0:36 Intro. [Recording date: July 27, 2012.] Russ: You've been a central figure in the application of economics of sports, and that's our topic for today. I want to start with an area you've written widely on, the financial impact of sports teams and sports stadiums on their communities. What do we know about that? What have we learned over the years in analyzing those effects? Guest: First of all, it depends on the kind of facility. That, an arena that has multiple uses, say, it's going to have a basketball team and/or a hockey team, has other potential uses, like concerts and tractor-pulls, all kinds of stuff. And so a well-managed arena can be occupied 250-300 nights a year. And they can break even. And indeed, I don't think there are very many cities out there who regret having built an arena, unless the city next door also builds one. And then you have two that are half occupied. So, you can't really argue vociferously against building an arena. Baseball and football stadiums, however--there aren't any that have been substantially subsidized where the local community has received anything remotely resembling a reasonable return on investment. They are financial black holes. Especially football stadiums. Russ: Used 6 times a year. At best. Five times a year. Guest: Yes. They may make the playoffs. And then you've got a pre-season game. Russ: Given, 12. Really go out on a limb. Guest: So, yeah. Even in the best of circumstances what you've created is something that essentially sucks the blood out of a neighborhood. Because it's so rarely used. And indeed, they create slumps. As opposed to being engines of growth. And cities who put in hundreds of millions of dollars into football stadiums inevitably find themselves with big losses. Baseball is not quite so bad. Russ: 8 a month. Guest: Yeah. 81-plus games per year. But the problem with baseball has been that the owners have realized that it's a really bad idea to have Fenway Park, where all that concession money walks across the street to the bars that are not part of the Red Sox's empire. So, the modern version of a baseball stadium essentially is a baseball field, the stands, a shopping center, and then acres of parking to make certain that no one can ever go anywhere else. Russ: So, that's Turner Field. Guest: Miami is the best example. Because not only, when you get past the parking lot, then you've got to cross a freeway to get to anything else. So, what that means, again, is that the facilities that used to have some spillover benefits to the neighborhood no longer do. Russ: That's even a harder case to make. Guest: Yankee Stadium, for example. It used to be the case there were memorabilia shops and bars and things like that adjacent to Yankee Stadium. They just disappeared. Russ: They are all inside the stadium, capturing that. Guest: Exactly. So, the bottom line to it is: Cities should not subsidize baseball and football stadiums, if the goal is engine of economic growth or financial benefit. Now since I don't have anything against San Francisco subsidizing the opera, I can't say: Therefore it follows you shouldn't pay the money at all. But the decision to pay the money should be based purely on having it in the community because you like it. As opposed to: It's going to return some great financial bonanza. Russ: Yeah. It's embarrassing to say, but it's a special interest group called sports fans. And the cronyism of the owner, who often is generating the political sport for those subsidies. Political support is the sports fans plus the construction industry, construction unions, plus the banks who are going to handle the financing. You put all those together and you are typically up to 20-25% of the vote. Now you are going to get another big hunk of votes in order to get it past the electorate, and that's where the economic development argument comes from--is that if people vote purely on the basis of, shall we throw $1000 per capita at a sports team, they'll generally say no unless you can convince them they are going to get a return on it. And the way you get up to 50% support is to promise them that it's going to be an economic benefit. Russ: You are talking about situations where there would be a public vote on whether to subsidize a stadium. Which is not always true, though. Guest: It's not always true, but usually it is. Hilariously enough. There is a great quote from the Mayor of a town in Arizona, which says: We always put it to a vote. If the people say Yes, then we build the stadium. If the people say No, we build the stadium anyway. Russ: Yah. Guest: But usually the frequency of winning the votes has gone down dramatically in the last 15 years. My favorite vote is when the good citizens of my former home, Pasadena, voted 80 to 20 against giving the Rose Bowl to the National Football League (NFL). So, there's hope. Russ: When you say, giving the Rose Bowl to the NFL, what do you mean? Guest: They were going to spend approximately $350 million to renovate it so it would have NFL standards, which means lots of luxury boxes, and then give it to the NFL rent-free. Russ: To attract-- Guest: To attract a professional (pro) football team to Los Angeles. Russ: And they voted yes[?]. So, despite the claims--I'm sure there was an economics study that showed all the multiplier effects, but despite the claims, the electorate was not convinced. They need to study more econometrics, Roger. Guest: Well, the Rose Bowl, the city of Pasadena turned out to be against it, and the economic development argument didn't wash.

