companies fire employees and lose millions (billions?!) the public can't see the relationship. There is no simple performance measure to show why a CEO earns his $$. Athletes can be measured and ranked and performances dissected, but a CEO's role is more abstract.

    5. CommentedAnne Smith-Stolberg

      Mention of Zidane brings to mind Francois Holland's recent suggestion of 75% tax on income over 1 million Euro that had some (many? I don't live in France) aghast and others rather unconcerned, noting that this would effect only a very few, exemplified by the in recent times discredited and therefore overpayed French football star.
      Further, I live in Germany and today it was announced that the boss of VW would take out of 2011 a packet worth 16 million, the most ever paid in Germany - lot of money I would say, though I dare say not so in US terms - and I bet the debate on overpaid managers will heat up again as it always does and is surely worth reflecting on,but rarely do the same people much seem to mind the sums that have become the norm in football (soccer!) and I have always found that odd too.

    6. CommentedProcyon Mukherjee

      This article brings out the crucial point that public fervor or dissent for super-star payoffs stem from their lack of knowledge of what these payoffs actually bring in terms of economic value to entire eco-system. As in any efficient system, it is the added value that such payoffs bring in to the economic system as a whole; the public who spend and also absorb the positive and negative impacts, are only part of the whole picture, unknowingly they contribute either on the revenue side or the cost side.

      Procyon Mukherjee

    7. CommentedGiulio Renoldi

      Prof. Rogoff, I might be too simplistic, but I would explain athletes' payoffs using the scale of operations effect explained by Garicano L.

    8. CommentedZsolt Hermann

      I think it is a multi-factorial question.

      But one answer could be that the public views superstart athletes as "their own", people who grew out of gettos, from very difficult backgrounds, many NBA players would be drug addicts, gang members or would be already dead if they did not play professional basketball. And most of the time these players do not lose their contact with their roots, they live the celebrity lifestyle but they are not disappearing in the clouds.

      And most importantly although they are well paid, they are still only puppets, they have limited years to make their living and they fully depend on their owners.

      There was a beautiful quote from one of the NBA players 2-3 years ago, when being asked: "are you wealthy?". and he answered, "no i am just rich, the guy who writes my cheque, he is wealthy".

      What people start to understand is that being rich is not a problem, we all have different desires, we all aspire for different things, not all of us want to be an Olympic champion, or Nobel prize winner or a President.

      The problem is the attitude, the disconnection, the artificial class system the top layer creates. Interesting how people look down on India because of the social layering cast system when it is very obviously present in all western democracies, even more crystallized then in developing countries.

      We are very close to understand that it has nothing to do with money, it is all about how we relate to each other.

    9. CommentedRobert Bauer

      I think this can easily be explained by cost-benefit analysis:
      - The cost for an athlete like Lin is his high salary. The benefit is that he attracts a bigger audience that enjoys watching his performance.
      - The cost for a movie star like Leo diCaprio is his salary. The benefit is the revenue he generates for the movie company b/c more people like to watch him the movie.
      - The cost for an entrepreneur such as Bill Gates is his profit margin. The benefit is a corporation that makes products and provides employment for almost 100,000 people.
      - The cost for a successful CEO such as Apple's Tim Cook is his salary & bonus. The benefit is managing a corporation better than average and therefore providing products in a more efficient way, higher profits and employment for more people.
      - The cost for a non-successful CEO such as HP's Carli Fiorina is her salary & bonus & an almost bankrupt corporation with no benefits. Therefore this salary is considered as unfair if we apply a competitive market system as a measure of fairness.
      - It seems that the costs for managers that work for banking services with no clear benefit to society and the market economy as a whole are their salaries, bonuses and the externalities as a consequence of the market failure. That's why salaries for people of work in these institutes (that is, not just the CEOs) are considered as unjust, unfair and probably require some sort of a regulation to correct such market failure.

    10. Commentedhannad abi haydar

      while believing that sports stars are incredibly over paid, and going on a an "unsustainable" path (soon, not necessarily now), the difference than the other 1% is that the public beleive they are being entertained by these figures, and, recently, will never need to bail them out. nor they feel that the policies of their governments are being twisted to suit the intrests of a given club. no matter how the NBA league will inflate the pay cheques of all these super stars, (or hollywood), no club will become a Goldman Sachs or Exxon Mobil or Lockheed Martin