Why Free Agency Would Improve the Level of Play in MLS

Excited about the return of the Portland Timbers?  Well, temper that enthusiasm because it appears more and more likely that the MLS is headed toward a work stoppage with the key sticking point free agency for players.

Under the current system, a player who is released by a team or whose contract runs out must enter the MLS re-entry draft and then be allocated to the highest team in the pecking order who wants him. The players want unrestricted free-agency - they want players in that position to be able to sign with the team of their choice.

The players are right.  Unrestricted free agency would improve the level of play in the MLS by allocating the best talent to the teams who will make the best use of it.  The draft system, while a decent way to ensure a level of parity is not efficient.  Teams and player are often not matched optimally.  For example, a team who has the first option on, say, a wing player who might already have a couple of decent wingers might just pick up the option to provide cover or to prevent the player from helping out a rival.  On the other hand, a team in desperate need of a winger is prevented from signing that player.

But the beauty of markets is their efficient allocation of resources. In an open bidding process, the team that expect to make the best use of the player will bid the most of the player thus ensuring the team with the highest valuation of the player gets him.  Players will be more likely matched to teams that fit their skills and teams will improve.

There are two counter arguments that I can think of.

First, a team might have a high valuation on a player because they are simply weather.  This is true in the Designated Player market but the re-entry draft does not affect that.  Salary caps or, much better, NFL style revenue sharing (or both) are the way to deal with income inequality seeping into player.  MLS has salary caps.  Problem solved.

Second, in the re-entry draft process teams can use the mythic 'allocation money' to trade picks and move up to get a player that want.  But the ability of teams to do so is limited and this method is inefficient and likely leads to many instances where the efficient outcome was not reached.

So I hope the MLS comes to its senses and grants free agency to players because the on-field product will be improved by so doing.

Fred Thompson: Capitol eyes gas tax — yet we’re 17th highest!

 Once again, Fred Thompson keeps the blog alive:

The Oregon Watchdog recently warned that “A gas tax was just approved by lawmakers a few years ago, and now it looks like they are back for more.” And asserted that “we are paying more than most states and apparently getting less.” Is that true? If it were, calls to boost the gas tax might seem profoundly wrongheaded. But the fact is that we are neither paying more nor getting less. 

These issues were explored at the 2015 Legislative Transportation Education Seminar, held January 14 at Willamette University under the auspices of the Willamette Center for Governance and Public Policy Research and the Oregon Public Policy Research Alliance. What we learned is that Oregon’s state gas tax ($.30 per gallon, non commercial vehicles, increased from $.24 in 2009) is 14^th or 15^th highest in the country. But most states rely more heavily on vehicle registration fees to fund transportation, about 40 percent of the total nationwide, than do we. Consequently, looking at state transportation funding, the combined cost of vehicle registration and state fuel taxes, Oregon is 27^th highest in the US. On a per capita basis, therefore, the state of Oregon collects a bit less than the average state for highway maintenance and investment.

Oregon also relies less than other states on municipal and county level gas taxes to support city streets and county roads. Instead, we rely almost exclusively on state fuel taxes and registration fees to meet the needs of cities and counties (30% of state collections goes to counties and 20% to cities). Consequently, taking state, county, and municipal fuel taxes and registration fees together shifts Oregon even further down on the per capita transportation funding tables, to 32^rd highest.

Of course, the US as a whole is running way behind on highway maintenance and investment. With respect to deferred highway maintenance and investment, the State of Oregon is actually a lot better off than most states. The civil engineers association ranks our state highway and bridge maintenance and replacement about tenth best in the country (giving Oregon a grade of C+, versus an average of D). Indeed, most experts (including those in the state DOT) believe that the highway trust fund will continue to meet the state’s basic maintenance and replacement needs through 2017.

That isn’t true of our cities and counties, however; their needs are large (billions) and pressing. Nor is it necessarily the case with respect to additional infrastructure investment, where arguably Oregon is a laggard. Moreover, many believe that the state currently relies excessively on debt to finance new construction and would like to shift toward current funding, which requires more cash now.

In this instance Oregon’s Watchdog asks a good question, but reaches the wrong conclusion. Not keeping up with our needs in this area is penny-wise and pound-foolish.

Fred Thompson: Stuffing Oregon's Kicker

Note: Another Dispatch from the desk of Fred Thompson:

There are 12 Christmas trees in Oregon for every person, more than in any other state. That’s one way we are special. Another is our system of state and local public finances, where, by many measures, Oregon is an outlier.  Generally, special also means better.