6:57 Russ: Let's talk about the sports industry in general. It's changed incredibly as an economic phenomenon over the last 30-40 years. Let's start with labor relations--the relationship between the players and the owners. Both the legal environment and other factors have changed tremendously. How would you summarize the importance of what has changed, and why did it change, in terms of the labor relations? Guest: Well, of course the crucial fact about labor relations is that all sports have achieved some degree of free agency. That is to say, once a player plays a certain number of years, they qualify to be part of the normal labor market. And you know, at the time, this was being advocated. Economists had written as early as the 1950s that there was no good reason, an economic basis, for the reserve clause of the player-reservation system. The owners had responded by saying it would destroy professional sports, to have a labor market for sports. And indeed, in the 1970s, they said I've got free agency and we have no sports left. Russ: Well, they were right. They were so precious [?]. Guest: So, the very first question to ask is: What was the effect? And the effect was roughly to double the fraction of revenues that went to players, from in the range of 25-30% to in the range of 50-60% of revenues in all the sports now go to the players. Russ: In the national income announcements it's 2/3, pretty much, historically. Guest: Yeah. The sports industry probably would have an even greater percentage of its revenue going to labor in the absence of the restrictions that remain. Russ: The draft, for example. Guest: Because there's no capital investment. If cities give you a stadium. Russ: That's a good point. How you measure those fractions, there's issues. Guest: Yes. The fraction of income going to players would be substantially lower if they had to pay for their stadium. Russ: Typically. Guest: Yeah, typically. There are a few that do, but mostly they don't. So, what that basically says is that the market worked; that teams didn't spend themselves into oblivion. The second issue, of course, was the reason that free agency was supposed to destroy sports as we know it today was the issue of competitive balance--that the Yankees would hire all the best baseball players and the NY Giants would hire all the best football players. Russ: Green Bay would no longer be able, Milwaukee, St. Louis-- Guest: Any small town with a small market would be unable to compete. Russ: And there's some truth to it. Guest: The first obvious empirical point is that in no sport has there been a clear reduction in the degree of competitive balance. Measured any way you want to measure it. It's kind of a difficult concept to quantify. Does it mean the difference in the quality of the best and worst team in any given year? Russ: The probability of winning equal for every team each year? Is there no dynasty somewhere? Guest: Right. Does it mean multiple wins? Is it the same teams in the playoffs? You can imagine a world in which the best team wins 75% of its games and the worst team wins 10% of its games, but the identity of those teams changes from year to year. So, different teams win the championship every year. That could still be regarded as balanced. But it turns out it doesn't matter how you measure it. That the presence of dynasties--that is, teams who persistently are in the championships, you know, get to the semi-finals or finals, the end of season tournaments--or the spread in the won/lost records in the best and the worst teams--all the measures of competitive balance say that it's at best no difference, and in the few cases it's gotten more balanced. Like, baseball is definitely more balanced now than it was. And the National Basketball Association (NBA) is more balanced. Just before the free agency, the Celtics won 9 years in a row. So, the prediction that this would lead to competitive imbalance was false. And then we can ask--the next question is: Why? Because economists happen to have been right about this one. We have very few victories; we rarely can predict the outcome correctly. So, we are going to have to trumpet this one. Russ: Which part of it, though? One part of it you already said. Obviously the economic prediction would be a shift in revenue toward the players. The competition. Although some could have argued there is not enough competition, it's just a limited number of teams. But surprisingly large impact for some people. But there's definitely been an impact. Guest: Yes. The question is: Why would one not expect that the degree of competitive balance would be pretty much unaffected by player-market rules? And the answer to that is that who owns the right to the player--whether it's the player or the team--doesn't really matter in the long run. Because if the team is more valuable in another city than the city in which he's currently playing, he'll end up getting either just transferring because he gets a better wage offer, or being traded or sold. Russ: That's a great point. Guest: The thing that convinced the early sports economists, like Simon Rottenberg, who wrote the first important paper on the economics of sports in 1956, that it was the ability of the Yankees and the Dodgers to retain high quality teams by simply buying the players from other teams. And indeed in the 1950s, we can recall-- Russ: Kansas City Athletics. Guest: Kansas City, after the Athletics moved to Kansas City, they basically became a farm team for the Yankees. So, that insight, which is called the invariance principle--that's what Rottenberg called it--four years later, Ronald Coase wrote his famous paper and we all call it the Coase theorem. But the basic story of it is, in the absence of some significant market failure, one doesn't expect the initial allocation of an asset to determine where it's actually going to be used in the long run. Russ: The only thing that changes is who captures the benefit. Guest: Exactly. The thing is the transference of income. Russ: Resources flow to their highest use. Guest: Exactly. Russ: Or at least there is pressure on it. Now, Coase said, if the transaction costs are too high, that might not happen, so you may care a lot about the initial-- Guest: Yeah. I mean, most people who cite the Coase theorem get it wrong. Russ: Correct. Guest: They get the cite wrong because what all the paper is about is all the ways it might not work. Russ: Correct. I know. It drives me crazy. Guest: So, we'll call this the anti-Coase Theorem. Russ: I said it drives me crazy, but it also drives Ronald Coase crazy. I just interviewed him recently, and it drives him crazy, too. Guest: I know. And I was at his 100th birthday party. But the insight is still valid: Can we identify the common sources of market failure that would cause the Coase Theorem not to be true in the baseball players' labor market? And the answer is: No. Because it's a fairly atomistically competitive market in which you are making bids for players who have well-known track records. Their values are well understood.

