The US Economy is Like the NFL/NBA Labor Dispute. And We're the Players

From the fan perspective, this is all just a bunch of rich cry babies whining about how much money they will make or get each year. Well, to a certain extent, that is true. The reason this article is appealing to my blog is that this is basically a microcasm of what is going on in the government right now…the budget ceiling and deciding on what is going to be done about spending and taxes.  

So the average American, let's say, is making $40K per year. Well, even the lowest paid basketball or football player is paid several hundred thousand dollars per year for playing a sport half of the year. Right?  Well, yes, but I don't ever want to bring that up in an argument because it is one of the most grueling and competitive careers to try to make it in. My father is always complaining saying that he is a physician who spent years in school and he won't make the money that these guys are making. Well, to my father I always say, "If it's so easy, go out and shoot a ball through a hoop and you can make $20MM per year." He never buys this but really, that is what it is. This is supply and demand. 

No one wants to pay my father $20MM to see him examine a patient. I don't blame them. These athletes have to make their money because their window is so small to make the money and the amount of destruction they put on their bodies is quite large. Yes, I know. Big deal. Well, again, I go back to how difficult it is to make it in this line of work and I am a BIG believer in "no one is ever overpaid or underpaid."  Whatever you get is what the market bears. In hindsight you may be able to say someone is over or underpaid, but everything is 20/20 in hindsight. Anyways, I digress…

The billionaire owners are complaining because their teams are losing money each year. The athletes don't believe it. Well, take it from me, I almost bought into an NBA team in 2008 (Miami Heat…boy, I was dumb for backing out of that 2 weeks prior to closing) and dabbled into the NFL slightly, and these teams LOSE money. Each owner knows that when they go into it, though, for the most part. There is an old adage among sports owners: You can either win or make money. You can't have both. Someone may say "but look at the Yankees! They win and they make a ton of money! Look at how much their team is worth!"  Yes, Steinbrenner bought the Yankees for $10MM in 1973 and it is now worth $1.2 billion, BUT I am quite sure that he had operating losses every year and luckily his team went up in value along the way. In addition, Yankees make money from the YES network which is their sports network. It isn't really the Yankees themselves.

So why do the owners buy into ventures where it was hard to make money? Well, 1.) Ego. I was going to be a minority owner of an NBA team and you should have seen the kind of response I got from business people when they know of this. Doors were opening and I hadn't pulled the trigger yet! 2.) Since you can't just up and start a new professional sport, there is a large barrier to entry and it is reserved for the elite few who have a lot of money, so the demand is always increasing while the supply is pretty constant. In the world of economics, that is the formula for an asset that will naturally increase in value over time. So the hope is that they may lose $10MM in a year, but if their team is worth $300MM, all they have to do is go up 3% per year, and it's all even.

So why are the billionaires upset? Well, if you look at how much it has cost to run any major sports team over the last 15 years, you will see that the expenses (mainly how much it costs to sign a player) has increased at a MUCH higher rate than the revenue. When that happens, it is just a matter of time when it is IMPOSSIBLE to make money. Forget doing different things to make money…it becomes impossible when your revenues are going up 3% per year and the expenses are increasing 6-7% per year.

Now the players believe that the owners are just being stingy and they want more protection for themselves and their careers. I understand that completely. The average NFL or NBA player probably plays for 2-3 years and even if you make $1MM per year for those years, that can't last a lifetime after taxes and agents and everything. But that really isn't a reason to want more money or to get more security, in my opinion. If the costs keep going up like this, teams will have problems because owners will eventually have a breaking point where they say "Hey, I was willing to lose $10MM, but I am not willing to lose $50MM." Whatever the number is, it will happen and it will happen sooner rather than later because revenues are increasing at about half the rate of expenses.  

So how is this like the current situation we are in economically in the United States and the world? Well, look at our spending. Before, we would always say "It's ok to spend! We will just keep growing and the tax revenue will make up for it in the long run after our growth has come around." Well, I think that may have worked for a while when this country was growing at 4-5% real GDP numbers each year, but in the last 3-5 years, that hasn't been the case. The world has been shocked and countries, such as Greece, are coming close to default. In fact, the U.S., which has always been known as the most stable investment in the world, is coming close to a default if they don't lift the debt ceiling for the 72nd (or something like that) time in history.  What is the point of a debt ceiling if you keep raising it?

So we, the players on the U.S. team, have to decide if we are willing to forgo future salaries (by paying more taxes), in order to get a more sustainable business model (the U.S. economy). At this pace of spending, we will eventually go into default because even though we are a great and smart nation, we can't spend trillions per year more than we bring in and expect that to be fine. In the late 70s and early 80s, we were as low as the high 20% range of public debt to GDP. Now we are pretty close to 100%! At some point, that has to give. I won't even draw comparisons to other countries because mere logic will dictate that at some point, it has to give.

At some point, we have to decide what taxes we are willing to pay (pay cuts) and what spending we have to decrease (benefits) in order to make the long term viability of this country work. This is exactly like the world of sports.