Nevertheless, Oregon’s system of state and local finance has one difference that isn’t particularly praiseworthy: the so-called kicker law,  which requires the state to return actual revenues in excess of the annual budget forecast to taxpayers. No other state in the country has anything quite like it. Oregon’s kicker was justified as a means of keeping the legislature from rolling over revenue windfalls to future budgets, thereby unsustainably increasing state spending. This was and is a reasonable concern, but the kicker was and is an ill-conceived fix to this particular problem. Rather, it is fundamentally inimical to the very worthwhile goal of smoothing out state and local spending, which calls for setting revenue growth in excess of long-term trends aside for a rainy day.

Oregon’s Total Revenue and Total Expenditure

 Oregon’s kicker law dates back to 1979. The voters overwhelmingly ratified the law in 1980, but the first actual kicker rebate didn't actually occur until 1985. During the 90s a surprisingly good economy generated kicker rebates nearly every biennium: 1995, 1997, 1999, and 2001. The only subsequent rebate occurred in 2007, a personal income tax rebate of $1 billion. That year the legislature diverted the business-tax kicker to the state’s rainy day fund and in 2012 Measure 85 assigned it to the public-school fund for keeps.

The dearth of personal-income-tax kicker rebates so far this century is not entirely due to a disappointing economy. That is the main reason, of course. But Oregon’s recovery has by most measures outstripped that of the nation as a whole, especially with respect to state revenue growth. Consequently, it appears that the state also highballed the official revenue forecast. In so doing, its actions were entirely consistent with the recommendations of the 2008-9 Legislative Task Force on Comprehensive Revenue Restructuring. The Task Force aimed at making Oregon's tax system more stable and adequate. It found that the secret to stability and adequacy lies in stabilizing spending growth at a sustainable rate and in using savings and short-term debt to smooth out revenue volatility. The Kulongoski administration put these findings into place via its so-called reset budget. Then, so long as the administration remains committed to the reset-budget’s long-term spending targets, funds are automatically generated for Oregon’s rainy-day fund and/or to pay down its debt (the measures also allowed for automatic borrowing if revenue fell short of the spending target).

This year it probably will not be possible to avoid a kicker rebate without legislative action. Despite the best efforts to avoid such an outcome, actual revenues look to be running ahead of the forecast. Not surprisingly kicker repeal is once again on the legislative agenda. (Of course, the legislature can always put off the distribution of a kicker rebate by an emergency vote, as it did in 1991 and 1993, without actually repealing the law.)

Moreover, some legislators are concerned with the current administration’s apparent inclination to discard the reset budget: reset principles are not highlighted in the 2015-17 budget proposal and the medium-term fiscal planning unit in the Department of Administrative Services that formulated the reset budget and put it into place has been dismantled. This is a potential threat to the state’s long-term fiscal stability and, perhaps, also underscores the ongoing need to enact the Task Force’s recommendations for improvements to Oregon’s fiscal system, including reform of Oregon's personal-income-tax kicker, into law.

Senator Ginny Burdick, Chair of the Senate Finance and Revenue Committee, is the key to these reforms. She served on the Task Force and has a longstanding commitment to both fiscal stability and kicker reform. Interestingly, California, Oregon’s neighbor to the South, recently voted Proposition 2 into law. Proposition 2 amends the California Constitution to require that the Governor make mid-term spending and revenue targets part of the state budget process, requires the state to set aside revenues each year – for 15 years – to pay down specified state liabilities, and substantially revises the rules governing the state’s rainy day fund. In other words, California’s legislature did pretty much what Oregon’s has, so far, not done with respect to kicker reform. They referred a measure aimed at making state and local spending sustainable to the citizenry. On November 4, 2014, 70 percent of Californians voted in its favor.

We need to go there too.

Oregon's Employment at Record High Level in November

Oregon's employment is at an all-time high, according to the Oregon Employment Department.  More impressive, perhaps, is that November recorded an all time record increase in new jobs at 11,200.  The unemployment rate remains at 7.0% which is itself, ironically, a good sign as it means that lots of folks are returning to the job market and looking for jobs.

It looks like the recovery is finally and truly here and the low price of oil will certainly help this as well.

The Paradox of Choice

In economics, an expanded choice set from new goods, increased income, lower prices, etc. is generally a good thing.  You can more easily satisfy your desires when there are more things to choose from.  However, with more choice come more decisions to make, more information to gather more things to compare.  All of this is costly to an individual and these costs can sometimes outweigh the benefits of expanded choice sets, particularly when that expansion comes from additional goods.