14:52 Russ: Although, the irony about it--we talk about Kansas City. The Kansas City Athletics in the 1950s sold a lot of players to the Yankees. The Oakland Athletics became a team that was known for trading players--and then sell them--sometimes they traded players to more upscale market teams for more prospects and draft picks--not draft picks, prospects, typically. And if you are astute, as Billy Beane was, at least for a while. Guest: And still is. Russ: And still is. Guest: They are doing it this year with smoke and mirrors. Russ: Yeah. My son--we're big fans of Moneyball--said: Do you think he's got a new trick? Could be. Or could be lucky. There's a randomness in all activities like this. But who knows. My point is that there are a lot of intangibles. I think what makes baseball especially so exciting and interesting as a fan is the incredible amount of statistical evidence we have. And that's improved; and we've gotten better at understanding it. But there are still these things that can't be measured: how a player is going to perform under pressure in a bigger market, and psychological issues. So there's still these imperfections that either lead to random outcomes or astute outcomes. We don't know. Guest: Well, the probabilistic nature of sports is I think a major source of interest in it. It's not going to the ballet, the opera, where you know-- Russ: he's going to die at the end. Guest: He's going to die at the end. Russ: That's what makes it exciting. The unpredictability of it. Guest: So, the unpredictable aspect of it. But in terms of a baseball player who is going to come to bat 500 times per year, you have a fairly good predictor of how much he is going to contribute to the team. And I think that's the crucial part. The market has a lot of information. Russ: Correct. No doubt. Imperfect, but they have a lot. Guest: And a lot of feedback. And a propos Billy Beane--the interesting thing about the As is of course that they not only sell players. They buy players. Russ: Yeah. Guest: They sell the expensive ones and buy the cheap ones. Russ: Correct. Guest: And sometimes it works and sometimes it doesn't. If what he's doing is taking a player who has got 5 or 6 years worth of experience, who is about to come to free agency, and selling that player for the purpose of acquiring a bunch of minor leaguers who still are two years away from the major leagues, who have the same expected value but they are not certain, then every so often he's going to do extremely well. Every so often he'll do very badly. Like they did a few years ago. They did exactly the same number the last time they sold off all their stars. And it didn't turn out well. They ended up with a team that was below 500. Now, it worked. The last time they just sold off all their players a couple of years ago and these kids have turned out to be stars. Russ: Right. As you say, it's a small--if you have 500-players you get a certain expectation: whenever it's 3 or 4 or 6-- Guest: It's only a small number. So, yeah. I mean, I think that the main difference between Oakland or Minnesota or some of the other small market teams is that the only game they can play is the lottery on young players. So you are going to see them rise and fall in the standards if they play their cards right. And some years they are going to have really good teams. By contrast, if you are a team with a lot of money like the Yankees or the Dodgers, and you are not in the pennant race, you've made a big mistake. Because you have much less variance. Russ: Yeah. That would be the Mets. For example. Guest: Yeah. Russ: Spent a lot of money and have very little to show for it. Guest: Historically, until recent years, Texas was that way. Spent lots of money for no apparent purpose. Russ: Right. Because people make mistakes. Obviously. And there's a random element. And there's an interesting question of whether--I interviewed Michael Lewis on this. I asked him why he thought Billy Beane told his story publically. He had a market advantage and he revealed it. And it's clear that that market advantage has shrunk. His insights into baseball percentage and other things that gave him an edge. One hypothesis would be simply that people would have figured it out anyway. Guest: Well, they had. Russ: Or, that they had. Michael Lewis's view, which--I don't know if it's accurate or not--but his view was that Billy Beane felt that baseball is old-fashioned. These people are not going to pay attention to it anyway, so it doesn't really matter. And I think he was partially right. Guest: Both stories are true. Russ: Correct. 'Cause I think some owners--this was Michael Lewis's point, too--there are some owners who are less traditional and have other motives, and other things going on, who are much more open to hiring statistically sophisticated general managers. Whereas some of the other ones just stayed the way they always had--hired their friend or somebody who had a track record that maybe not so accurately predicted their futures. Guest: Well, I think that's right. I think, to get to the point, that the teams that were going to change their benefit strategy and adopt an econometric approach to how you hire players, those teams had already learned the lesson and by the 2000s were already doing it. Russ: Yeah. Guest: And then the other set wasn't going to change anyway. Traditionals.

