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3 big economics problems with the NCAA's talking points

The NCAA's picture of the potential failure of collegiate athletics isn't just dangerous legal ground. It also wouldn't work in econ class.

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Thursday, the House of Representatives' Education and the Workforce Committee held a hearing to debate the Northwestern unionization ruling. Much of the discussion centered on the NCAA.

Baylor president Ken Starr and Stanford athletic director Bernard Muir were in attendance, but the most interesting testimony came from economist Andy Schwarz, a sports economist active in writing about the O'Bannon and Northwestern cases.

Schwarz was able to show the why the NCAA's arguments don't hold up when applied to basic economics and why changes would not be as catastrophic to the system as the organization claims. We've focused a lot on the legal issues with the NCAA's arguments, and while economics and antitrust law are intertwined, Schwarz's testimony gives an even more basic look at the problems in the NCAA's talking points.

1. Universities can afford to provide benefits.

Perhaps the funniest moment from Thursday's hearing — or the most disheartening — was when representative Phil Roe of Tennessee proclaimed, while holding up his iPad, "I just pulled up on my iPad that most schools lose money."

That's a major talking point from the NCAA, which is why it was probably the first thing Rep. Roe found when, I'm guessing, he Googled the topic right before the hearing.

The claim is not wrong. Most athletic departments do lose money. The problem comes when you use that logic to conclude that athletic departments can't afford to pay players.

"The idea that this is a money-losing industry is incredible," Schwarz said. "If you look at a money-losing industry, you wouldn't see rising employee [coaches] pay, you wouldn't see firms flocking to join the industry. The money is in the system. It's just that it's being denied to the primary generators."

Schwarz compared the NCAA to a rich investment banker on Wall Street who makes over a million dollars per year. That's a lot of money. But what if the same investment banker buys a lavish apartment on the Upper East Side and a vacation home in the Hamptons, and then has some kids and needs to change his lifestyle? Of course, he won't want to do that and could claim he doesn't have money to raise his kids. But he does if he reallocates his money.

This is the same predicament facing the NCAA. Its schools need to operate in budget. But they also want to, as Schwarz said it, build "recruiting palaces," shifting the burden of funding athletes to tax-funded Pell grants.

Sure, they fund non-revenue sports, but the judge in the O'Bannon case said that's not a reasonable excuse. Because the NCAA could mandate that money come from the money that's currently going to skyrocketing coach salaries and recruiting palaces.

2. Price-fixing is only a good deal for schools.

Firms that fix prices to keep profits high will probably be unhappy when they're forced to stop doing that. Antitrust law was created because price-fixing is unfair to the people who aren't benefitting. Such is the case with the NCAA's member schools.

"I'm worried about how [schools] stifle competition through imposing limits," Schwarz said.

If the NCAA is paying attention, this is what it should be worried about, too. Right now, the NCAA is in hot water with a number of suits that claim it violates antitrust law by allowing schools to collude and cap compensation at the value of a scholarship.

Schools have defended themselves by granting "autonomy" to the power five conferences to provide full cost of attendance scholarships. That might make some people less angry, but it still won't work in court. It's still 64 schools working together to cap compensation, even if the cap is above what it was before.

Schools don't want a free market, because they don't want to have to pay athletes market value. However, they want the public to believe that the only two choices are the price-fixed model and a free market. That's not true.

When the law becomes involved, a price-fixed system isn't an option.

No professional sports leagues want full free markets, which is why they're allowed to break some antitrust laws if they negotiate with players. (The committee should have focused on the possibility of a union that would negotiate licensing for athletes. It would deal with the NCAA, unlike the one that won at the regional NLRB level, and could be mandated as a result of the O'Bannon case.) Negotiating is a better deal for the leagues, and it's why, as Schwarz pointed out, the NFL is in favor of its players staying in a union.

For major organizations, a price-fixed system with no negotiation is a better option than negotiating. But the fact is that when the law becomes involved, a price-fixed system isn't an option. The NCAA doesn't want to admit that. And why would it? The schools are getting a pretty sweet deal.

3. The current system is anti-competitive.

Aside from the "schools can't afford it" argument, the NCAA's biggest issue with paying players is it could hurt competitive balance. Because then the powerhouses would get the best recruits.

As the great Jacobi points out, it would be a damn shame if this happened right now.

Right now, coaches don't have anything to lose when they offer scholarships. There are rules against oversigning, but oversigning still happens. School X can offer a three-star recruit a scholarship as an insurance policy, then drop that player from the team if all the five-stars pan out. However, if School X were forced to get in a bidding war with School Y over the recruit — and it's a recruit School Y really wants — then School Y could offer more money to the player.

The obvious response here is that Alabama can pay more for its low-value recruits than Troy can for its high-value recruits. But those players are already going to Alabama anyway. The real competitive gain we'll see is in the Big 5 conferences, where some schools are a bit richer, but Iowa State can still pay one of its top recruits money that's better than Alabama would be willing to, if that prospect is lower on Alabama's board.

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The NCAA's biggest problem heading forward is that basic economics refutes its argument that the fall of amateurism will result in the fall of college athletics. Markets don't just disappear.

People love college sports — and more importantly, there's too much money at stake — for that to happen, even if money is reallocated to make the system legal.