There is a good example of this in today's New York Times in the form of an Op-Ed by a former independent record store owner, Sal Nunziato, who laments the lack of a filter for music that the old big label led industry used to provide.  As Mr. Nunziato states "I don’t want thousands of choices. Some choices would suffice, and the suits made that happen." Now we are flooded with choices because there are fewer hurdles to music being made available to consumers.  But the only way to tell if it is any good is to sort through it all and listen to it.  I am sympathetic to this.  I am a child of the vinyl album and this new era of Spotify (I subscribe) is difficult to deal with. I have limited time to search around for reviews and recommendations and have a hard time finding new music that I like - there is just so much to sort through.

I feel the same way about the decline of the mainstream media.  I talk a lot about the demise of real in-depth investigative reporting, but the biggest loss is of the editor whose job it was to make the decisions about what was most important for readers to know.  Now I have too much choice about information from all kinds of edited and un-edited sources.  Ironic that I say this in a blog, but I never intent to be a news source.  My only hope is that my training as an economist lends some value added to discussion of policy and economics news.

But I digress. The big point here is not particularly novel: in the era of information technology we are so flooded with news, entertainment, sports, etc., it can actually make us worse off than we were when there were a few big music labels, a flagship daily newspaper in every city, and a few television networks.  I don't actually believe that on the whole we are worse off.  Far from it, I think we are tremendously better off (as a lover of european soccer I am massively better off now than I was a few years ago), but I do think a good business to be in in the near future is the 'filtering business' - helping consumers weed through the morass of information, entertainment and so on.    

A Quick Note on the November Jobs Report

First off, the news is very good.  This is but one month, yes, but the trends are all good and we have been experiencing relatively robust growth for quite a while.  I say relatively because in past recessions recoveries have been quicker and more robust.  But this recession was different and it has taken a lot of time to unravel all of the damage done to the financial system. So relative to other crises of a similar nature (see: Japan) we are now in pretty robust recovery territory.

Second, the wage growth story that seems to be a popular narrative today is important.  Why?  Because when economists worry about inflation (economists like those in the Fed) what they really look out for is not the CPI or PPI but how price increases are showing up in wages.  The real inflation worry is exactly this feedback loop: higher anticipated prices lead to higher wages which lead to higher prices.  If the Fed starts to worry about this a lot, it is bye bye cheap credit.  So get that mortgage soon.

Third, the unemployment rate is sticky in recoveries and for a good reason.  More folks back looking for jobs is a good thing.

Fred Thompson: You Can Pay Now Or Later And Now Is (A Lot) Better

Note: Another dispatch from Fred Thompson:

Highway trust funds all over the country are running on empty. That is true at every level of government: federal, state, and local.

Highway maintenance really isn’t optional. Street and highway deterioration is inexorable: highway wear and tear is a simple function of the number, speed, and axle weights of the vehicles using the road and the passage of time, but damage accumulates at a compound rate. Statewide, given current discount rates, every dollar of highway-maintenance spending deferred has an average present value of nearly three dollars in future outlays, ranging from about $1.50 at the margin in Multnomah County to $11 in Clackamas County next door.

Recognition of this fact is one of the reasons that transport funding was placed in trust funds. Earlier generations feared that, if gas-tax dollars were not carefully walled off, myopic officials would raid highway maintenance funds to sustain other, trendier endeavors. They were right, of course. What they failed to take into consideration was the failure of elected officials to keep gas-tax rates abreast of inflation, let alone the dramatic improvements in vehicle miles per gallon of gas that have occurred of late. State per-gallon tax rates have been static for 20 years and mileage per gallon is up nearly 30 percent.

Tim Nisbett, in a guest column in the November 21, 2014, Oregonian, opined that “our transportation funding system is ready for a tax fairness overhaul.” Nisbett cited with approval a recent editorial from the Grants Pass Daily Courier calling for a “shift to income taxes to augment or replace the state's existing gas tax system.”

Nisbett’s argument rests on a series of premises. The first is that the ‘user pays’ mechanism, which matches tax burdens to the benefits citizens get from public services, cannot keep up with our transportation needs. Second, transportation taxes comprise a sizable portion of the average working family's contribution to state and local services. Third, these taxes are inherently regressive and that “the roadways of the future will require greater support from those best able to pay for them.” Finally, user fees exact an especially unfair toll on rural Oregonians, who tend to use the roads much more than the rest of us.