20:32 Russ: Now, as a sports fan one of the things that's frustrating is the perpetual drama when there's a new labor contract. Happens in football, happens in baseball, all the major league sports. When there's a threat of a strike, other things go on. Is that going to just keep going? Guest: Yes. Russ: It can't seem to get better at that. Explain why. Guest: There's two reasons. At the heart of it is that sports unions are inherently extremely weak. Russ: Sports unions. Guest: Yes. And the reason they are inherently weak is that the median voter in the union is somebody who expects to have only one or two more years of playing career. And so if he loses a year, he's lost 50% of his lifetime income by losing one year. So, players' unions have a very difficult time keeping the union together during a lockout or a strike. Given that, owners periodically take runs at breaking the union. And they usually can succeed in getting significant give-backs. Most collective bargaining agreements have the property that in them is a big short-term give-back. And that eventually sort of disappears, because the way the agreements are written, it's sort of like a one-time hit, but they don't change the trajectory. And so within a few years you are back up to where you were; and it's time for another one. It's also abetted by the fact that because of our wonderful tax laws, which create a huge financial incentive to sell teams after you've owned them for 7-10 years, the characters on the ownership side change dramatically between collective bargaining agreements. And you get people in there who think that the previous owners were just stupid. Russ: Suckers. Guest: And that they can do better. Russ: That's interesting. Guest: So you find really aggressive new owners coming in, saying: No, no, no; if you guys have just hung in there, we could have broke the union and gotten back down to the 25% payroll that we had in 1965. Russ: And these are also owners who are coming from industries where they have been successful. Obviously they have to be very wealthy. Where the labor/management relations are very different. The competitive environment is very different. Guest: And that brings up the magic question, which is the subject of my most recent paper. Russ: Fire away. Which is: In Europe, sports unions are close to non-existent. In the United States, sports unions are very visible and seemingly quite effective. Russ: And sympathize with the public, I would add. Guest: And sympathize with the public. But: In Europe, 3 times as many people belong to labor unions as in the United States. Russ: In outside sports. Guest: Yeah, in outside sports. Russ: That is interesting. Guest: So, it's a puzzle: Why is it the case that the only powerful unions left in the United States are government workers and sports? Whereas, the European economies remain highly unionized no matter where you are? And the reason for that is antitrust. That antitrust is an out for a union in the United States, and it's really not in Europe. Russ: Explain. Guest: Private antitrust is almost nonexistent in Europe. It's beginning to come into existence. But in Europe almost all antitrust cases are initiated by the government. Or the European Union. Whereas in the United States almost all antitrust cases are private. Russ: Private meaning initiated by a private--? Guest: Right. Two private parties litigating. So if I think you are engaged in a monopolistic practice that hurts me, I can sue you. Whereas in Europe, there is some opportunity for that, but in the vast majority of cases it's the government investigating somebody. There have been a couple of antitrust cases in Europe, but they are much less frequent and much more difficult. And in particular, one thing that you cannot do in Europe is co-mingle labor relations and antitrust. In the United States, the law has this process called decertification. Which is: A union can convert itself from a collective bargaining union to simply a professional association, like the American Bar Association or the American Economics Association. And thereby become just an aggregation of private actors. In which case the Antitrust Laws apply. And the new organization, the professional association, can then sue the employer if that employer engages in anti-competitive practices. The reserve clauses--the restrictions on the player markets that exist in all the sports--once you get outside the context of unionization are antitrust violations. The only way they can be converted into something that is exempt from the antitrust laws is through a collective bargaining agreement. Only labor, organized as a union, has the power to grant an antitrust exemption to the employers for collusive behavior in the labor market. That is an extraordinarily powerful weapon. And so you have this wonderful--if you read carefully the articles about impending lockouts and strikes, like right now in the National Hockey League--what you read is the owners want a union and the players don't. Now, that is really a very strange circumstance. Russ: Right. It doesn't make sense.

26:31 Guest: But it's driven by a peculiar legal institution in the United States, which is: Labor unions in sports have something to offer that is extremely valuable to owners. Which is the antitrust exemption, particularly the antitrust exemption of the rookie draft, the cap on rookie salaries, things like that. If leagues attempted to do that outside of the collective bargaining agreement they would be thrown out as an antitrust violation. Russ: Which is weird, because--we could spend the rest of the time on this, I don't want to, but I just want to mention it--a league, a sports league, is a weird thing. Because it's a--you can't play on your own. You need an opponent. And you need the drama of the competition. So you need other teams. Unlike a business. You can't just say, I'm going to start a sports team that just wears the uniforms and wanders around. It has to have opponents. So the league is this weird thing. Guest: There's always Notre Dame. Russ: Yeah. Well. We're going to get back to Notre Dame in a minute. But basically you've got--a league officially, you have to have other opponents. And then--but at the same time, each team is trying to win. Each team's owners are trying to maximize its profits. But if you maximize your profits on your own and you drive all your opponents out of business, you don't have a league any more. Guest: But that's not the profit-maximizing solution. Russ: Obviously. So, there's this weird mix of: you have to collude in some dimension. You have to build a schedule. Guest: It's not collusion, though. Because it has no adverse affect on the market. The definition of an anti-competitive restraint is one that reduces the efficiency of the market, not increases it. Russ: Yeah; well, I'm using the word 'collusion' in its everyday sense of the word, meaning get together to plan stuff. Guest: But there's lots of things where that analogy breaks down. All right? First of all, the teams don't have to own the league. And in most of the world, they don't. That is to say, the football league in England, which is the second, third, and fourth professional divisions. It is a separate legal entity from the member clubs. All right. And indeed, throughout most of sports and most of the world, leagues are separate. And in the United States, the National Association for Stock Car Auto Racing (NASCAR), is separate. Individual teams that race in NASCAR events. Likewise, racetracks are separate. So, there is no good reason why you can't have competition in the team market and competition in the league market. The National Collegiate Athletic Association (NCAA) is organized as a series of conferences that compete with each other. The NCAA gets in trouble when it tries to override the conferences and make rules that apply to all colleges. Russ: But it has lots of those rules, obviously. Guest: It has lots of those rules, but it's lost a lot of legal battles about them, too. The most important being when it lost the right to sell broadcast rights for all of colleges. Which are now sold by conferences. So, yes, it's true that there has to be an entity which you can think of as a standard setting organization. You can think of the National Football League (NFL) as the i-triple-e (IEEE) settings; the i-triple-e sets standards to talk to printers. Russ: Right. Guest: So you need a standard-setting organization. Russ: Because you can have rules that each team--some rules--that each team lives by. How big your field is. Guest: Exactly. And then the question is: When does the necessary standard-setting activity stop? And spill over into anti-competitive market restrictions? That is the interesting question. And with respect to player/market rules, the economics research is virtually unanimous. Nothing is every unanimous in economics. But as close to unanimous as you can get, that the player market restrictions are unnecessary for the financial health of leagues. Although it is definitely true that teams are worth more if they can restrict competition in the player market. Russ: Which is back to your old point, right? It's a question of who is going to capture the gains. Guest: Who gets the gains. Russ: There's a lot of things I want to ask you about on that, but let's move on. Guest: We could go on forever on that.

