NFL Teams as Franchisees

The NFL had been the only large US sports league to prohibit private equity firms from owning teams. Beaton and Gottfried at the WSJ report that this prohibition is slowly being removed.

The National Football League, the most lucrative league around, has long barred firms from owning a piece of its teams. Its policy was simple: team owners should be actual people, not corporate entities. That meant eschewing the free-flowing cash infusions from institutions that now line the pockets of owners in the National Basketball Association, the English Premier League and Major League Baseball, among others.

Now, after years of discussions, that’s finally changing.

At a meeting Tuesday afternoon, NFL owners passed a new policy that will allow them to sell up to 10% of their teams to a select group of preapproved firms. It removes the last major hurdle to the flood of private capital sweeping through the sports landscape, which now has firms circling the college game and others amassing portfolios of pro franchises.  

Why such severe restrictions on private equity ownership? Possibly, this is a way to keep franchisees interested in maximizing league profitability and not just club profitability. It has long been suspected that club owners are willing to sacrifice some of their profits to generate more wins and, perhaps, a championship. (An exception that still chaffs me is the McCaskey's dismantling of the 1985 Bears immediately following their Superbowl victory, but I digress.) This seeming "over-investment" in team quality improves quality of play throughout the league enhancing fan engagement across the board and so makes all the teams more profitable. It is feared that private equity firms would be too interested in the club's bottom line to keep up these investments.

 

America innovates while Europe regulates

NYTimes reluctantly admits that "overregulation and weak governance in Europe may undermine the continent’s future."

Europe softened the harshest edges of capitalism, provided safety nets and in important ways has exceeded the United States in well-being. European infants are less likely to die than those in America, childbirth is less dangerous in Europe than in the United States, and Europeans live longer.

But

...Europe is struggling today. The U.S. economy last year grew six times as fast as in the European Union, 2.5 percent to 0.4 percent.

[NOTE: Using rule of 72: US income will double in 29 years; EU income will double in 180.]

...The United States abounds with tech successes like Apple, Google and Meta, but there isn’t a single European company on one recent list of the world’s top 10 tech companies by market capitalization.

Related: Why are there so few unicorns in the EU?

Rents fall ==> new supply falling ==> rents will increase

 WSJ:

Apartment Construction Is Slowing, and Investors Are Betting on Higher Rents 

For more than a year, apartment renters in many cities have been getting some relief from price increases because of the enormous amount of new supply being delivered by developers.

Now, big investors are betting that downward pressure on rents from new supply is coming to an end and the market is shifting back in landlords’ favor. At the heart of their reasoning: the critical metric of new construction starts, which began slowing last year and now are falling even further.

Apartment developers are stepping on the brakes, especially compared with the building frenzy in the early years of the pandemic. Across the country some rental-construction projects are getting stalled, as developers struggle to obtain the financing needed to complete them. Other investors are pivoting to more lucrative alternatives.

...

Most apartment developers today build high-end units for middle- and upper-income households, which have little impact on the affordable-housing shortage. Lower-cost rentals—the kind most in need by low- and moderate-income households—remain scarce and are rarely built without a government subsidy.

Social Security and Medicare are screwing our grandkids

NYTimes:

Under almost every president since 1980, 80 percent of the real growth in domestic spending has gone to Social Security and ... Medicare.

For Example: 

...A 65-year-old couple with average life expectancy and average household income (about $90,000 in 2023) who retires in 2025 would require $1.34 million to finance their benefits, even though they had paid only $720,000.

Younger workers are paying taxes to support generous benefits to retired ones.

So ..., younger generations are more likely to fall into lower-income classes than their parents or grandparents. Nearly a half century ago, it was the reverse. ...

As a result, "...older folks parading in golf carts [while] twentysomethings [are] paying onerous student loans and living with their parents This is F***ed up. 

[Note: this blog limits profanity to this topic.]

Politicians learn that criminals respond to incentives

NYTimes:

In the late 2010s, calls began growing for a more relaxed approach to law enforcement. Crime had fallen so low that it didn’t always seem like a threat. And more people had understandably grown concerned about mass incarceration, given that the U.S. was a global outlier and disproportionately locked up people of color.

These concerns helped lead to several policy changes. In Oregon, citizens voted to decriminalize all drugs. In Washington D.C., Democratic politicians questioned the importance of immigration enforcement. In New York, the Manhattan district attorney in 2017 stopped pursuing most fare evasion cases, and Brooklyn took similar steps.

These policies haven’t aged very well. Fare evasion in New York has surged. Oregon, faced with neighborhoods coping with sick addicts and public defecation, recently restored some penalties for drug use. On immigration, the Biden administration’s loosening of border policy has frustrated even many Democratic voters, mayors and governors — and the administration has since reversed itself.

The subway systems in New York and other cities have also made changes. Washington and Philadelphia have installed taller barriers to stop people from jumping over fare gates. New York and Chicago have placed more police officers inside the transit system.

Algorimthic Rental Collusion

Today, the DOJ accused RealPage of facilitating collusion. Among its services, RealPage has developed an algorithm that culls through rental information on 3 million units to make rental rate recommendations.The government alleges this stifles competition because, through its illegal monopoly over rent-setting software, RealPage allows landlords to illegally coordinate price increases. This is the latest in allegations that IT allowing sellers to see each others' prices in a market will reduce competition in that market. Earlier this Summer, I saw a presentation about a similar information sharing platform alleged to facilitate gasoline collusion in Australia.