I think I am on Tim Nisbett’s side on this issue, but I don’t buy his argument, at least not entirely. Only one of Nisbett’s claims is unambiguously correct: that gas taxes are regressive. While it is true that gas tax revenues haven’t kept up with transportation needs, doubling state gas tax rates would largely fix that problem. The reason gas-tax revenues are inadequate is that they have fallen way behind the nominal growth in the state’s economy, which is entirely due to the legislature’s unwillingness to increase tax rates, along with DMV fees, over the past fifteen years. Doubling the per gallon tax rate would merely return the transportation tax burden on ordinary Oregonians to the level of 2000.

Nor are gas taxes a particularly heavy burden for most of us. The average driver pays significantly less than $100 in gas taxes and DMV fees per vehicle per year. Of course, the burden is higher on folks who drive more than average, especially rural drivers, but those who drive more than average also cause more road wear and tear than the rest of us. Moreover, urban drivers already provide big subsidies to country-road users. It is estimated that gas and weight-use-per-mile taxes resulting from operations on rural highways cover less than a third of their construction cost and upkeep.

I am a fan of user fees. As an economist, I like their incentives and I like the information that they can generate. Consequently, I would argue that increasing per-gallon gas tax rates (and indexing them to inflation) is the first thing that needs doing. We ought to do the same thing with DMV fees, so that they are no longer a burden on the highway trust fund, but instead contribute to it, as they were meant to. There is a simple way to offset the regressivity of gas-tax increases: drop the marginal tax rate for the 5 percent bracket of Oregon’s personal income tax (the first $3,500 of adjusted gross income) to zero. That would meet our transportation needs and, at the same time, increase the overall progressivity of Oregon’s state and local tax system. Nisbett called for a Red/Blue coalition for meeting the state’s transportation needs; this seems to be a better candidate for such a coalition than boosting our highest marginal personal tax rate, which is already the highest in the U.S.

I would also note that it is now possible to design and implement cost-effective mechanisms that more precisely monitor road use than ever before. In the long run, that could be of immense value for transportation planning and influencing road use. Those devices should probably be tried out on commercial vehicles, which are already subject to a weight-use-per-mile tax (in part because the highway damage caused by multi-axle freight vehicles is not directly covariant with fuel consumption). If the system works, it could be adapted to personal vehicles as well. Indeed, the Oregon Department of Transportation is now testing alternatives to the gas tax that would similarly track participating personal vehicles.

However, treating ODOT’s experiments as a solution to the transportation-funding problem seems very much like putting the cart before the horse. Increasing taxes is politically difficult, changing tax mechanisms is nearly as hard; doing both at the same time is practically impossible. Our roads need more money now.

Big in Manaus

Here is a picture my colleague, Vladimir Ponczek, sent me and our co-author, André Portela Souza, of a publicity banner for his talk on our research, "Child Labor and Learning," that he is giving today in Manaus, Amazonas.  He says the banner is in the main square and that the Mayor of Manaus is going to attend.

Today Manaus, tomorrow the world!

Football-nomics

A column that appeared in The New York Times' Upshot section caught my attention.  It being election season, David Leonhardt wrote about football being a new partisan divide:

To the list of issues that divide the country along partisan lines, you can add an unusual item: football. 

Yes, virtually every slice of America still watches football in enormous numbers. But blue America — particularly the highly educated Democratic-leaning areas of major metropolitan areas — is increasingly deciding that it doesn’t want its sons playing football. 

The number of boys playing high school football has fallen 15 percent over the last six years in both Minnesota and Wisconsin, according to the National Federation of State High School Associations. The decline in Colorado has been 14 percent. It has been 8 percent in Massachusetts and Maryland, 7 percent in New York and 4 percent in California

The problem is, of course, the increasing evidence that football is bad for your brain.  This appears to be especially true if played as an adult pro, but there are also worrying signs that it may be bad for high school aged kids as well.
 
This article, however, got me thinking more about class than political views.  I don't refute the premise above but I hypothesize that you could look at participation in football and socio-economic status (SES), you would find a high correlation between participation in the sport and lower SES.  In fact, if you go to the poll Leonhardt references you find this:

"Highly educated (college degree or higher) individuals were ... about half (46 percent) as likely to be comfortable with sons playing football, relative to adults with lower levels of educational attainment."

So I suspect my hypothesis is correct.  All of this leads to the conclusion that football payers will be increasingly drawn from poorer populations.

At the same time NFL ticket prices have increased:

Which raises the specter of poor folks causing themselves serious harm playing a sport in front of rich folks: gladiator indeed.  In the past 'gladiator' has been used to describe the NFL but it appears to be gaining new resonance.