31:03 Russ: Let's talk--you mentioned college sports, the NCAA, I want to talk about that. We have a very weird thing--to an economist. It's not so weird to the general public, although they are starting to think it's a little weird. We have a system where young men and women--mostly young men--produce millions and millions of dollars of profit and revenue in a few sports. I think mainly two, mostly; there are other exceptions, mostly on certain campuses. But in general, football and basketball, especially football, produce enormous amounts of revenue for the college writ large. They play for free, other than tuition benefits and food and lodging. But they don't draw a salary. There are tremendous restrictions on what they can do with their time during those 4 years. They are often no longer, if they are rich or other things, or injured, they can't work part time on the side because that could be a source of bribery. They are forced if they want to retain that scholarship, and in some sports is their only way to, generally the only way to the professional careers--they have to practice at shocking--I think it's shocking to the non-insider what their workload is like, day to day. Guest: Yes. Russ: It's not just games and a little practice on the side. They are weight lifting and training year round. And because of what economists would call rents, the profits that are generated from that activity, there's still competition for those that takes place, and state and construction[?] payment to certain coaches. And as a result we've had, recently especially, a set of very ugly scandals in college sports. Recruiting is a perennial problem, in terms of so-called cheating, which is an inevitable example of resources trying to flow to their highest valued use. But they don't flow very easily to the athletes. They flow to others--typically the coaches, I think; and to the universities. And we have this horrific Penn State scandal, which I think is tied in pretty obviously to this phenomenon in some dimension. Where do you see this heading? What, if anything, might change? And what if anything might we do to change it? I'm not sure it's changeable or whether it's wise to try to change it. But what are your thoughts on that? Guest: Well, this is another topic that should go on for several hours. And so-- Russ: I'm giving you about 10 minutes. Guest: I know. Let me just start off with the obvious point, which is: The price of virtue is going up extremely rapidly. Russ: Yeah. It's costly to be a good guy. Guest: Twenty years ago it cost you a few million to be a good guy. Now it costs you a few tens of millions. Russ: Because you are forgoing-- Guest: The amount you are forgoing--we'll start with the factual base. The factual base is not quite the way you characterize it. It's only about 50 teams, universities, that make a lot of money on their football team. And it's a somewhat larger number but still less than half of the Division 1 basketball teams that make money. The rest of them do not generate this huge surplus. Russ: They are trying to get it, but-- Guest: They are trying to. And indeed, every so often a school that you haven't really heard of will suddenly burst forth. Russ: Boise State. Guest: Yes. Oregon in basketball. And they will do very well, although their time on the stage is short. And usually it's a coach or two and then they fall back. Russ: Or, cheating. They lose the coach to another-- Guest: They either lose the coach or they are found to have cheated. What the NCAA has done is organize itself in a way that allows, for the most part, flagship state universities, which start with a huge fan base because such a large fraction of the state went there, and including a good fraction of the state legislature-- Russ: Went there. A terrible public choice problem. Guest: Exactly. And so you have this enormous political base to make the U. of Nebraska be a great football power. Or U. of Oklahoma, or U. of Alabama. Russ: Michigan. LSU, Georgia. All the largest. People don't notice this: large state universities, which seat 90-106,000 people-- Guest: Have 30-50,000 students, have hundreds of thousands of alumni and can pack a football stadium 80-100,000 every single game. Russ: And people can't figure out why Notre Dame isn't what it used to be. But it's pretty obvious why it's not what it used to be. It can't access the public purse. Guest: And it's too small. See, Notre Dame suffers from the same problem Stanford does, which is-- Russ: High standards of academic-- Guest: they have a high academic standard and a fairly small alumni base. Notre Dame has done far better actually against the onslaught of the big state university than anybody else, frankly. Russ: USC is the only other-- Guest: Yes. Russ: Duke, in basketball. Relatively cheap sport. Guest: For the most part, if you look at the list of the perpetual top-25 teams, it's mostly these big flagship state universities. And a very large fraction of them are not the academically top flagship state universities. And so, these are institutions whose public visibility and political popularity hinges more on their athletics than their academics. Russ: So, I interrupted you. You were talking about the NCAA's role in this. That part for me, the part you mentioned so far, is the willingness of the legislature to tolerate all kinds of things and encourage funds going to these things. Guest: Well, yeah. See, in theory the NCAA is an organization of university presidents. That's in theory what it is. In practice, at most of these institutions the director of athletics is a more powerful person, and a more highly paid person, than the president of the university. And has enormous local political influence. And for the most part--there are exceptions--the directors of athletics are the ones who run the NCAA. And they run it for the benefit of the department of athletics. What that of course means is they like having as many sports as possible, because the bigger the enterprise, the bigger the budget and the more important they are. And they also organize things to benefit the coaches as well, because they are also extremely powerful. The revenue effect on coaches' salaries is enormous. What you are hired to do as a coach is primarily to recruit. That's mainly what it is. There are people out there who are really good coaches, but-- Russ: If they are not good recruiters they are not, it's pretty