What has changed with IT is better communication of the market conditions. What has not changed is the underlying market conditions in these industries. The apartment rental business is extremely unconcentrated. For example, there are close to a million units for rent in the DFW metroplex owned by perhaps 10,000 separate entities. As many as 30% could be using RealPage's service and, for the sake of argument, are in lockstep trying to elevate prices above competitive levels. But that means there may be as many as 7,000 apartment owners who could undercut these prices. We know OPEC has trouble maintaining prices with a dozen members, because there are two dozen other oil exporters that can potentially undercut them. When the number of sellers gets much past double digits, there is a huge temptation for any one of them to undercut the others.

Technology that improves information sharing can make markets more efficient. Until about six years ago, even I owned rental property. I wasn't very good at it. One reason was that I did not know how much to charge. Had I been aware of RealPage, I might have been able to increase occupancy rates. In fact, in financial markets, research often finds that quick and transparent information through advances in IT improves market efficiency by making prices better reflect the underlying values of assets.

Incentivizing Data Analytic Teams

The effectiveness of incentivizing routine or manual tasks has often been been studied. The effectiveness of incentives for non-routine, analytical tasks, such as data analytics, is much more difficult to determine. As well as the usual free-riding in teams, performance metrics are noisier and these tasks tend to have higher levels of intrinsic motivation. Englmaier et al (2024) find a clever setting to test the efficacy of external incentives - escape rooms. A 10 euro incentive to escape with 45 minutes, doubles the likelihood of meeting the target. The usual time allotted is 60 minutes. This provides some evidence that bonus incentives can be a viable instrument to increase performance in these tasks.

Why Hilton Doesn't Franchise Luxury Hotels

The WSJ has posted a nice eight minute video about the hotel business as part of their "Economics of" series. One trends has been a decades long shift toward franchising properties to the owner / operators. However, Hilton, as well as other chains, own and operate their luxury hotels themselves. In this segment, their are just too many non-quantifiable dimensions of amenities on which a hotel can falter. It is too difficult to set metrics for a franchisee.

The last refuge of a vacant liberal mind: blaming inflation on anti-competitive behavior

In the late 1970's at Stanford, I heard John Kenneth Galbraith, the economist in charge of price controls during WWII, call the idea "the last refuge of a vacant liberal mind."  The turn of phrase was so elegant and shocking--at the time, I was a liberal--that it has stayed with me.  

Here are some modern takes on this old canard.

NYT (8/16/24) "Price Gouging"

In detailing her presidential campaign’s economic agenda, Vice President Kamala Harris will highlight an argument that blames corporate price gouging for high grocery prices.

...

The Harris campaign announcement cited meat industry consolidation as a driver of excessive grocery prices, but officials did not immediately respond on Thursday to questions about the evidence Ms. Harris would cite or how her proposal would work.

 NYT (12/23):  "Greedflation"

During the debate, President Biden once again blames inflation on corporate greed. This follows an old, albeit-debunked, strategy that I first heard about as undergrad in the 1970's. Here are some modern takes on it

As rising inflation threatens his presidency, President Biden is turning to the federal government’s antitrust authorities to try to tame red-hot price increases that his administration believes are partly driven by a lack of corporate competition.

On Christmas 2021, the headline in the NY Times business section was "As Prices Rise, Biden Turns to Antitrust Enforcers."  Larry Summers immediately bashed the idea:

“The emerging claim that antitrust can combat inflation reflects ‘science denial,’ ” tweeted Harvard economist Lawrence Summers, a senior official in the Obama and Clinton administrations. “There are many areas like transitory inflation where serious economists differ. Antitrust as an anti-inflation strategy is not one of them.”

VP Harris advocates price controls, so I am sending her a copy of my textbook.

TRUTH IN BLOGGING: I was political appointee in the Trump administration (Chief Economist of the Antitrust Division).

VOX on regulating rents:

Harris’s remarks to cap rents echoed a recent proposal from the Biden administration just two weeks earlier to limit rent hikes to 5 percent nationwide over the next two years for all landlords who own more than 50 units. (They estimate this would cover over 20 million units across the country.) The Biden plan — which would require congressional approval — would exempt not-yet-built units, so as to not discourage much-needed new housing. The two-year rent cap, Biden officials said, would serve as a way to drive down costs while new housing was under construction.

Harris’s seeming embrace of the Biden plan isn’t the first time she’s expressed support for rent control. In 2019, after Oregon adopted a then first-of-its-kind statewide rent control measure, she tweeted in praise of the bill signing. “No one should ever have to choose between paying their rent each month or feeding their children,” Harris wrote. As a senator, she also introduced legislation to offer tax relief to renters who earned less than $100,000 if they spent more than 30 percent of their income on rent and utilities.

ANALYSIS: 

• Chapter 2: Voluntary transactions create wealth by moving assets to higher valued uses. Price controls deter some transactions by limiting the range of agreements between sellers and buyers. 
• Chapter 8: With a price ceiling below the market clearing price, there will be more buyers than sellers. Who gets to buy?  In Sweden, politically connected buyers are more likely to be chosen.
• Chapter 9: In the long run, assets will exit the industry, or new supply will not enter, exacerbating the very problem (high prices) the price controls were designed to solve.  Although VP Harris seems to be aware of this problem, she thinks she can solve it by creating an exception for new supply. However, would-be builders will wonder how long before their new supply becomes old and subject to the controls?  
• And don't forget the increase in the number of government bureaucrats to enforce the new rules.

RELATED:  This is the third time I have had to send out an unsolicited copy of my textbook:  President Maduro (Venezuela, below), The Pope, and now VP Harris.

UPDATE (MarginalRevolution):

Here is the Washington Post’s Catherine Rampell on Harris’s price control policy:

It’s hard to exaggerate how bad this policy is. It is, in all but name, a sweeping set of government-enforced price controls across every industry, not only food. Supply and demand would no longer determine prices or profit levels. Some far-off Washington bureaucrats would. The FTC would be able to tell, say, a Kroger in Ohio the acceptable price it can charge for milk.