As an academic economist, what interests me is why participation cuts along SES lines.  I think there is a simple model that describes the situation.  A potential participant in football thinks about the expected payoff of participating which could lead to college scholarship and eventual pro paycheck on top of the fun factor.  There is also a payoff to not participating - perhaps less fun but potentially better long term health.  This payoff to not participating depends on the outside option - what would the person do if not play football as a profession.  Those from wealthier, more educated families are likely to have better outside options - colleges and careers less available to poorer kids.

So my model looks like this.  You choose to pursue football seriously if:

Exp. Payoff = Exp. Benefit – Exp. Cost > Exp. Payoff of Outside Option

As we learn more about the dangers of football to long-term health the expected payoff from participating falls for everyone regardless of socio-economic status.  But the expected payoff from the outside option is unchanged as we learn more about the detrimental effects of football participation but increase with SES.  I have illustrated this below:

The blue lines are the expected payoff from football and the shift is downward as we learn more about head injuries and their long-term impacts.  Kids choose to participate in football if the blue line is above the black (the value of the outside option).  So high SES kids choose not to participate but as the blue line falls fewer higher SES kids participate leaving only the lowest SES kids playing football.

Now, of course, like any model this is a overly simplified (which is the point of models, after all) and there is tons of complexity in the real world not captured here.  But the point is, if this is one of the dynamics going on in football we could quickly come to the point where the gladiator analogy is quite apt.   And we could quite quickly get into some very uncomfortable territory about what is ethical in terms of allowing and sanctioning a sport that causes serious harm to its participants.

I am a HUGE football fan and so I hope there are reforms and ways to make the game safer because I would hate to lose it.

The Economics of Marijuana Legalization

So I am trying to claw my way back into more regular blog posts and what better occasion than the midterm elections coming up to do so...or so I thought.  My well-intentioned plan was to try and inject some economics into the ballot measures, but it has been hard to find time to stop and blog.

So in a last gasp effort on the eve of the election I just do a quick drive-by on what economists have learned about the effects of legalizing marijuana.

In a well-cited paper, my former Colleague Dan Rees and his co-authors, Ben Hansen of the U of O and Mark Anderson, find that: "The first full year after coming into effect, [medical marijuana] legalization is associated with an 8–11 percent decrease in traffic fatalities."  The implication is that marijuana is a substitute for alcohol and easing access to marijuana reduces alcohol consumption and related DUI traffic fatalities.

In a newer paper by Wen, Hockenberry and Cummings, released as an NBER working paper, it is found that the implementation of Medical Marijuana Laws (MML): "increases marijuana use mainly among those over 21, where there is also a spillover effect of increased binge drinking, but there is no evidence of spillovers to other substance use.

Finally, Anderson, Hansen and Rees are back at it with this paper that suggests that the: "results are not consistent with the hypothesis that legalization leads to increased use of marijuana by teenagers." Again, they are talking about medical marijuana.

Recreational legalization is still so new we don't have any good studies yet that I am aware of.  So the takeaway.  It appears that marijuana use by adults increases with medical marijuana legalization but it is not clear whether it it is a substitute or complement to alcohol.  It does not appear to increase teenage use nor lead to the abuse of other substances.

Do with this info what you will.

Steve Jobs and Pricing in the Nines

When the new iPhone 6 was announced, so too were prices that ended in 99.  This is almost ubiquitous in consumer pricing, but it catches my eye because it comes from the company of Steve Jobs.  From what I know if Steve Jobs I suspect that this pricing would not have pleased him, he seems like the kind of person for whom the price of $200 is much more elegant than $199.  And yet, even when he was in change, Apple product prices inevitably ended in 9.

So why is this?  It seems that the rational costumer of economic theory would not be moved by such tricks, instantly rounding up or understanding that $199 is simply a dollar less than $200.  But the widespread use of pricing in nines clearly suggests that the story is more complex.  Pricing in the nines remains, then, a bit of a puzzle in economics.

Most economic and psychological theories that I have encountered have to do with consumers not really spending cognitive energy to fully evaluate the price.  Psychological research has suggested that we tent to fixate on the most important number - the one the the far left.  Economists have suggested we truncate to use cognitive energy economically.   I wonder if we are happy to fool ourselves to convince ourselves to buy something we really want.  In other words, we feel better knowing we have spent "less than $200" on the new iPhone we really want.  Which is, I suppose, just another form of the same explanations above.

Whatever the reason, I bet Steve Jobs didn't like it.