tough. Guest: If they are not first rate recruiters, they are going to have a top-20 team. And so what the nature of the market for players is about is everybody has the same price tag--it's going to cost you 1 scholarship--and everybody has exactly the same price tag. You as a coach, if you are really good at recruiting, you spend exactly the same amount of money as the guy who is no good at recruiting, but you get a bunch of blue-chippers and your team is much better and generates a lot more revenue. And then competition in the market for coaches causes you-- Russ: To capture the gains-- Guest: To get all the rest, that would have been paid to the players. And so we are now in a world, as you say--if we go back to 2000 it was unusual to have any coach make more than a million dollars a year. Now we have a whole bunch of them making $5 million. And it's just going to continue that way. We have gotten ourselves into a situation in which we start out with a lot of universities having their future depend on their political popularity, and their political popularity depends on the quality of their athletic teams, especially football or men's basketball. That then creates this other environment where the athletic directors and the coaches end up running the university, and they are the main beneficiaries of all of the money that is coming into the sport. Russ: You mean it's not run for the student athletes? Shocking.

40:18 Russ: So, we're sitting here on the Stanford campus right now. Stanford is, as we said earlier, rather exceptional, unusual in its ability to compete at the national level in college sports, and across a very wide array of college sports. Little known--it does exceptionally well in a lot of sports that people don't pay attention to. But in the ones that they do--football, basketball, sometimes baseball--they have also done quite well. While maintaining standards. And I taught here in 1986 and was fortunate enough to have members of the Stanford baseball team in my economics class. They won the College series that year; they came to office hours. They didn't have people paying to take tests for them. Stanford has a very high standard. Is that an aberration or a model? Guest: It's an aberration. And the reason for it is the Stanford recruiting problem is to identify a very small fraction of the kids who are going to play at the highest level of intercollegiate sports who also are serious academics. Russ: Yeah. There aren't enough of those to go around. Guest: My friends who are interested in sports at universities are insanely jealous of me. My summer Research Assistant (RA) this year is an undergraduate athlete who is running regressions for me. Russ: That's uncommon. Guest: The thing is, what Stanford did a long time ago was not try to hide the fact that you have to be a student here. Instead, to try to use that as a recruiting advantage, by just telling kids right from the get-go: The reason to come here is because you don't want to be just an athlete; you want to be a multidimensional person and you want to be a good student and you've been a good student. And that works for a small fraction. But the number--like in a typical year, the number of students who play football who could get admitted to Stanford is in the range of 70-80. And we have to get 25 of them. And so if there were more than 3 or 4 schools out there trying to recruit this way, we'd all be toast. We couldn't possibly compete. Russ: So, you started off by saying virtue has gotten more expensive. And you talked about a change from 2000. That's, I assume, driven by ever-larger TV contracts and [?] payouts. Guest: That's exactly right. Russ: Corporate sponsorship. Guest: The huge run-up in both the March Madness, the NCAA Basketball tournaments, both men's and women's. Women's is now the same thing. I mean, it's behind, but women's basketball today is more popular than men's basketball was 15 years ago. Women's basketball is rapidly entering the same domain of the price of virtue being high. It's still nowhere near men's basketball, of course. Men's football, if you are at the top, the Bowl Championship Series (BCS) conferences in football. So you have this huge engine that generates enormous amounts of money. Basketball is especially profitable. I don't know if you heard this story a couple of years ago about the million dollar free-throw. The million dollar free-throw was one of the small schools, I think it was one from the Colonial League, which was an accidental entry into the NCAA just because it won its tournament, but it wasn't a top hundred team. Managed to win its first round game by, at the end of regulation, a kid was fouled shooting and if he made both free throws they would win. And indeed he made both free throws. That caused the payoff to the Colonial Athletic Association from the NCAA basketball tournament over the next 5 years to go up by a million dollars, because they got one extra game. Russ: Wow. That's amazing. That's incredible. Guest: Yeah. So the bottom line is, each conference gets a share of the NCAA basketball revenues that is determined by the total number of games they played in the tournament in the previous 5 years. And so one game is now worth closer to $2 million. So, when you put that much--think about how that translates into the pressure on the kid, and the economic incentives to ensure you have a kid up there at the free throw line who is going to make free throws. Russ: Yeah. That kind of sums it up. And it explains--it's obviously true but it's even stronger today--that being a coach where your economic wellbeing depends on the performance of 19-year-olds under pressure is a tough life. You can see where they are a little bit--it draws an unusual type of person into that world. Guest: It does. And it's interesting observing the Stanford coaches. From their perspective it's a really tough thing. Because on the one hand they know that the expectations on them are not as high as they would be if they were at Alabama. On the other hand they know that the recruiting problem is infinitely more difficult. And it's not an easy life. They work very long hours and it's a tough job. I don't begrudge them their success, but there again, we don't keep our coaches because we don't pay $5 million. So, when they come--they come, they fail, they get fired; they come, they succeed, they go on to somebody who will pay them more.

46:45 Russ: Let's shift gears. I want to talk about steroids and performance enhancing drugs. One way to enter this discussion--I'll start with this question--is: Should Barry Bonds be in the Hall of Fame? Guest: If I had a vote for him I would certainly vote yes, because the incremental value of performance enhancing drugs, no matter what the truth is behind the story of Barry Bonds, is minor. But I think that's not the interesting question. Russ: Good. It's a shocking answer; I'm with you. Most sports fans, and certainly most sports writers do not agree with that. But I agree--my view is the impact is small; the statistics that suggest otherwise are not very [?] Guest: You ask yourself the question: Prior to the slightest hint there was any use of performance enhancing drugs by Barry Bonds, what kind of a baseball player was he? And he was a Hall-of-Fame-quality baseball player. Russ: Yeah. Now, you can debate if he lied under oath or things that should keep him out of the Hall of Fame. Guest: I also favored Pete Rose going into the Hall of Fame. Russ: Right. But you are saying that's not the interesting question. So what is the interesting question? Guest: Well to me the interesting question is we have taken something that is borderline criminal behavior and delegated to a private organization the responsibility for defining what is legal and illegal and inflicting the punishments. And to me that's reprehensible. Russ: Hmm. I kind of like that, Roger. I'm going to have to disagree with you. But make the case. Guest: The reason for it is the World Anti-Doping Authority (WADA) is an entity that earns its bread by ever expanding the list of things that are banned, and punishing people for them. Its incentives are wrong. Russ: So, you are going beyond baseball here. You are talking about cycling, Olympics-- Guest: The whole banana. It all flows from this superstructure that's been created, and if you drew down, and you read the decisions about athletes, a very large fraction of these cases are for ridiculous things. Because they have way over-defined what's a performance enhancing drug. And so they are doing enormous harm. Russ: So, why--first explain the incentives for why they've expanded the list. And why that's bad. So start with: what are the incentives for the people in the organization? Guest: The problem that athletes face is two-fold. The first is that you can go into a restaurant and have a meal and it's possible that a standard ingredient in that meal is going to cause you to have a positive drug test and to be punished for it. And that's because the criteria for deciding what is a banned substance is: the first point is, is it possible that there exists a dose of this that would be performance enhancing? And b). can we test for it? Russ: I agree that's a stupid rule, but why would they have that rule? Guest: And the reason they have that rule is because the World Anti-Doping Authority basically charges a piece rate. The fees you pay for that institution to exist and be out there catching the bad guys is proportional to the number of bad guys they catch. And they have--what's been happening, it's been delegated to these entities that are not part of the sports to decide for us what's legal and what's illegal and what the punishment is. It's not being decided in a mechanism whereby the best interest of the athlete has anything to do with it or the best interest of the sport has anything to do with it. Russ: But many people would argue--and I'm not one of them--that it's in the best interest of the athletes to not have to deal with the temptation to tamper with their bodies in unhealthy ways, so this zealousness is a good thing because it reduces this private incentive, this arms race between athletes, that they all start taking the steroids and they are not getting any edge from it; all they are doing is hurting their bodies. So that's the argument for making them banned. Guest: The very first question to ask yourself is: Precisely what is the steroid problem? Is it steroids? Because, like, for example, a few years ago my wife had a frozen shoulder; she couldn't play golf any more; she went to the doctor, got a steroid shot. One single steroid shot, in a couple of weeks it cleared her up; she could go back and play golf. Russ: And she's hitting the ball out farther. No, she's not. Guest: No, she's not. Russ: And I think that's a myth. Guest: But the point is that a lot of the banned substances have important and beneficial medical uses, and there is a medical use exemption but it's extremely difficult to get.

52:29 Russ: So, let's get away from this international issue, which we may come back to. But let's just go to baseball, where there is not an outside body that is imposing rules and regulations on the players. In theory because of the labor union and the owners' incentives--there's conflicts between them but someone's looking out for the players, in some dimension. Could be a public good problem, collective bargaining problems. But somebody's looking out for the players; certainly somebody's looking out for the sport. In my view, which might be similar to yours from what you are saying, is they just should have left it alone. And people who want to take steroids, they can; maybe they'll find out they work, maybe they won't. But it should be a private choice that no one should be tampering with it. But that's not the way they went. Guest: But I can see why you wouldn't want to do that. I think it's possible to design a perfectly rational drug program. But the way it would have to be done is precisely focus on the activities that would be a Prisoners' Dilemma, where-- Russ: A conflict between your self-interest and the group's. Guest: Yeah. A situation in which everybody feels the need to engage in behavior that is self-destructive. Russ: So, do you think steroids is that case? Guest: I think in some cases yes, but much more limited than the rules we've made against it. And I think that the problems stems actually from a bigger problem in sports, which is the leagues and the teams have screwed things up pretty badly by the way they approach the medical care of players. The steroids problem is nowhere near as big a problem as the dementia problem for football players. Russ: I agree. Which is coming big time, in the last two years become salient and it's growing. About head damage from collisions. Guest: The damage from collisions, the permanent bodily injury that's being done to football players because the game gets faster and the players get bigger and the hitting gets worse. The leagues have not attempted to adjust the rules to diminish it. Russ: They are starting to. Guest: Yeah. Like for example, rugby players and football players play a similar game and they have similar physical attributes. They are big, they are fast. NFL players wear a missile called a helmet; rugby players don't. And rugby players don't suffer from these problems and football players do. Russ: Yeah. It's the greatest example of economic thinking in action, sometimes called the Peltzman effect: You put the helmet on to protect yourself; it makes the game more dangerous. Guest: Exactly. So the box we're in is that we start off with the players not willing to trust the league and the owners because they know that they don't take care of them. That the short-term incentives to win today's game tend to overshadow the long-term incentives about the players' health. And that gets in the way of attacking the drug problem in a sane way. Which is to focus on what the problem is as opposed to just have public-relations driven rules that make you get by the sports writer who doesn't think very deeply about the problem and just thinks all drugs are bad. Russ: So, if you had your 'druthers you would liberalize the rules of steroid use and other performing drugs--HDH? Weight lifting, my favorite sport--would you allow players to lift weights? Guest: What I would do is, it seems to me that the athletes should be able to make the rules. And whatever rules they want to make, that's okay. As long as it's legal. I mean, I don't think they should engage in illegal activities. I would rather fight the marijuana battle in Congress than fight it in the NFL Players Association. But once the rules about drug use go beyond legality then I think it should basically be the players who decide. And the problem I think--it's not just professional sports. It's worldwide. That's why I go back to WADA. Russ: That's the World Anti-Doping Agency. Guest: There's almost no role in defining what the boundary is once you get past legality. And that's what's causing the problem. That's why we have over-enforcement, why we don't focus the energies on taking care of the things that are genuinely a 0-sum game problem or a negative-sum game problem, a Prisoners' Dilemma problem. I think it's perfectly reasonable to do that. But I do not think that the current system is a valid solution to that problem.

57:48 Russ: So, lets talk about the owners' incentives. I've heard on talk shows recently, and I think this is going to grow: Retired athletes asked the question, do you want your kid to become a football player? A great football player, a football player who is a Hall of Famer or is a future Hall of Famer is asked: Do you want you kid to be a football player, because it's dangerous? We've always known it's dangerous, but now it looks like it will be more dangerous. Guest: It's becoming worse. Russ: The owners have an incentive there because they might have trouble attracting skilled young people into their sport. Guest: That's happening. Russ: So they do have an incentive to fix it, but it's a long long-run incentive. Guest: And it's probably too long run, in the sense that the time horizon of owners in professional sports is really quite short. It's a few years. Russ: But, at the same time, as a fan of the sport, many of us are going to be, if not already, uncomfortable enjoying watching people hurt themselves in ways that may make it difficult for them to enjoy their grandchildren. Guest: Circus Maximus. Russ: Yeah. And I think that as a short run incentive is going to push them. Where do you think that's going to turn out? Let's stick with football. What do you think football's going to do with this problem that you've got very large people at high speeds running into each other and hurting each other? It's always been true; it's just that the hurt is getting bigger. Guest: My expectation is that the NFL will be very slow to deal with the problem. That it's more likely to be dealt with at the college level than at the NFL level. Russ: Although there may be some legal pressure on them. I think there could be some lawsuits that are going to push them. Guest: I agree that the big wildcard--there's 40 some lawsuits now against the NFL from retired players. Yeah, but the issue is what will the financial hit be. It could be awfully be. And if it is really big then that will provide them with an incentive to change their behavior. But right now, prior to that--first of all, it's not obvious to me that the retired players are going to get a big payday from these lawsuits. And the second part of the story is, I think you are right that the demand for not just football but all professional sports has increasingly had a violence component to it. I mean, hockey has the same problem. Basketball is a very different game now than it was 25 years ago. Russ: Much more physical. Many more injuries, by the way--it seems to me. Guest: It's not a game--as somebody who has played basketball all my life, it's not a game I would want to play if I were 20 years old, the way it's currently played. Russ: Do you think you would have said that when you were 20 years old? Guest: Yeah, because I didn't like violent sports as a kid. Russ: How tall are you, Roger? Guest: 6'5". Russ: Okay, so Roger is 6'5", I'm 5'6"--it's a-- Guest: Your basketball career was short. Russ: We're taping this in Roger's office. And we're sitting down, so the differences are still visible but it's not quite as dramatic. So, you played basketball your whole life. By the way, what level did you play? Guest: I played in college. Russ: Where was that? Guest: I was at Cal Tech. Out of nowhere. They made a movie about it. Russ: They did? Guest: Yeah. Quantum Hoops. Go see Quantum Hoops. Russ: What's that movie about? Guest: It's a movie about CalTech basketball. Russ: Are you in it? Guest: I sure am. Russ: Cool.